There have been some lofty claims made about cryptocurrency in the past, including that it will replace government-issued money, prove as groundbreaking as the smart phone and democratize the financial system. But most investors point to a fairly ordinary reason for holding the digital assets: to diversify their investment portfolio. The catch: There's a right way and a wrong way to use digital assets such as bitcoin for diversification, financial advisors and market analysts said.

Diversification is an important facet of a sound portfolio, advisors said. At a high level, it helps reduce investment risk. Nearly half of crypto investors — 45% — say diversification is the primary reason they hold the asset, according to a report published this month by the Urban Institute, a think tank.

In fact, diversification was investors' No. 1 motivator, according to the report. In other reasons, 27% of the investors said they believe crypto is the future, 11% said they would make more money in crypto than other investments, and 5% said they don't trust the U.S.

dollar, according to Urban, which surveyed 3,194 U.S. adults in January. It defines crypto owners as those who report owning cryptocurrency such as bitcoin, solana, ethereum, XRP, stablecoins, memecoins and other digital coins.

The findings suggest that investors are looking to crypto as part of a more traditional investment strategy, whereas in the earlier days of its roughly two-decade existence, investors largely held it to be countercultural and nonconformist, experts said. "As crypto gets more widely integrated into mainstream financial markets, and becomes just another asset, it makes sense that it'll be separated from the anti-establishment views that drove early adopters," said Dan Cassino, a professor of political science at Fairleigh Dickinson University and the author of "Bitcoin Bros: Masculinity, Cryptocurrency, and the Future of Men." Overall, it's a good sign that people are thinking of cryptocurrency in investment terms, said Douglas Boneparth, a certified financial planner and president and founder of Bone Fide Wealth in New York. "When the primary motivation moves from ideology or speculation toward portfolio construction, that's a sign of maturation," said Boneparth, who is also a member of the CNBC Financial Advisor Council.

However, just how effective crypto can be as a diversifying asset "depends entirely on the quality of the execution," he said. 'A good complement' to traditional investments There are different ways to diversify an investment portfolio. For example, investors can diversify between asset classes by owning a mix of stocks, bonds, cash, commodities and crypto, among others.

They can also diversify within asset classes, such as by holding both U.S. stocks and international stocks. The basic premise is to have assets that don't move in tandem, but instead move up and down independently of each other, said Veronica Willis, a senior investment strategist on the asset allocation team at Wells Fargo Investment Institute.

That way, when stocks drop, investors can rely on other asset classes to serve as a ballast.