What to do now if you have Bitcoin in your portfolio

Bitcoin finally reached $US100,000 and investors holding the cryptocurrency in their portfolios have a few moves they’ll need to make before they celebrate.

The flagship crypto crossed the $US100,000 threshold for the first time late Wednesday, a fresh milestone in its 2024 hot streak. This year alone, Bitcoin has more than doubled in value.

“It is a big moment for a lot of people,” said Tyrone Ross, CEO of Turnqey Labs, a platform that provides data aggregation for reporting on crypto assets. “There are folks who have been holding for a long time.”

Portfolio enhancing properties

Individual investors don’t have to go whole hog into Bitcoin for it to make a difference in their portfolio’s performance.

WisdomTree ran an analysis looking at the period from the end of 2013 through the end of November, studying how Bitcoin performs at different allocations within a portfolio that’s split 60 per cent toward stocks and 40 per cent in fixed income.

Even a 3 per cent allocation toward bitcoin results in a 20 basis point improvement to a portfolio’s Sharpe ratio – a measure of risk-adjusted return – according to Dovile Silenskyte, director of digital assets research at WisdomTree. She noted that a portfolio that includes a 1.5 per cent to 2 per cent Bitcoin allocation is sensible.

“The risk and return profile is improved if an investor makes even a tiny allocation to bitcoin,” she said.

Sitting on sizable gains

Individuals who have ridden Bitcoin’s upward ride now face a difficult decision. One such investor is Douglas Boneparth, CFP and founder of Bone Fide Wealth in New York City.

He has owned Bitcoin since 2014, having mined it back then. Boneparth, who is also a member of CNBC’s Financial Advisor Council, has held the digital currency for more than a year and hasn’t touched it. (He would not specify the value of the holding). His basis in the virtual currency is zero, and he and his wife have been “going back and forth on the next move.”

“It’s an outsized position, and how do we go about it?” Boneparth said. “There’s the dichotomy between being an advisor and also this bitcoin holder who has conviction and believes in it.”

“It forces people to define their appetite for risk,” he added.

Indeed, while Bitcoin investors may cheer their gains, they must consider how they might feel if this concentrated position took a sharp decline. What might be the impact on their long-term goals? In that case, paring down the position or diversifying away some of that risk may be warranted.

A re-evaluation of risk

Rebalancing the portfolio – that is, right-sizing concentrations by pruning some of the outperforming holdings and buying underperformers – might be the ticket here.

“Will the volatility or the drawdown impact your financial goals?,” asked Boneparth. “At what level will it have a big effect versus the smaller effect, and what are you willing to tolerate when it comes to any position?”

But taking some Bitcoin off the table can also come with tax ramifications, as crypto is subject to capital gains taxes. However, if this is done alongside tax-loss harvesting, investors can realise losses within their portfolio and use them to counter the gains and minimise taxes.

For investors who would rather put their winnings to charitable use, they may want to consider donating some of their crypto holdings to a donor-advised fund and using it for grants.

This way, they thin out an overconcentration in their portfolio and – provided they itemise deductions on their tax return – can claim a charitable deduction for doing so. Fidelity Charitable reported receiving cryptocurrency donations to the tune of $US688 million this year through November 19.

“There are a lot of charities that over the past couple of years through the ups and downs of crypto have the functionality to accept it,” said Ross.

The next move doesn’t have to be an all-or-nothing proposition, but it is a good time for a gut check on goals and risk appetite.

“For me personally? [$US100,000] is not a big deal – it’s a path along a longer road,” said Ross. “It’s a stop on the way to much higher.”

CNBC