How to Structure a Crypto Portfolio

Crypto portfolio structure

Portfolio structure is a hot topic among crypto investors. You’ll often see them debating questions like these:

  • “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 crypto portfolio structure. Ultimately, though, there’s no ‘correct’ approach. It all depends on your risk appetite—which is likely already high relative to most investors.

As you’ll learn below, however, there are various degrees of risk within this nascent asset class we call cryptocurrencies.

Bitcoin: The Crypto Portfolio Staple

A crypto portfolio just isn’t complete without bitcoin (BTC). Yes, an altcoin-only portfolio can outperform bitcoin over a short timeframe. But once that timeframe is extended, you can almost guarantee the return of that portfolio would be higher if bitcoin featured in it.

Newcomers are often shocked to learn this: It’s quite common to see bitcoin comprise an investor’s entire crypto portfolio. Certainly, this is likely the case for many institutional investors and family offices with investment exposure.

Ultimately, bitcoin is the world’s oldest, most popular cryptocurrency. This matters, a lot. What’s more, the Bitcoin network has withstood many social and technical attacks. It also continues to attract new miners; growing more resilient.

Ethereum & Other Smart Contract Platforms

Whereas Bitcoin uses blockchain technology in an effort to decentralise money, smart contract platforms use it to decentralise legacy industries including 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 crypto 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 very lofty. Can they build scalable smart contract platforms that usher in the currently-primordial era of web3 and decentralisation? Time will tell. If they do, then the price of cryptocurrencies native to these platforms will almost certainly rise.

Nugget showing example of common crypto portfolio structure

BTC and Ethereum’s ETH token typically take up the bulk of a crypto portfolio

Large-Cap Cryptocurrencies

Cryptocurrencies considered ‘large cap’ are those that rank among the top twenty by market cap. (Market cap is equal to 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. 

Why the separation? When it comes to crypto 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.

Examples of large-cap cryptocurrencies include the two most valuable Bitcoin hard forks, 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, there are 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), exchange tokens are designed to incentivise trading activity on the exchange to which they are tied to.

Why have exchange tokens proven so popular? A big reason is due to the scarcity that’s built into the token’s design. Oftentimes, this takes the form of a token buyback-and-burn scheme. This is a routine event in which the exchange operator destroys a given amount of its native token’s total supply, up until it exhausts a predefined allocation (e.g., half of BNB’s total supply).

Mid-Cap Cryptocurrencies

When investors refer to mid-cap cryptocurrencies, they typically mean those that rank between twentieth and one-hundredth in terms of market cap. It’s normal to see roughly ten per cent of an investor’s crypto 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, mid-cap cryptocurrencies typically benefit the most. Conversely, though, mid caps are almost always the hardest hit in a market downturn (i.e., ‘crypto winter’).

Small-Cap Cryptocurrencies

There are several 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 of cryptocurrencies ranked outside the top hundred is known as ‘small-cap cryptocurrencies’. It’s rare to see a crypto investor allocate more than a few percentage points of their portfolio to any one small cap.

Most small-cap cryptocurrencies will fail. This is inevitable. However, there’s every chance that a handful of hidden gems can be found. Indeed, many cryptocurrencies currently in the top fifty once loitered as small caps before investors caught wind of their unique properties.

Investing in Token Fundraises

More risk-tolerant investors will normally allocate a slither of their crypto portfolio to tokens they bought at a project’s inception. They buy these tokens by participating in a token fundraising round.

Generally, a crypto fundraising round takes the form of either an initial coin offering (ICO), an initial exchange offering (IEO), or a security token offering (STO). Note, these investments carry a significant amount of risk. That’s 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 reputable project).

What About Stablecoins?

Stablecoins, as the name suggests, carry the lowest risk-profile of any cryptocurrency. Traditionally, stablecoin demand has been driven by traders and investors who prefer maintaining a cryptocurrency-denominated capital reserve. They do this because they can act on market opportunities faster than if they first had to convert fiat into cryptocurrency.

There’s another big reason why stablecoins appeal to investors: A fast-growing field called decentralised finance (DeFi), or open finance. Thanks to DeFi lending platforms on Ethereum, investors can earn interest on their stablecoins. This is accounting for an increasing percentage of investors’ crypto portfolios, particularly those who don’t care for mid- and small-cap cryptocurrencies.

Completing the Portfolio Puzzle

Hopefully, you now have a loose framework to use when structuring your crypto investment portfolio. Of course, it’s one thing to have a portfolio structure that suits your risk appetite, but it’s another thing to know how to research and invest in cryptocurrencies.

These are things the Nugget’s Crypto Community discusses day in, day out. The group is a blend of over 1,000 crypto enthusiasts and full-timers. Having access is a sure-fire way to accelerate your understanding of key crypto investment trends and themes.

The content contained in How to Structure a Crypto Portfolio is intended solely for informational purposes and should not be construed as investment advice. As always, please do your own research and understand the risks associated with investing in any asset class, be it cryptocurrency or otherwise.

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