There is no fixed or "correct" way to allocate crypto in a portfolio, and the decision depends on each investor's goals, risk tolerance, and outlook, according to Charles Schwab, the largest publicly traded U.S. brokerage firm managing over $12 trillion in client assets.

In a recent research report, the firm outlined two main approaches to investing in crypto.

The first is a return-based approach, which looks at expected returns, volatility, and correlations with other assets. The second is a risk-based or risk budgeting approach, which focuses on how much risk crypto adds to the overall portfolio.

"These approaches can be used in conjunction to help investors make informed decisions if they want to incorporate cryptocurrencies in their portfolio," Schwab said in a white paper published Monday by Jim Ferraioli, director of digital currencies research and strategy at the Schwab Center for Financial Research.

"Investors need to be cognizant that, regardless of the approach they take, adding cryptocurrency to a portfolio brings a larger concentration of risk relative to traditional assets. Therefore, as weightings increase, even modestly, one's portfolio performance will be increasingly attributable to performance of the cryptocurrency allocation," Ferraioli said.

The return-based approach 

Under the return-based or "mean-variance optimization" approach, allocations depend on expected returns. If investors expect higher returns from bitcoin, allocation can be higher, while lower return expectations can lead to very small or no allocation.

Schwab said if an investor assumes bitcoin returns of 15% per year, allocation could be around 1% in a conservative portfolio, about 6.6% in a moderate portfolio, and 8.8% in an aggressive portfolio.

For ether, which is more volatile than bitcoin, Schwab said allocations would be smaller, around 0.1% for conservative, 2% for moderate, and 2.5% for aggressive portfolios.

Schwab added that if expected returns are below 10%, bitcoin or ether may not justify any allocation, even for aggressive investors.

Schwab said bitcoin has shown annualized volatility of around 72% and drawdowns of more than 70%, much higher than traditional assets like stocks and bonds. Ether has been even more volatile, with close to 98% annualized volatility and drawdowns of nearly 88%.

The risk-based approach

Under the risk-based approach, Schwab showed allocations based on how much total portfolio risk comes from crypto, such as 5%, 10%, or 15%, across conservative, moderate, and aggressive portfolios. In these cases, crypto exposure is taken from the equity portion of the portfolio.

Schwab said in a conservative portfolio, around 1.2% allocation to bitcoin or 0.9% to ether can represent 10% of total portfolio risk. In moderate and aggressive portfolios, around 2.8% to 4% allocation to bitcoin and around 2% to 2.9% to ether can reach similar risk levels.

"Our research suggests that cryptocurrencies can provide some diversification benefits in a portfolio that is already allocated to a mix of traditional investments such as stocks, bonds, and cash," Schwab said.

The white paper comes as Charles Schwab has opened a waitlist for "Schwab Crypto," a new account that will let clients buy and sell bitcoin and ether directly.

For now, Schwab offers crypto exposure through exchange-traded products, crypto-related stocks, over-the-counter trusts, and futures for approved accounts, according to its website.

The firm had dismissed crypto as "purely speculative" in 2019 and has changed its view over time.