To start this post: Crypto Investment Strategy, it is important to know that nothing in this post can or should be considered financial advice or consulting. Simply one person’s opinion on crypto investment strategy and the future of digital assets. With that being said, let’s dive into it.
Diversifying a Portfolio
A common question in the stock market and crypto market: is it important to diversify your portfolio? Of course, everyone automatically assumes the answer is yes, but are you sure? If you ever actually go back and crunch the numbers, run a comparison, and test this hypothesis you may be surprised to find that historically, it did not work in the crypto market. Let’s start with the global market and understand why traditional investor follow this strategy.
In the global economy, markets are experiencing natural inflation as wealth grows through wealth creation across the world. Thus if there is more wealth, a stronger global economy, and increased trade. Naturally, a majority of markets will over preform on average. In a glance, the global economy has been growing steadily over the past 60 years due to an increase in energy consumption, consumers market needs, and global trade.
Clearly, not every industry will continually increase. For instance, the railroad industry was a pillar of the economy in the early 1900’s, but I would not suggest investing your life savings there now. Likewise, tech companies will rise and fall as innovation and development ensures, but how fast is global wealth growing?
An article from the Financial Poise on global wealth commented:
Global Wealth is On the Rise – From mid-2017 to mid-2018, global wealth rose by $14 trillion to $317 trillion, a growth rate of 4.6%. What’s more, over that year, the growth of wealth exceeded population growth, so subsequently, global mean wealth rose to $63,100 per adult (a record high).Financial Poise, April 2019
In short, we all statistically just become richer per person by just being alive, congrats. Additionally, the Financial Poise had this to say about the US:
U.S. Consistency – In the U.S., both total wealth ($98.154 trillion) and wealth per adult ($403,970) has grown every year since 2008. This growth occurred even when overall global wealth suffered a decline in both 2014 and 2015. In the most recent report, U.S. household wealth rose 6.5%.
It is a pretty good time to be an American as our national wealth year over year increase surpassed the global wealth increase on average.
Diversifying a Crypto Portfolio
If you are an investor and you preach diversification of portfolios with a surging market you will probably be correct most of the time. Why is this the case? Because if you diversify enough, you essentially have a spread of the average market, or otherwise known as the Market Portfolio. Investors also follow this theory due to the disposition effect, investor attention, and the Herd behavior including information cascade effect and relative wealth concerns.
Ideally, a market portfolio sounds great in theory, except when applied to the crypto market. This is because the crypto market is no where near the maturity of the global market.
Let’s evaluate this theory on crypto. For fun, let’s use memory lane and see how the top 10 assets have changed year over year in the Crypto Market using mid May as a comparison date for each evaluation.
2013 Cryptocurrency Market Top 10 Assets
There are a few things to consider when reviewing the crypto market. The first thing is that it was not a mature market in its early days. This means, there was not substantial data on the market and the assets did not have the proper time to come into fruition due to lack of exposure and education. Therefore, as we look at the top 10 assets year over year, you will start to see them change less and less as the market matures into 2019.
2014 Cryptocurrency Market Top 10 Assets
Even though the market is not mature in 2014, we can see Bitcoin and XRP claim the top 3 positions at an early stage. This is why these two assets could be labeled as risk-adverse assets compared to the majority of other cryptos. Remember, it is the data surrounding the price, positioning, and liquidity of these assets compared to the market portfolio which establishes their risk levels. Consistent trade volume and percentage market share (year over year) are also very important indicators of risk levels for assets and not purely fundamentals.
2015 Cryptocurrency Market Top 10 Assets
Here we see some familiar names like Litecoin, Dash, Stellar and even Dogecoin sitting all in the top 10. With the exception of Banx which ended up becoming a scam, MaidSafeCoin which is rank 78, and Nxt which is rank 144, all of prior top 10 assets are still in the top 50 of the crypto market. This is quite impressive for such an immature market.
2016 Cryptocurrency Market Top 10 Assets
In 2016, the surge of Ethereum began. A foundational game changer, Ethereum restructured the market and lead to a new breed of crypto projects. Additionally, this is the first year of top ten assets that will not be labeled scams, shutdown, or be terminated by the next year’s top 10 list. We can see the market is starting to mature in 2016 leading to a surge in prices. Additionally, the movement from traditional ICO investments into token sales would soon scale Ethereum into a new super power.
2017 Cryptocurrency Market Top 10 Assets
2017 has some familiar faces that we have all seen before. This was your top 10 assets as of May 2017 that lead the way for the bull run to $20,000 per Bitcoin.
2018 Cryptocurrency Market Top 10 Assets
In 2018, this list is the most important list to date. This is a list that is representative of the most impactful bear market that crypto industry has experienced on a large scale. We can see all of the projects listed here are still top 15 projects of the entire crypto market today without exception. This fact speaks to the maturity of the market and how far the industry has come.
2019 Cryptocurrency Market Top 10 Assets
Here we are in today’s time (2019) with a similar market ranking to the one above. By removing Tether from the top 10 (which CMC should) we would have Tron sneaking back into the top 10 and rightfully so with its vibrant (persistent) CEO and community. The only project that has been pushed slightly out of the top 10 is IOTA. Ironically, by removing Tether and the new fork of Bitcoin cash which is Bitcoin Satoshi’s Vision (Faketoshi), Iota would be ranked 13th which is not that far of a drop from 9th. IOTA still has mass potential and can easily climb into the top 10 given current market conditions.
With the lack of movement coming from the top 10 market cap assets, there can be a case for a Market Portfolio that would bare more consistency with the overall market sentiment then ever before.
This problem in the prior years with diversifying your portfolio is the assets in the top 10 were never consistent enough to create a reliable spread. Now, with the market gaining substantial exposure, and the assets becoming stable, a market portfolio could be argued for.
The answer to the above question, is it important to diversity your portfolio, has changed. Historically, across the market the answer would be a resounding no. You would have lost a substantial amount of profits if you did and Bitcoins you could have obtained.
In Today’s market the answer is quite the opposite. Any investors or speculator can easily make a foundational argument for a market portfolio that would potentially decrease volatility and risk. The risk is associated still with hacks, forks and exchange failures. A Market Portfolio may look something like a spread of the top 15 assets that is skewed towards the top 3 most stable assets, Bitcoin, XRP, and Ethereum. This Market Portfolio would be perfect for institutions, hedge funds, and pension plans looking to gain exposure to the crypto industry, but still maintain a minimal risk level.
Hedging your Portfolio
Another alternative to creating a standard Market portfolio and investing in it, is hedging against other types of cryptocurrency. This will be done a number of ways, but I propose it is done by crypto type.
For instance, If you invest heavily in Bitcoin, then you probably should not invest in assets like Litecoin, Bitcoin Cash, Bitcoin SV or Tezos. This is because all of these assets are trying to accomplish the same task and are competitors.
Likewise, if you invest heavily in Ethereum, you probably do not want to purchase EOS, TRON, Cardano, or any other platform based currencies.
You can say the same for Ripple in comparison to Stellar and NANO.
Hedging gets trickier when you get into investing in lower market cap coins, but the same idea can be applied. If you are heavily invested in Ethereum and want to hedge from it, you will want to invest in tokens not based on the Ethereum platform. Although, this is also changing because tokens can soon migrate between chains.
Similarly, if you invest in Binance coin, you will not want to invest in Huobi or Kucoin exchange tokens.
Other ways to hedge
If you are even more risk adverse, hedge into stable coins. Do this when the market is volatile as a strategy to capture gains and decrease losses. Stable coins are mostly used by traders to reduce the exposure to the overall market volatility.
To summarize, creating a market spread is becoming more and more appealing. As financial instruments open up and adoption gains traction, owning a spread of the market portfolio may be the best bet. The top 50 assets on the market will still move considerably for the coming years, so if you create a spread try to keep it close to the top 20 at a maximum.
Otherwise, do your due diligence and possibly try to hedge accordingly to not have too much exposure towards one industry. If you can not choose the assets to hedge against, or you are just not confident in your research, fall back to a spread and save yourself time and heartache.