The 6:3:1 Portfolio: How to Build a Diversified Crypto Asset Portfolio

Author: Matt Hougan, Bitwise Investments; Translator: Deng Tong, Golden Finance

With the emergence of Bitcoin, Ethereum, and crypto stocks in the form of ETPs, investors can get exposure to much of what crypto has to offer.

For the past 15 years, building a crypto portfolio has been difficult for traditional investors. You have to piece together investment opportunities using unfamiliar applications, private funds, or inefficient products, and the costs are often high.

Those days are gone.

With the launch of spot Ethereum ETPs today, investors can now, for the first time, seize the biggest opportunities in the cryptocurrency space using only three low-cost, liquid ETPs.

Here is a portfolio that I think investors should start with:

• Bitcoin ETP: 60% allocation

• Ethereum ETP: 30% allocation

• Crypto Stock ETP: 10% allocation

Below I’ll explain why I think 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 with other strategic investments.

Why Diversify in Crypto

First, let’s start with the “why.” Why build crypto assets instead of just investing in Bitcoin?

In short: Crypto isn’t one thing. It’s a breakthrough technology that can be used for many purposes. You can use crypto to create new monetary assets (i.e. digital gold); build a more efficient financial industry (i.e. DeFi); more efficiently transfer dollar-backed assets (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 all multi-trillion dollar markets. As an investor, I want exposure to all of them. Unfortunately, no single crypto ETP can do the job.

Take Bitcoin, for example, it’s the largest and most well-known asset in the crypto space. It’s the leading monetary asset in the crypto space, and it’s conquering a massive market. But Bitcoin only accounts for a little over half of the entire crypto market. Importantly, it’s 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 categories. But if you only buy one, you’re missing out on a big part of the market.

Similarly, 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 in creating stablecoins goes to the companies that created them, not the blockchains they trade on.

If you want to fully understand everything cryptocurrency has to offer, you need these three dimensions: Bitcoin, Ethereum, and cryptocurrency companies.

Building and Customizing a Cryptocurrency Portfolio

As mentioned earlier, I think the right starting point combining these three assets is as follows:

• Bitcoin ETP: 60% Allocation

• Ethereum ETP: 30% Allocation

• Crypto Stock ETP: 10% Allocation

192);">I chose these weights because 60-30-10 roughly reflects the market cap of each asset.Why not start with what the market tells you the relative importance of each asset is?

However, I suspect many investors may want to customize their exposure by increasing or decreasing the weighting of certain components. For example:

• Overweight Bitcoin:Bitcoin's primary 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 worried about global currency debasement, you'll want to overweight 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 embracing tokenization), you'll want to 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%. Valuations for crypto companies are attractive on a growth-adjusted basis. Opportunistic investors may want to overweight these stocks.

Beyond that, some sophisticated investors may want to augment their core crypto portfolios by taking additional subsidiary positions in other crypto investments.For example, cryptocurrency index funds offer broader exposure to crypto assets. (Disclosure: Bitwise manages the world’s first and largest cryptocurrency index fund.) Alternatively, investors may be interested in active and hedge investments, which have very different risk profiles than long-only investments. Others may want to look into venture investments that focus on private companies and next-generation tokens.

But the three-ETP portfolio is a great place to start. It provides exposure to the vast majority of the 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 put together such a comprehensive cryptocurrency portfolio at such a low cost. Today, every investor can.

That sounds like progress to me.