Oct 27, 2021

7 min read

Constructing a theme-based crypto portfolio — Part.1

The future isn’t coming — it’s already here. As such, I am very fascinated with Cathie Woods, the founder, CEO and CIO of Ark Invest, who believes that the global economy is undergoing the largest technological transformation in history thanks to five innovation platforms evolving at the same time. These five innovation platforms are: Genome sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.

Likewise, Real Vision has created a special 5-part mini-series: The Exponential Age. I have linked three videos that you can find on YouTube that are absolutely mind-blowing in this regard. The central thesis is that we’ve entered an era where the digital and physical paths finally converge and everything is disrupted.

You must watch these! Besides, you should definitely sign up for Real Vision Crypto if you are interested in learning about cryptocurrencies. It is for free.

This was a rather lengthy introduction and I got a bit sidetracked with Real Vision — my bad. My point is that an innovation-based portfolio is rather nifty and as such it might be a good idea to borrow this concept to our crypto portfolio. With more than 6,500 cryptocurrencies in existence as of September 2021, it makes sense to categorize some of those cryptocurrencies in order to conceptualize the crypto space better. Such an approach might also serve us well when building a crypto portfolio. So let’s dig in and look at some common categories.

Bitcoin

Bitcoin is the king of cryptocurrencies and as such it rules supreme in a category of its own — mazel tov, God bless you! Put simply, it is hard money you can’t f*ck with. There should be no debate. No-one controls it. No governments, no companies, no central banks, no money printer goes brr. It’s a revolution as big as the internet. It’s transparent as glass and subtle as a wrecking ball. I have explored this idea ad nauseam and it needs no further elaboration nor justification.

Please note that there are numerous hard forks directly or indirectly originating from the Bitcoin main chain. The simplest way to conceptualize a fork in a cryptocurrency’s blockchain is to imagine that the fork introduces a new set of rules for bitcoin to follow.

To put that into perspective, Litecoin (LTC), Bitcoin Cash (BCH) and Bitcoin Gold (BTG) would almost certainly come to mind. For you bookworms and history buffs out there I would recommend reading The Blocksize Wars by Jonathan Bier (excellent surname. It also means beer in German btw).

Here is a nuanced discussion on Bitcoin’s core values, layered scaling, and blocksize debates from the Lex Fridman Podcast .

Please feel free to ignore bitcoin forks for your convenience. In my humble opinion, they are a waste of time. I am totally in the bitcoin maxi camp on that one. I don’t see much value in them and as such I have never bothered to read up on them. Waste of time — there might be an argument in trading these goodies but that’s not my cuppa tea.

Smart Contract Platforms

Bitcoin (BTC) has surely has transformed the way we think about money. It is fundamentally changing our notion of who controls it, how it is controlled, and who can use it. But Bitcoin is one part, albeit a very important part, of a broader emerging decentralized economy. And if its introduction of digital cash unlocked the door to this economy, Ethereum’s smart contracts are kicking it wide open.

So what are smart contracts? They refer to computer programs that are deployed and executed on blockchain networks. They are being used to facilitate all kinds of functions from decentralized asset exchange to decentralized lending to blockchain-based asset issuance and tokenization. They were initially proposed by computer scientist and cryptographer Nick Szabo in the 1990s.

Before I embarrass myself: Smart contracts are complicated so best read up on them yourself. The Block has an excellent report on Layer-1 Platforms that is not only an outstanding read but will also help you conceptualize some of the movers and shakers in this space.

Suffice to say that Ethereum is king. It is currently the second-largest coin in market value, second only to Bitcoin. Here are some videos that might help you to understand Ethereum’s potential a little better. By now this should be fairly obvious but let’s just double down in case someone missed the boat.

The story doesn’t stop at Ethereum though. Dozens of smart contracting platforms have launched in tandem with Ethereum’s rise. Some are seeking to offer an easily adoptable alternative to Ethereum and challenge its status as the de-facto platform for launching decentralized applications. Others are taking a different approach centered on giving developers the highest level of flexibility in building their own blockchains and creating infrastructure to facilitate cross-blockchain communication.

This begs the question: Can anyone dethrone the smart contract king Ethereum? To be sure Ethereum is still number one with a steady 22% growth in the past 30 days. However, with gas fees seemingly forever high, other blockchains are gaining traction. Solana (SOL) has climbed the ranks from 5th to 3rd with a 36% increase in total locked value (TVL). Avalanche (AVAX) and Fantom (FTM) continue to melt faces using lavish incentives to surpass lagging Polygon (MATIC). All great projects in their own right so be sure to DYOR.

Defi Llama is a useful site to look at ranking and metrics for DeFi (Decentralized Finance) protocols. So if you go to Defi Llama and click on chains you will be able to identify a whole bunch of promising smart contract projects. P.S. I am very bullish i.e. foolish perhaps on Solana (SOL), Avalanche (AVAX), Fantom (FTM), and Algorand (ALGO) (among others). Needless to say, I missed the train on Solana — I bought in way too late but it still has tremendous upside in the long term I reckon.

Below is a nuanced discussion on Solana at the Bankless Podcast.

The below diagram from The Block clarifies things further. Notice the Layer 1 smart contracting platforms at the bottom, which is the subject of our attention. I forgot to mention Polkadot (DOT) and Cardano (ADA). The latter chain is still in the works but once Cardano’s smart contract platform is up and running it will probably very successful judging but their massive community surrounding visionary Charles Hoskinson, who is btw the co-creator of Ethereum.

Charles Hoskinson is an interesting character. A lot of his followers love him, others love to hate him. Here is an epic discussion on the Lex Fridman Podcast so be sure to make up your own mind.

I should wrap this up. This post is getting out of hand — nobody wants to read an endless novel. In summary, we looked at two crypto categories: Bitcoin and Layer 1 Smart Contracting Platforms. Key learning is that Bitcoin is king! Ethereum is a monster and you’d better DYOR on some of the other smart contract platforms. There is huge upside as the traditional analog world moves into the digital realm and you better believe that this shift is coming. Macro, technology and digital assets all converge at once. This affects everything — and it makes the stock market seem like a f*cking sideshow.

In the next post I will look at DeFi and perhaps stablecoins. Maybe I will throw in meme coins.

Happy categorizing ya’ll.

Frei Bier / Twitter: @FreiBIER13

DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas. As a former academic, I also recognize that I will need to sharpen my paraphrasing and referencing skills.

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Constructing a theme-based crypto portfolio — Part.1

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