Portfolio structure is often a topic of conversation among cryptocurrency investors. Time and time again, you see the following questions posed: “Should I own more bitcoin?” “Am I over-exposed to altcoins?” “Do I invest in multiple smart contract platforms’ cryptocurrencies or just Ethereum’s ether?”
Indeed, there are many opinions when it comes to cryptocurrency portfolio structure. Ultimately, though, there’s no ‘correct’ approach. It depends entirely on your appetite for risk—which is likely already high relative to the average investor. As you will see below, though, there are various degrees of risk within this nascent asset class we call cryptocurrencies.
Bitcoin: The Bedrock of Any Cryptocurrency Portfolio
A cryptocurrency portfolio isn’t complete without bitcoin (BTC). It’s just that simple. Yes, an altcoin-only portfolio can outperform bitcoin over a short period of time. Once that time frame is extended, though, you can almost guarantee the return of that portfolio would be higher if bitcoin was a part of it.
Newcomers are sometimes shocked to learn how common it is to see bitcoin comprise an investor’s entire cryptocurrency portfolio. Certainly, this is likely the case for many institutional investors and family offices with cryptocurrency exposure.
At the end of the day, bitcoin is the world’s oldest and most well-known cryptocurrency. This matters, a lot. What’s more, the Bitcoin network itself—which has withstood various social and technical attacks—continues to attract more miners; demonstrating its resilience to sceptics.
Smart Contract Platforms
Whereas Bitcoin uses blockchain technology in an effort to decentralise money, smart contract platforms use it in an effort to decentralise a range of legacy industries such as data storage, gambling, and utilities. Given their potential to disrupt multi-trillion-dollar industries, cryptocurrencies underpinning smart contract platforms often comprise a large chunk of cryptocurrency investors’ portfolios.
The ambitions of the teams working on these smart contract platforms—such as Ethereum (ETH), EOS (EOS), Tezos (XTZ), and Cardano (ADA)—are incredibly lofty. Should they manage to pull it off, though, and build scalable smart contract platforms that usher in the currently-primordial era of web3 and decentralisation, then the cryptocurrencies native to these platforms will likely surge in value.
Cryptocurrencies considered ‘large cap’ are those that rank among the top twenty by market cap (i.e., circulating supply multiplied by spot price). Whilst it’s true that Bitcoin, Ethereum, and other well-known smart contract platforms belong to this category, they’ve been separated for the sake of this article because, when it comes to cryptocurrency portfolios, bitcoin and cryptocurrencies native to smart contract platforms typically comprise an allocation that’s far greater than other large caps.
Occupying this category are a number of so-called ‘traditional’ cryptocurrencies. That is, these large caps’ properties and design specifications overlap—at least partially—with those inherent to Bitcoin. Included here are the two most valuable Bitcoin hard forks in Bitcoin Cash (BCH) and Bitcoin SV (BSV), a payment-focused cryptocurrency called Litecoin (LTC), and Monero (XMR), a cryptocurrency boasting enhanced privacy features.
Of the remaining large caps (i.e., those that are neither smart contract platforms nor ‘traditional’ cryptocurrencies) there exists some whose apparent utility and value proposition has proven a hit among investors. Particularly relevant here are ‘exchange tokens’. Popularised by Binance’s Binance Coin (BNB)—which now sits in the top-ten cryptocurrencies by market cap—these tokens are designed to incentivise trading activity on the exchange to which they are tied to. A big reason why exchange tokens have proven so popular is because of the element of scarcity built into the token’s design. Oftentimes, this takes the form of a token buyback-and-burn scheme—a routine event whereby the exchange operator destroys a given amount of its native token’s total supply, up until a predefined allocation (e.g., half of BNB’s total supply) is exhausted.
When people refer to mid-cap cryptocurrencies, they typically mean those that rank between twentieth and one-hundredth in terms of market cap. It is normal to see roughly ten percent of an investor’s cryptocurrency portfolio consist of mid caps. This percentage allocation will be lower for risk-averse investors and higher for risk-seeking investors.
Because they carry a higher risk profile than large-cap cryptocurrencies, the opportunity to make significant returns in the mid-cap category entices many. When a so-called ‘alt season’ hits, it is usually mid-cap cryptocurrencies that benefit the most. Conversely, though, mid caps almost always incur the greatest losses during a market downturn (i.e., ‘crypto winter’), as anxious investors hit the ‘sell’ button and revert to bitcoin, stablecoins, or fiat currency.
There are thousands of cryptocurrencies out there. Once you traverse the top one-hundred by market cap, however, you’re well and truly in high-risk territory. The catch-all category that digital coins and tokens ranked outside the top hundred are lumped into is known as ‘small-cap cryptocurrencies’. It’s rare to see a cryptocurrency investor allocate more than a few percentage points of their portfolio to any one small cap.
To be sure, whilst most small-cap cryptocurrencies are uninspiring and destined for failure, there always exists the possibility that a handful of under-valued hidden gems can be found. Indeed, many cryptocurrencies currently occupying the top fifty by market cap once loitered as a small cap before investors—and the crypto community at large—caught wind of its unique properties.
Investing in Token Fundraises
For an investor that is more risk-tolerant, a slither of their cryptocurrency portfolio will normally consist of tokens purchased at a project’s inception. The way an investor buys these tokens is by participating in a token fundraising round.
Generally, a cryptocurrency fundraising round takes the form of either an initial coin offering (ICO), an initial exchange offering (IEO), or a security token offering (STO). As you can imagine, these investments carry a significant amount of risk. This is mostly because the project issuing the tokens are: (i) trying to develop something never before seen, or (ii) proposing a solution that already exists (or is on the roadmap of a more well-known, trusted project).
What About Stablecoins?
Stablecoins—as the name suggests—carry the lowest risk-profile of any cryptocurrency. Traditionally, demand for stablecoins has been driven by traders and investors that prefer maintaining a cryptocurrency-denominated capital reserve. By doing this, they’re able to act on market opportunities as they arise, as opposed to having to waste precious time converting fiat into cryptocurrency.
Over the duration of 2019, however, stablecoins have become increasingly appealing to cryptocurrency investors for another reason. Indeed, thanks to the continued emergence of decentralised finance (i.e., ‘DeFi’)—or open finance, as it is sometimes referred to as—interest-yielding stablecoins have proliferated. These are starting to account for more and more of a percentage of investors’ cryptocurrency portfolios, particularly those who have no desire to invest in mid- and small-cap cryptocurrencies.
Completing the Portfolio Puzzle
Hopefully this article has helped you piece together a mental framework you can use when deciding how to structure your cryptocurrency portfolio. Of course, it’s one thing to have a portfolio structure that suits your risk appetite, but it’s a whole other thing to know how to research and invest in cryptocurrencies.
This is something we in the Nugget’s Crypto Community discuss day in, day out. Having access to the group—a blend of enthusiasts and people working full-time in the industry—serves as a sure-fire way to accelerate your understanding of key investment trends and themes affecting the cryptocurrency market.
The content contained in this article is intended solely for informational purposes and should not be construed as investment advice. As always, please do you own research and understand the risks associated with investing in any asset class, be it cryptocurrency or otherwise.
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