The simplest way is: Bitcoin ETP 60%, Ethereum ETP 30%, and crypto company stock ETP 10%.
Written by Matt Hougan, Chief Investment Officer at Bitwise
Compiled by Luffy, Foresight News
In the 15 years since the birth of Bitcoin, building a cryptocurrency portfolio has always been a challenging task for traditional investors. You have to use unfamiliar applications, private funds or inefficient products to obtain investment opportunities, and the process is often accompanied by a high cost burden.
Fortunately, this situation has quietly changed. With the launch of the spot Ethereum ETP, traditional investors can now finally use low-cost, liquid ETPs to seize the huge opportunities in the cryptocurrency field.
So how should investors allocate their cryptocurrency positions? I think the right starting point is:
- Bitcoin ETP: 60%
- Ethereum ETP: 30%
- Crypto Enterprise Stock ETP: 10%
Below I’ll explain why I believe this is a “basic portfolio” for most investors. I’ll also describe how you can add or subtract from these three categories to build a customized portfolio that fits your individual needs.
Why is there a need for diversified investment in the cryptocurrency field?
First, let’s start with the “why.” Why should you build a cryptocurrency portfolio instead of investing directly in Bitcoin?
In short: there are differences between different cryptocurrencies. Cryptocurrency is a groundbreaking technology that can be used for a variety of purposes. You can use cryptocurrencies to create new monetary assets (digital gold), build a more efficient financial system (DeFi), transfer dollar-backed assets more efficiently (stablecoins), speed up the settlement of stocks and bonds (tokenization), and more.
These are multi-trillion dollar markets. As an investor, I want exposure to all of them. Unfortunately, no single cryptocurrency ETP covers them all.
Take Bitcoin, for example. It is the largest and most well-known asset in the cryptocurrency market, but Bitcoin only accounts for half of the entire cryptocurrency market. Importantly, it is not the leading platform for DeFi, tokenization, or other smart contract applications. In contrast, Ethereum is the second largest asset in the cryptocurrency field, but it dominates the smart contract field.
Both Bitcoin and Ethereum are exciting and leaders in their respective fields. But if you only buy one of them, you are missing out on a large part of the market.
Likewise, some applications of cryptocurrency are best realized through companies rather than crypto assets. For example, stablecoins are one of the most exciting applications of cryptocurrency: digital dollars on the blockchain, circulating globally. But most of the value of creating stablecoins accrues to the companies that create them, not the blockchains they trade on.
If you want to fully understand what cryptocurrencies have to offer, you need these three: Bitcoin, Ethereum, and cryptocurrency companies.
Building a cryptocurrency portfolio
As mentioned above, I think the right starting point for combining these three assets is as follows:
- Bitcoin ETP: 60% allocation
- Ethereum ETP: 30% allocation
- Cryptocurrency Company Stock ETP: 10% allocation
I chose the weightings for these assets because 60/30/10 roughly reflects the market capitalization of each asset. So, the easiest way is to just follow what the market tells you.
However, it is known that many investors want to customize their portfolio by increasing or decreasing the weighting of certain components. For example:
- Increase your holdings of Bitcoin: Bitcoin's main use at present is as a store of value and an emerging monetary asset. If you want to hedge your portfolio against inflation, or are worried about the depreciation of global currencies, then you need to increase your holdings of Bitcoin.
- Overweight Ethereum: Ethereum’s main use case right now is as a smart contract platform that supports applications like DeFi and tokenization. If you want to bet on the growth of these applications (e.g. Wall Street accepting tokenization), then you should overweight Ethereum.
- Overweight crypto companies: Crypto companies have underperformed crypto assets over the past year: The Bitwise Crypto Innovators 30 Index is up only 68% over the past 12 months, while Bitcoin is up 128%. Crypto companies are trading at attractive valuations, and opportunistic investors may want to overweight these stocks.
Beyond that, some experienced investors may want to enhance their core cryptocurrency portfolio by taking subsidiary positions in other cryptocurrency investments. For example, cryptocurrency index funds offer exposure to a broader range of crypto assets. Alternatively, investors may be interested in active and hedge investments, which have very different risk profiles than long-only investments. Still others may want to look into venture investments focused on private companies and next-generation tokens.
But an ETP portfolio is a great place to start. It provides exposure to the vast majority of markets and major applications of cryptocurrencies, but with the comfort, familiarity, and cost-effectiveness of a traditional ETP.
A few years ago, even the world’s largest institutions would have found it difficult to put together a comprehensive cryptocurrency portfolio at such a low cost. Today, every investor can do it.
