I have been getting quite a few emails and DMs regarding Bitcoin lately, and I realised there is currently a knowledge gap between the crypto-curious and first time investors who are looking to invest but still don’t understand the fundamentals of crypto, the use cases or how to allocate a crypto portfolio efficiently.
If you are reading this post, I assume that you have a basic understanding of what Bitcoin is, the value of crypto and generally a bullish sentiment for crypto as an overall asset class over the long term.
Before You Continue..
Asset Allocation Is The Driver Of Returns
Crypto aside, the rules when it comes to investing in any asset is the same, and that is: Your portfolio allocation will determine your returns.
If you have a highly concentrated portfolio of 3-4 stocks or 3-4 crypto for example, if one of them turns out to be a 10-bagger (the value grows 10X the original size), then you are most likely to be much richer if you instead chose a diversified portfolio of 20 stocks/crypto. (Vice Versa if it goes down)
So my general comment is: If you have little to no capital, focus on a concentrated portfolio. Analyse and research thoroughly and make 3-4 well informed and high conviction decisions and stick to it. If you did your due diligence, your allocation will outperform the market for sure.
On the other hand, if you already have a sizeable capital, perhaps in the 6-digits to 7-digits range, you can focus on a diversified portfolio to retain portfolio value and grow at a relatively stable rate compared to a concentrated portfolio.
You won’t get crazy gains like you do with a concentrated portfolio but you won’t suffer heavy paper loss during a bear market as well.
In general, 10-20 positions is the optimal rate and it depends on you if you can monitor that many positions.
Concentrated Crypto Portfolio
So today, with a capital of $1000, how can we achieve an optimised portfolio of crypto assets if you want to diversify into crypto? Here is how I will go about with this $1000.
I will provide 2 different strategies depending on how active or passive you are. Do note there are no fixed strategies and asset allocation is more of an art than science.
Crypto Portfolio 1: The Blue Chip Passive Portfolio
75% Bitcoin – $750
25% Ethereum – $250
This portfolio will be more suited for the more lazy, passive investors out there who don’t have the slightest interest or no time to keep up with crypto news every single day.
So why Bitcoin and Ethereum? Because they are the 2 largest crypto asset and proven themselves as a investible asset given their ability to recover from sharp drawdowns for many years and still able to outperform every asset class over the last 10 years on an annualised basis.
Enter the Lindy Effect
This is also the manifestation of the Lindy Effect playing out.
In short, the Lindy Effect in layman terms meant that the longer a technology or innovation survives over time, the stronger the narrative and the more powerful it becomes.
Bitcoin’s Lindy Effect
Bitcoin in 2009 was nothing but a speculative play or seen as a lottery ticket. No serious investor or hedge funds will even bother looking at it. Fast forward 12 years through boom/bust cycles and halving events, it is now one of the most powerful store of value with a perfectly scarce supply of 21 million and no country or government can ever manipulate it or print more Bitcoin.
Everything is displayed on the blockchain and transactions can be tracked easily. As more time passes, Bitcoin rewards becomes two times lesser due to the built-in halving every 4 years and this theoretically makes Bitcoin more scarce than before. You can read up more on Bitcoin’s Stock-To-Flow Model to learn more.
Ethereum’s Lindy Effect
As for Ethereum, starting out with zero dapps or any use cases other than gambling or casino when it first incepted, to surviving 2 cycles of crypto bear market was enough to allow Ethereum developers to focus on infrastructure development and to build a thriving and resilient ecosystem that outperforms the traditional finance ecosystem we know today.
Ethereum’s value comes from the deep, entrenched network effects and a whole parallel universe of financial system that thrived without the support of government stimulus or aggressive fiscal injection to survive.
(For comparison, traditional finance almost fell in 2008 if not for the Federal Reserves Unlimited Money Printing measures. In fact, banks like Citibank or Goldman Sachs would not even exist today if the government did not step in to bail them out back in 2008.)
Ethereum’s DeFi ecosystem is self-sustaining and is only growing stronger each day. Ethereum is in essence the beginning of the new internet of value, where users can own a piece of the internet by holding Ether, Ethereum’s native token and interact with the many applications out there with just a digital wallet and the internet.
What Makes A Good Portfolio
According to modern portfolio theory, every investment portfolio can be measured across a spectrum, and the best portfolios are the ones that maximises the Sharpe ratio and lies on the efficient frontier, which in simple terms, translate to the best risk-reward tradeoffs according to how much volatility you are willing to take for a given amount of returns.
Historically speaking, Ethereum is the better performing asset in comparison to Bitcoin but it comes at a higher beta, or volatility.
So if you are looking to go for the highest return potential and not too worried about volatility, you may tweak the allocation and overweight Ethereum instead.
You can go for 75% Ethereum and 25% Bitcoin for higher returns potential but do note you will need to stomach higher volatility.
These are not exact science and you can allocate them based on your own convictions but a 75/25 split between Bitcoin and Ethereum respectively will provide the best risk-adjusted returns with the highest Sharpe Ratio over the long run.
Crypto Portfolio 2: The Blue Chip Active Portfolio
25% Bitcoin -$250
25% Ethereum -$250
10% Chainlink -$100
10% Polkadot -$100
10% Cardano -$100
10% Binance Coin -$100
10% Stablecoins (USDC)
This portfolio will be for the more active investors out there who want to capture higher returns potential than simply buying Bitcoin and Ethereum but at the same time you need to understand each project and their tokenomics before making such an allocation.
While $1000 might seem little to work with, having a diversification across 6 blue chip crypto and Stablecoins to buy the dip will prove to be highly effective if you are nimble and able to buy the dip quick.
By keeping an equal allocation for the Altcoins such as Chainlink, Polkadot or Cardano for example, you allow the portfolio allocation to grow into itself without rebalancing.
The winners will naturally outperform and your allocation will reflect that. There is no need for rebalancing or selling your winners because these are some of the biggest projects out there with huge potential in the future, and one key mistake most investors make is selling their winners too early for the sake of “securing profits.”
Chainlink will essentially be an oracle play while Polkadot, Cardano and Binance Coin will be the alternatives to Ethereum which you can consider and may have higher upside than Ethereum but you will need to research and build the convictions yourself.
The allocation above is once again not an exact science nor my recommendation but merely an allocation among the crypto blue chips to capture more potential gains.
At the end of the day, how you allocate your portfolio will depend on how active you want to be in managing them and how deeply you understand each project.
The Most Important Thing
This once again points back to one of the most important rule in investing no matter what you are investing in, and that is:
To know what you own and why you own it.
If you bought into Ethereum not knowing what it is and merely bought it because price is going up, then you are most likely to sell it when it goes down (which happens very often in crypto) and end up losing the potential gains in the long run and also your initial investment.
Conviction needs to be built through research and understanding of the underlying investment and never based on the opinions of others.
Hence, please take this educational content with a grain of salt and do your own due diligence when it comes to investing.
I won’t know when crypto will go up or go down in the short term, but as a bullish investor of blockchain technology, I know that crypto will only continue to trend higher in the long run as the asset class is really in its nascent stage and more needs to be done before it reaches its final form.
Crypto is here to stay and it will be a matter of time before every sector of the economy gets disrupted by blockchain technology and smart contracts, which essentially removes many of the middle man roles we know today.
Whether you love it or hate it, innovative disruption is happening across every sector and those who refuse to learn or embrace new technologies will be left behind.
Whether it’s investing in the stock market, or crypto, or real estate or any other asset class, it is important to understand that allocation is the driver of returns.
If you hold 90% bonds and 10% bitcoin, don’t expect yourself to outperform someone with 90% bitcoin and 10% bonds during a bull market and likewise, don’t expect your portfolio to maintain stable if majority of your portfolio is in “Risk-On” assets like stocks or crypto.
The 2 portfolios which I came up with are just illustrative and the allocation should cater to your own needs and risk tolerance.
There will not be a portfolio which works for every individual just like how every individual has very different preference when it comes to fashion, music, food or sports for example.
Finding a portfolio which works for you takes time to craft and it takes conviction to build a concentrated portfolio which you believe in.
If this is your first time investing, I recommend you to read my other blog posts and to build an investor mindset with a long term focus. Investing is never about getting rich quick but to build wealth sustainably over time through compound interest.
Crypto is merely a tool for investors to diversify and allow us to achieve our financial freedom faster if you invest into projects with great fundamentals and you remain disciplined about it.
Even though the portfolio strategies used in crypto and stocks are similar, the 2 are completely different assets classes so do take note of that.
With crypto prices pummelled recently due to a slew of bad news and fear erupting in every corner of the market, I personally feel that it is an excellent opportunity to accumulate further and upside is imminent in my view.
Once again, please do your own due diligence and make your own decisions! How will you be approaching crypto? Leave your comments down below!
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The Power of Low Fees
One huge advantage I have as an investor is paying very minute fees which can really eat into returns in the long run because I am using Firstrade to buy US Stocks which has absolutely $0 fees and extremely fast wire transfers for deposits and lightning fast trade executions.
Ever since I switch to Firstrade last year as my main investment vehicle, I saved up on a ton of fees and hence able to achieve way better returns than before. I saved up more than 5 times the fee paid in 2018, 2019 and 2020 this year due to the switch and I am really happy thus far.
Of my entire investments in 2020, fees only take up 0.1% of my entire portfolio! (2018+2019+2020 combined across all brokers and Robo)
If you need some inspiration for companies to research, you can check out my post on 5 stocks to buy if the market crashes here.
For those who are already into Crypto
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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.
Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor.