Bitcoin (BTCUSD) has had a spectacular run this year, rising to over $100,000, and some analysts expect it to go even higher next year. While that may tempt you into considering investing in it, financial advisors remain cautious about recommending the cryptocurrency to clients and suggest allocating only a small portion of your portfolio towards it.

Even though the Federal Reserve's (Fed) recent projections around fewer rate cuts next year saw bitcoin prices sink, they have still more than doubled this year. If the Fed slows down its pace for rate cuts, Treasury yields will remain high and attract more investors compared to riskier assets like bitcoin.

Experts Advise Caution When Investing In Bitcoin 

Asset manager Blackrock recently suggested that a 1%-2% bitcoin exposure in a portfolio is a "reasonable range."

While its important to note that Blackrock runs the largest spot bitcoin ETF, the iShares Bitcoin Trust (IBIT), some advisors also agree with having a limited allocation to bitcoin.

“If the price does actually appreciate...it will still add meaningful outperformance to the portfolio,” said Malcolm Ethridge, a certified financial planner (CFP) and Managing Partner at Capital Area Planning Group. “But if it doesn't live up to its promise, and the price falls to zero, it wouldn't completely wipe them out either.”

Bitcoin is an extremely volatile asset and having only a small investment could mean capping the downside.

"This should be viewed as outside of core investments because they’re so volatile and you can lose a significant amount of money," said David Rosenstrock, a CFP and founder of Wharton Wealth Planning. 

Scott Sturgeon, CFP and founder of Oread Wealth Partners, advises people to reflect on why they actually want to invest in bitcoin.

“If you want to invest in it because you see it as an uncorrelated asset or as a hedge against inflation, maybe that’s justification to invest,” said Sturgeon. “Conversely, if you want to buy it just because it’s gone up 120% year-to-date, I might suggest you’re just chasing returns and are speculating more than investing.” 

Should You Buy Bitcoin, Opt For An ETF, or Consider a Proxy? 

If you're convinced that investing in bitcoin is right for you, you need to decide how to want to put your money in it. Your options include purchasing the cryptocurrency directly, investing in bitcoin ETFs or funds or buying shares in bitcoin-related companies.

Douglas Boneparth, CFP and President of Bone Fide Wealth, educates his clients about cryptocurrency but doesn't solicit investments. He personally started investing in bitcoin in 2024 and prefers investing directly in bitcoin versus a spot ETF or a stock like MicroStrategy (MSTR), a bitcoin holding company that’s considered a proxy for the cryptocurrency.

“I’m a purist and believe that if you're going to own bitcoin, the best way to do that is by actually owning the cryptocurrency itself and storing that on a hardware wallet,” said Boneparth. “As far as Microstrategy goes, you're essentially buying leveraged bitcoin—they’re loading their balance sheet with bitcoin and using a lot of debt to go out on the open market and buy it…You’re buying an even riskier bitcoin asset.”

However, for investors who are new to crypto, advisors say spot ETFs can be a better option. That way you would not need a bitcoin wallet to hold the cryptocurrency and can conduct the ETF transactions through your brokerage account. Although, just make sure to pay attention to the fees.

“If you’re new to the space and you’re a long-term investor, using an ETF makes it relatively easy,” said Sturgeon.