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…