Young Wealthy Investors Defy Logic by Holding More Crypto, Even Cautiously

For most investors, risk tolerance determines how much of their portfolio is allocated to risky assets versus safer ones. Generally, aggressive investors take on more high-risk assets like stocks, while conservative investors lean toward bonds. You’d expect cryptocurrency, a highly volatile asset, to be favored by risk-takers. Surprisingly, though, a recent Bank of America Private Bank study finds that among young, wealthy investors aged 21 to 43 with $3 million or more to invest, conservative investors hold more cryptocurrency than aggressive ones. On average, conservative investors allocate 17% of their portfolios to crypto, while their aggressive counterparts hold just 14%.

This trend appears counterintuitive given the volatile nature of digital assets. However, Stephane Ouellette, CEO of digital asset firm FRNT Financial, believes that it reflects the current market dynamics. Unlike the bullish momentum of 2021 that attracted aggressive investors, today’s more subdued market is driven by those who see cryptocurrency, particularly Bitcoin, as a hedge against traditional financial systems.

The study’s findings suggest that young, wealthy investors aren't necessarily changing the definition of what it means to be conservative or aggressive. Instead, they are using crypto as a form of protection against the existing financial system, says Ouellette. As the crypto market lacks the explosive growth that previously lured in aggressive traders, it is now being sustained by die-hard believers in digital assets.

Brad Klontz, a financial psychologist at Creighton University, says that while owning crypto might seem illogical for conservative investors, their lack of trust in traditional financial systems might make them more inclined to diversify into alternative assets like crypto. For them, adding cryptocurrency to their portfolio feels like a safeguard against potential economic collapse, even if it goes against traditional investment principles.

From a broader perspective, younger investors with considerable wealth may feel that the risks posed by cryptocurrency are minimal in comparison to the overall size of their portfolios. Mike Pelzar, head of investments at Bank of America Private Bank, suggests that for some young, wealthy investors, cryptocurrency is seen as a safety net. Should traditional currencies or the economy face a catastrophic failure, crypto might be the one asset to retain or even grow in value, making it, ironically, a safer bet in their eyes.

For these young, wealthy investors, holding cryptocurrency isn't about chasing risky returns but finding peace of mind by diversifying outside of the traditional financial framework.