Stocks Are Up, but Crypto Is Down. Here's How to Invest.

Key Points

Crypto is doing poorly lately, but the stock market is ripping.

That means there are likely bargains to find in crypto.

But you'll need to prepare the rest of your portfolio appropriately first.

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Vanguard S&P 500 ETF (NYSEMKT: VOO) is up by nearly 6% this year (as of May 1), and the iShares Core MSCI Total International Stock ETF (NASDAQ: IXUS) has gained roughly 10% so far. Meanwhile, Bitcoin (CRYPTO: BTC) has fallen about 14%, and Ethereum (CRYPTO: ETH) is down closer to 24%.

Stocks climbing while crypto declines is not unprecedented, but the gap this year is wide enough to rattle anyone holding both. Nonetheless, there's an opportunity awaiting those who can stomach it. Here's how to play this setup.

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Index funds aren't optional

The first move to make is to accept that before touching even a dollar of any crypto investment, the boring part of your portfolio needs to be locked in, and you need to be contributing to building it out consistently even beyond that.

An exchange-traded fund (ETF) tracking the S&P 500, like the one mentioned earlier, gives you ownership in roughly 500 of the largest U.S. companies for an expense ratio near zero, and it has compounded at a rate of close to 10% annually over the long haul. That's the kind of return you can plan a retirement around, and it requires nothing except patience and diligence in regularly contributing to your pile of money. The odds of most investors doing much better over time than what those ETFs offer are, statistically speaking, on the slim side.

If you want, you can get a bit fancy with your portfolio's anchor by buying index funds that offer a different slice of diversified exposure. For instance, the iShares Core MSCI Total International Stock ETF (NASDAQ: IXUS), which covers developed and emerging markets outside the U.S., has outpaced the S&P 500 this year.

The idea here is that loading up on low-cost index funds gives you the confidence and the financial foundation to take risks in the name of growth elsewhere, including in crypto, without jeopardizing your financial future if those bets sour.

Crypto's bear market is the buying window

Most of the crypto market is down a lot since the last crypto bull market ended in October. Everything from the crypto majors to altcoin microcaps has been devastated, and many assets aren't showing much in the way of recovery.

Still, today there is an abundance of entry points to crypto that rarely last. U.S. spot Bitcoin ETFs pulled in $2.4 billion in net inflows in April alone, indicating that sentiment might now finally be starting to look up. More than 80% of Bitcoin's circulating supply is held by long-term holders, which is one of the highest readings on record. That kind of holder conviction during a deep decline has historically preceded the next leg up.

Ethereum is a bit trickier to be optimistic about at the moment, but over the long term, its odds of recovery are very high. After successfully rolling out two major protocol upgrades in 2025, another two are on the docket for this year, and the chain is thus positioned to build on its impressive past successes in reducing gas (user) fees, all while adding new features that make it a more appealing place to develop applications.

So, given the above, if you don't already have a hearty allocation to index funds -- perhaps even as much as more than 50% of your portfolio's total value -- start there. Once that anchor is set, building a crypto position of 2% to 5% of your total holdings can add some growth without capsizing the ship when things get turbulent, which is guaranteed eventually. And when you build that crypto allocation, build it via dollar-cost averaging (DCA) into high-quality assets rather than dumping a lump sum into something more speculative.

Stocks rallying while crypto stumbles doesn't mean picking one or the other and then committing to it for eternity. The market is presently offering a clearance sale on the more volatile asset class while the steadier half hums along. Assuming you don't need the money within the next few years, it's smart to take advantage of this setup while it lasts.

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Alex Carchidi has positions in Bitcoin, Ethereum, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.