Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xxz@Golden Finance
Building a cryptocurrency portfolio has been difficult for traditional investors over the past 15 years. You have to piece together investment opportunities using unfamiliar apps, private funds or inefficient products, and the costs are often high.
Those days are gone.
With the launch of the Spot Ethereum ETP on July 23, investors can now, for the first time, capture the biggest opportunities in the cryptocurrency space using just three low-cost, liquid ETPs.
Here is the portfolio I think investors should start with:
Bitcoin ETP: Allocation ratio is 60%
Ethereum ETP: 30% allocation
Crypto Stock ETP: 10% allocation
Below I’ll explain why I believe this is a “basic portfolio” for most investors. I’ll also cover how to add or subtract from these three areas to build a customized portfolio that fits your needs, and how to supplement them with other strategic investments.
Why you should diversify in the cryptocurrency space
First, let’s start with the “why.” Why build a crypto package instead of investing directly in Bitcoin?
In short: Cryptocurrency is not one thing. It is a breakthrough technology that can be used for many purposes. You can use cryptocurrencies to create new monetary assets (i.e. digital gold); build a more efficient financial industry (i.e. DeFi); transfer dollar-backed assets more efficiently (i.e. stablecoins); speed up the settlement of stocks and bonds (i.e. tokenization); and much more (decentralized infrastructure, NFTs, prediction markets, decentralized social media, etc.).
These are multi-trillion dollar markets. As an investor, I want exposure to all of them. Unfortunately, no single cryptocurrency ETP is up to the job.
Take Bitcoin, for example. It is the largest and most well-known asset in the crypto space. It is the leading monetary asset in the crypto space and is capturing a massive market. But Bitcoin only accounts for a little over half of the entire crypto market. Importantly, it is not the leading platform for DeFi, tokenization, or other smart contract applications. Ethereum is the second largest asset in the crypto space and dominates the smart contract space.
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 served by companies rather than crypto assets. For example, stablecoins are one of the most exciting applications of cryptocurrency—digital dollars on the blockchain, available 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.
Build and customize a cryptocurrency portfolio
As mentioned above, I think the right starting point for combining these three assets is as follows:
Bitcoin ETP: Allocation ratio is 60%
Ethereum ETP: 30% allocation
Crypto Stock ETP: 10% allocation
I chose these weights because 60-30-10 roughly reflects the market capitalization of each asset. Why not start with what the market tells you the relative importance of each asset?
However, I suspect that many investors may wish to customize their investments by increasing or decreasing the weighting of certain components. For example:
Increase your holdings of Bitcoin: Bitcoin's main use case right now is as a store of value and an emerging currency asset. If you're concerned about hedging your portfolio against inflation, or are concerned about global currency devaluation, then you need to increase your holdings of Bitcoin.
Overweight Ethereum: Ethereum’s primary 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 attractively valued on a growth-adjusted basis. Opportunistic investors may want to overweight these stocks.
Beyond that, some experienced investors may want to enhance their core crypto portfolios by taking subsidiary positions in other crypto investments. For example, a crypto index fund provides exposure to a broader range of crypto assets. (Full disclosure: Bitwise manages the world's first and largest crypto index fund.) Alternatively, investors may be interested in active and hedge investments, which have a very different risk profile than long-only investments. Others may want to look into venture investments focused on private companies and next-generation tokens.
But the 60-30-10 three-ETP portfolio above is a great starting point. It provides exposure to the vast majority of markets and major applications of cryptocurrencies. And it does so 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 assemble such a comprehensive cryptocurrency portfolio at such a low cost. Today, every investor can do it.
That sounds like progress.
