Young & Invested: Should you invest in crypto?

Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.

This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 25

“Inferiority feelings rule the mental life and can be clearly recognised in the sense of deficiency and dissatisfaction”

I stumbled upon this quote deep in the trenches of the internet on a Sunday night. The assertion is by Austrian doctor Alfred Adler, most famous for coining the term ‘inferiority complex’. His sentiment on human behaviour got me thinking about the renewed enthusiasm for crypto investing and our ever-present sprint from mediocracy, or in this case, mediocre returns.

It’s no secret that cryptocurrency have regained Covid-19 levels of popularity over the last year. In a state of geopolitical uncertainty and increased institutional interest, perhaps this makes sense.

Besides genuine investors, crypto is overwhelmed by a flood of speculators, all attempting to profit from volatility and maximise their returns. And I get it. In today’s climate, the traditional path to wealth building (salaried income) feels insufficient. On top of this, stagnant wages and growing wealth inequality exacerbate collective perceptions of inadequacy. At the end of the day, most of us invest for the same reason: to build wealth and carve out the life we aspire to.

I believe this group fear of financial inferiority is what attracts large droves of casual investors to crypto. Specifically, the fear of living a financially inadequate or constrained life, in a world shaped by increased access to the affluent on social media. Whilst you’ll rarely find me spouting Socialist philosophy, it’s certainly fascinating how perception of our relative circumstances influences the way we invest and our desire for quick wealth. But perhaps I’ll save that for another article.

Personally, I view a lot of cryptocurrencies as less of a calculated investment and more like lottery tickets. Their allure lies in the promise of life-changing returns – the kind that can alter someone’s financial trajectory overnight. And I can’t blame people for showing interest in that. We grow up being encouraged to dream without limits. Then one day, reality creeps in – quietly and without instruction. The rules change, but no one really explains how. So, I think it’s only natural that some of us have obscure goals, without a defined number, time frame or logic.

But it’s this ambiguity that can sabotage long-term wealth creation and lead us into poor investment decisions. And that’s not to suggest it’s an objectively poor investment. But I’d argue that most casual investors have trouble understanding the what and the why of crypto, therefore rarely get what they want out of it.

Naturally, Bitcoin (being the largest) will drive most of this discussion. However, it’s presence as a larger, sustained currency in the medium term has proved an interesting point of difference to the remaining portion of the market.

In its simplest form, cryptocurrency was conceptualised as a digital, decentralised currency to facilitate transactions. This meant its value was independent of the fortunes of any country and its economy.

The goal of this article isn’t to inspire debate about the merits of blockchain technology or its value in modern society, I am simply here to discuss why I don’t like it as an investment product. But for those curious on the exact mechanics of a transaction, this explainer from the RBA breaks it down well.

Figure 1: How Does a Cryptocurrency Transaction Work? Source: Reserve Bank of Australia.

What has been driving the bull market?

Whilst there are numerous reasons why people invest in crypto, below are some of key drivers of recent momentum.

Rising uncertainty

One of the largest holders of Bitcoin, BlackRock, recently published a report on its unique diversification benefits. Much like gold, the coin has exhibited low historical correlation with US equities. Whilst there have been brief periods where correlation has spiked, they have been short and haven’t produced a clear long-term relationship.

Figure 2: An uncorrelated asset. Source: BlackRock. 2024.

Given the lack of a centralised system, it is largely detached from certain critical macro risk factors like banking system crises, sovereign debt crises, geopolitical destruction and other risks. As I discussed in my column last week, gold has served a similar anchoring purpose in the past, but it appears investors are turning to Bitcoin as concerns about US federal deficits grow deeper.

Scarcity

The creator of Bitcoin coded a fixed ‘hard cap’ of 21 million coins, meaning that total supply will never exceed that number unless core code is fundamentally altered. With nearly 20 million coins already mined, Bitcoin’s digital scarify is nearing its limit which forms huge part of its perceived value proposition. With traditional fiat currencies printed at the will of central banks, non-fixed supply has long created inflationary concerns. Bitcoin’s fixed maximum supply acts as protection against this.

Increased institutional support

President Donald Trump’s campaign was largely run on a crypto-friendly platform, serving as a defection from past regulatory hostility from the government. His win, coupled with the recently introduced the ‘GENIUS Act’, which is a set of sweeping crypto reforms, signal regulators are no longer at war with the asset. The President also launched his own $Trump coin in January.

The introduction of crypto ETFs into mainstream portfolios has been significant. BlackRock’s Bitcoin ETF IBIT has already attracting over 50 billion USD in investments within its first year on the market. Bitcoin in particular has proved some level of resilience and longevity, enduring multiple market crashes, which appears to bolster investor confidence.

Why I don’t like it as an investment

Encourages poor decision making

As someone with a reasonably disciplined strategy (dollar-cost averaging into index funds), crypto in my portfolio sticks out like dirty sneakers at a client meeting. Trendy, maybe. But incohesive, nonetheless.

The main problem I have is that it cultivates poor investing behaviour, specifically herd mentality and fear of missing out (FOMO). Whilst this isn’t something exclusive to the crypto, the speculative nature and lack of traditional fundamentals to ground prices certainly amplify this effect.

A good example of this is DOGE coin, a currency created as a joke in 2013. Almost a decade later, it suddenly shot to an 800% increase in 24 hours, driven by mass frenzy after attention from Elon Musk. Within a few months the hype naturally fizzled and mass sell offs began as the coin came plummeting.

This same pattern was observed last year with the introduction of the ‘Department of Government Efficiency’ run by Musk that shared the same acronym as the DOGE coin ticker. Again, there followed a mass frenzy, and it appeared that investors hadn’t learnt their lesson. Liquidation began promptly after, with traders losing over 60 million USD in 24 hours. Just recently, Bitcoin mining infrastructure firm Bit Origin,acquired around 10 million USD in DOGE which sent the price skyrocketing.

Figure 3: DOGE coin price chart since inception. Source: Google Finance.

This is not an isolated incident by any means. Similar behavioural patterns can also be observed from most speculative coins.

Ultimately, I believe that crypto encourages irrational, unprincipled decision making in response to rapid price movements. I know there may be a small chunk of investors who are able to profit from such volatility, but the reality is – that’s not the case for most.

I often hear “if only I had invested $1000 Bitcoin 10 years ago…!”. And sure – had you been able to invest a chunk of money in something that was deemed worthless at the time, held it throughout the sharp volatility, that might have been a good idea. But if I had picked the right Powerball numbers last week,I’d also be a millionaire.

When you partake in the market with the vague goal of ‘getting rich’ you’re much more likely to make terrible investment decisions, especially during volatile times.

High volatility and maintenance effort

If you own a phone or happen to flip through a Webster’s Dictionary, you might find ‘volatility’ listed as a synonym for cryptocurrency. It’s what crypto is most notorious for.

Part of this stems from its investor base. Whilst institutions currently own ~85% of the S&P 500, they only hold ~15% of Bitcoin. The rest is largely comprised of retail players – many who are short-term speculators rather than long term investors. This fuels wild price swings and creates a market powered by sentiment over fundamentals.

Young investors are encouraged to take risks and speculate – a longer time horizon should theoretically allow time to recoup lost money. But I’m not convinced. Losing $5,000 on a failed crypto bet now has a much larger impact on my future portfolio compared to losing that same amount decades later.

But should younger, long-term investors care about short-term volatility and wild price swings? It depends. But when the stakes are high like in crypto (all or nothing), the main risk of failing to meet your goals becomes amplified.

Volatility isn’t just a psychological stressor but an operational headache. Another core to my hands-off strategy is the frequency of rebalancing. For simplicity, I rebalance on an annual basis unless my portfolio deviates significantly from my target allocations. This keeps me from overreacting to market noise and ensures I stay aligned with my broader investment goals.

Throwing crypto into that mix (even at a small allocation) complicates this process. Extreme short-term price swings quickly skew portfolio weightings, distorting not only the risk profile but also increasing the need for adjustments. This exercise of checking my portfolio daily is something I’d rather avoid. Frequent trimming also risks eligibility for the capital gains tax discount, adding a layer of tax inefficiency to an already volatile investment.

Lack of traditional fundamentals

I’d like to think my education and work experience have provided me a solid foundation to make informed investing decisions based on my goals, strategy and understanding of fundamentals. That being said, dabbling in crypto makes me feel like an oncologist walking into neurosurgery. Technically trained, sure – but out of my depth nonetheless.

Crypto is not an alternative investment like gold or infrastructure. It is a speculative instrument, mostly based on narrative and herd enthusiasm. Despite institutional interest, its purpose still feels fragmented. Whether it be liberation from centralised institutions, aiding the technological revolution or simply a game of roulette – investors don’t appear to have reached a consensus.

And that’s not to say the share prices of individual companies don’t behave in reaction to market events. But investors still have clarity on the underlying value through its ties to earnings, assets and long-term performance – tangible sources of confidence.

Whilst I have a solid investing foundation, ultimately, I’m not a blockchain expert. This discomfort with my level of fluency is partially what drives my decision not to invest in it. In the wise words of Peter Lynch –know what you own and know why you own it.

How much should you allocate to your portfolio?

So, you still want to add crypto to your portfolio. Sure. It’s important to remember strategic asset allocation is key.

Betashares recently produced a paper examining the case for adding Bitcoin to a traditionally diversified portfolio of equities and bonds (70/30 allocation). Whilst a 30% defensive allocation is arguably too conservative for young investors, the case study still provided some valuable insights.

The research was conducted by Bitwise Asset Management, the largest crypto index fund manager in the US. The focus was on the period from January 1st, 2015, to December 31st, 2024, which included multiple bull and bear market cycles. The study focused on four metrics: cumulative returns, standard deviation, Sharpe ratio and maximum drawdown.

From the table below, cumulative returns indicate that the larger the Bitcoin allocation, the better the returns. However, that return comes with the obvious drawback of added volatility (standard deviation).

Figure 4: Portfolio performance metrics of adding Bitcoin to a traditional portfolio. Source: Betashares. 2025.

Standard deviation*

Interestingly, the study did not find a linear relationship between increasing allocation and portfolio volatility. The figure below shows that small allocations (0.5% - 2%) didn’t meaningfully contribute to increasing overall volatility, however once the allocation was higher than 2%, the standard deviation climbed a lot faster (as seen by the swoosh-like shape).

Figure 5: Standard deviation by Bitcoin allocation (3-year rolling period, assuming quarterly rebalancing). Source: Betashares. 2025.

Sharpe ratio**

When examining the Sharpe ratio - how much return you’re getting per unit of risk, it was found that adding Bitcoin to the portfolio increased risk-adjusted returns. However, the incremental benefit of adding more begun to stabilise at a ~5% allocation.

Figure 6: Sharpe ratio by Bitcoin allocation (3 -year rolling period, assuming quarterly rebalancing). Source: Betashares. 2025.

Maximum drawdown

Finally, they examined the maximum drawdown – a key metric for investors, that looks at the largest decline from peak to trough. This serves as a reality check to understanding your risk tolerance and determining whether an investment falls within comfort levels.

Figure 7: Maximum drawdown by Bitcoin allocation (3 -year rolling period, assuming quarterly rebalancing).Source: Betashares. 2025.

As seen above, allocations between 0.5% and 3% had little impact on the portfolio’s maximum drawdowns. Betashares notes that this might be surprising given the instrument is known for its volatility, however given returns are not typically corelated with stocks or bonds, the overall impact of volatility is reduced.

However, the figure shows a significant uptick above the 5% mark where the impact on maximum drawdown begins to increase rapidly. Therefore, given the impact drawdowns can have on meeting your investment goals, your level of comfort may reside at an allocation of 5% or below.

This is only one retrospective study and past performance does not predict future results. In saying that, the industry consensus on Bitcoin allocation for retail investors resides somewhere between 0%-10%.

Ultimately, between the enthusiasm of Larry Fink and natural pessimism of Warren Buffett, there is no one-size-fits-all answer. For some, looking at the quantitative measures of risk may be off putting enough to avoid the asset entirely, whilst others may be willing to embrace the rollercoaster.

So, should you invest in crypto?

I’m not trying to influence your decision one way or another, rather to draw attention to the additional considerations surrounding the investment. It’s easy to get stuck in the spiral of performance chasing in hopes of building wealth quickly. But our finances should enable, rather than dictate our lives.

Doing everything ‘right’ doesn’t guarantee you or I financial success. But the emergence of ‘escape the matrix!’ rhetoric and ‘everyday’ crypto millionaires does not mean it is the ‘right’ path for everyone. If we all escaped the matrix, we’d just end up building another one. An irony that introduces a kind of philosophical absurdity. Anyways. I don’t mean to liken all these investors to performance chasing speculators. But it’s important to acknowledge the heavy presence of them in the media and how they impact your decision making.

As the Betashares paper concluded, small allocations to cryptocurrency such as Bitcoin did result in better risk-adjusted returns over the historical period. An indication that you don’t have to mortgage your house and go all-in on the next DOGE coin. A healthy level of scepticism coupled with a disciplined, rules-based approach to crypto may be the best course of action.

It is important to note that any asset class should be considered as part of a well-defined investment strategy. For a step-by-step guide to defining your investing strategy, read this article by Mark LaMonica.

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*Standard deviation is often used as a proxy for investment risk. The calculates how widely a stock or portfolio return varied from the average over a historical period. Using the standard deviation of historical performance can help investors estimate the range of returns for a given investment. A high standard deviation implies that the predicted range of performance is wide and therefore the investment has greater volatility. Most people define risk tolerance as how much volatility they can stomach.

If returns follow a normal distribution, ~68% of the time they will fall within one standard deviation of the average investment return. ~95% of the time returns will fall between two standard deviations.

For example, a portfolio with an average return of 15% and a standard deviation of 10%, would result in an expected return between 5 and 25% roughly 68% of the time. And 95% of the time we can expect returns to be between -5% and 35%.

For long term investors, the role of volatility becomes less significant. The real risk is not earning high enough returns to meet your goals or suffering permanent capital loss.

**Sharpe ratio: The Sharpe ratio is one of the most widely used measures of risk-adjusted relative performance. It subtracts the safe market return from the expected return of an investment and ultimately divides that by the standard deviation.

If you have two hypothetical investments that both return 10% p.a. over the long term, the investment with the higher Sharpe ratio provides better risk-adjusted returns on the basis of lower standard deviation. In basic terms, you get a smoother ride to the same destination (although this rarely occurs in practice). You can read more about standard deviation and the Sharpe ratio here.