By Matt Hougan
Compiled by: TechFlow
With Bitcoin, Ethereum, and crypto stocks now listed as exchange-traded products (ETPs), investors can easily gain exposure to the majority of opportunities in cryptocurrency.
For the past 15 years, building a cryptocurrency portfolio has been difficult for traditional investors. You’ve needed to use unfamiliar apps, private funds, or inefficient and costly products.
But all this is history.
Today’s launch of Spot Ethereum ETPs allows investors, for the first time, to capture the massive opportunity in cryptocurrency through three low-cost, highly liquid ETPs.
Here is a portfolio that I think investors could use as a starting point:
Bitcoin ETP: 60% allocation
Ethereum ETP: 30% allocation
Crypto Stock ETP: 10% allocation
I’ll explain why this is the “foundational portfolio” for most investors and describe how to build a customized portfolio that suits your needs by adjusting the weightings of these three, and how to supplement it with other strategic investments.
Why diversify your investments in cryptocurrencies
First, let’s talk about the “why.” Why build a cryptocurrency portfolio and not just invest in Bitcoin?
In short: Cryptocurrency is more than just an asset. It’s a breakthrough technology that can be used for a variety of purposes. You can use cryptocurrencies to create new monetary assets (like digital gold); build a more efficient financial industry (like DeFi); transfer dollar-backed assets more efficiently (like stablecoins); speed up the settlement of stocks and bonds (like tokenization); and many more uses (like 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. However, no single cryptocurrency ETP can accomplish this.
Take Bitcoin, for example. It is the largest and most well-known asset in cryptocurrencies, the primary monetary asset, and covers a huge market. But Bitcoin only accounts for a little over half of the entire cryptocurrency market. More importantly, it is not the main platform for decentralized finance (DeFi), tokenization, or other smart contract applications. That is the domain of Ethereum, which, as the second largest asset in cryptocurrencies, dominates the smart contract space.
Bitcoin and Ethereum each have their own unique advantages and market positions, but if you only hold one of them, you will miss out on a large part of the market.
Additionally, there are some applications of cryptocurrencies that are best realized through companies rather than crypto assets. For example, stablecoins are one of the most exciting applications of cryptocurrencies - digital dollars on the blockchain, available worldwide! But most of the value of creating stablecoins accrues to the companies that build them, not the blockchains they trade on.
If you want full exposure to all the opportunities in cryptocurrency, you need all three: Bitcoin, Ethereum, and crypto companies.
Build and customize a cryptocurrency portfolio
As mentioned before, I think the following combination is an ideal starting point:
Bitcoin ETP: 60% allocation
Ethereum ETP: 30% allocation
Crypto Stock ETP: 10% allocation
I chose these weights because 60-30-10 roughly reflects the market cap of each asset¹. Why not start with what the market thinks is the relative importance of each asset?
However, many investors may wish to customize their investments by increasing or decreasing the weighting of certain components. For example:
Overweight Bitcoin: Bitcoin's primary use is as a store of value and an emerging monetary asset. If you are concerned about hedging against inflation or global currency depreciation, consider overweighting Bitcoin.
Overweight Ethereum: Ethereum’s primary use case is as a smart contract platform that supports applications such as DeFi and tokenization. If you are bullish on the growth of these applications, such as Wall Street’s acceptance of tokenization, consider overweighting Ethereum.
Overweight crypto companies: Crypto companies have underperformed crypto assets over the past year: the Bitwise Crypto Innovators 30 Index is up 68% over the past 12 months, while Bitcoin is up 128%. Adjusted growth shows that crypto companies are currently attractively valued. Opportunistic investors may choose to overweight these stocks.
Additionally, some sophisticated investors may want to augment their core portfolio with satellite positions in other crypto spaces. For example, crypto index funds provide exposure to a wider 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 hedged exposure, which has a very different risk profile than investing only for the long term. Others may look at venture investing, with a focus on investing in private companies and next-generation tokens.
But the three ETP portfolio is a great place to start. It provides exposure to most of the markets and major applications of cryptocurrencies, 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 build such a comprehensive cryptocurrency portfolio at such a low cost. Today, every investor can do it.
This is undoubtedly a huge progress.
