Investing in a Volatile World — The Role of Digital Assets in a Multi-Asset Portfolio

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Dragonfly Asset Management

7 min readJun 21, 2023

Dragonfly Investor Round Table #1

Why should traditional investors have a crypto exposure in a multi asset portfolio? It’s a question that Dragonfly Digital Asset Management sought to address in the first of our Roundtable series on the 23rd May, an event packed with investors & industry experts.

Investing in the Next Tech Revolution

In our conversations, it has become clear that many traditional investors are enthused by Blockchain and the incredible revolution in technology it represents, but approach investing in this unfamiliar space with trepidation and, sometimes, a misapprehension of the relationship between the tokens and the underlying protocols. Investing in a revolution is rarely easy! But, as Pouneh Bligaard, our CEO, is wont to say, “I have seen this movie before”. Back in the late 1990s there was mistrust and scepticism of the burgeoning dot.com market, a sector that traded on nose-bleed inducing ratios and, seemingly, little more than excessive hope and tightly crossed fingers. When the bubble burst, almost 1000 companies went to the wall — yet, for those who picked the long term winners, like Amazon or Apple, a modest investment of a few thousand dollars could see you a millionaire today. Similarly, investments in the railroads in the early 20th Century could make or break a fortune.

Source: Dragonfly Asset Management research

In the long term, of course, both the information highway and the railways changed lives, moving data and people around the world at a speed which would have been inconceivable only a few generations ago. Hindsight is a wonderful thing, but the global success of these revolutions — along with the industrial, oil, and electrical revolutions — did not seem inevitable at the time. Moreover, in such a nascent market, picking winners and losers is critical.

Why Digital Assets?

So, why do we think that Crypto will change the world and why should investors take a stake? Blockchain technology is ground-breaking, with the capacity to transform traditional business processes and redefine how we store, exchange, and perceive value. Decentralisation has given rise to a novel, incentive-driven infrastructure, paving the way for cutting-edge business models where value is accumulated within the network through tokens. Crypto assets are simply the way one can get exposure to the upside of the technology.

This offers digital asset investors the opportunity to generate meaningful capital growth. Bitcoin has already seen spectacular performance: over 10 years, annualised returns have come in over 100%.

Source: Dragonfly Asset Management, performance calculated using historical price data from Investing.com

Crypto, therefore, is not just a powerful, but a necessary addition to a multi-asset portfolio. Even better, this can be achieved with very little risk and very little downside! Research from Bitwise in 2021 found that a small investment of 2.5% in crypto would have contributed positively to a diversified portfolio’s cumulative and risk-adjusted returns in 100% of three-year periods, 97% of two-year periods, and 77% of one-year periods since 2014 (assuming quarterly rebalancing). They also found that this 2.5% allocation would have boosted the median three-year cumulative return of a traditional 60% equity/40% bond portfolio by 13.30 percentage points. Even taking into account the savage bear market which occurred subsequent to this report, our analysis suggests that a 3% allocation to Bitcoin in a balanced portfolio would have seen returns jump from 29.71% to 38.44%. Over ten years, the result is even more exceptional.

Source: Dragonfly Asset Management, performance calculated using historical price data from S&P Global, Ycharts, and DQYDJ

Multi-Asset Portfolio (w/ Crypto): Weights reflect a typical portfolio with the following allocation: 40% US Treasuries, 30% S&P 500, 20% Nasdaq, 5% Gold, 3% Crypto, 2% Cash

Multi-Asset Portfolio (w/o Crypto): Dragonfly Asset Management, weights reflect a typical portfolio with the following allocation: 40% US Treasuries, 32% S&P 500, 21% Nasdaq, 5% Gold, 2% Cash

Bitcoin (BTC) is also a hedge against the fractional banking system, representing a decentralised store of value and uncorrelated to other assets.

But it’s not all about Bitcoin! Other Crypto assets convey ownership of specific blockchain projects, and their tokens capture the growth and adoption of those networks, similar to company shares. The growth in some of these tokens has dwarfed the Crypto Daddy.

Blockchain has the Power to Transform All Major Industries

How, then, will Digital Asset networks change the world? Blockchain is already transforming industry and it is not so much a question of if but when it is fully integrated into our lives. A non-exhaustive list of the extraordinary potential of Digital Asset networks would include:

Enhanced Transparency and Security: Blockchain’s distributed ledger technology provides a transparent, immutable record of transactions. For industries where transparency is crucial, such as supply chain management, healthcare, and finance, it will improve accountability and help prevent fraud, tampering, and unauthorised access.
Decentralisation and Peer-to-Peer Transactions: Blockchain allows for decentralised networks, eliminating the need for intermediaries. This peer-to-peer nature can remove the reliance on traditional, centralised institutions and reduce associated costs for industries like finance, real estate, and peer-to-peer marketplaces.
Streamlined and Efficient Processes: Blockchain automates and optimises workflows through smart contracts. Smart contracts are self-executing agreements that automatically execute terms and conditions once predefined conditions are met. This can lead to faster, more efficient transactions, reducing paperwork and human errors.
Supply Chain Management and Traceability: Blockchain enables end-to-end visibility and traceability of products throughout the supply chain. It can help track the origin, movement, and authenticity of goods, mitigating counterfeit products, ensuring quality control, and enhancing consumer trust. Industries such as agriculture, pharmaceuticals, and luxury goods can benefit from improved traceability.
Tokenization and Digital Assets: Blockchain allows for the tokenization of physical and digital assets, enabling fractional ownership and increased liquidity. This has the potential to revolutionise industries like real estate, art, and intellectual property, making traditionally illiquid assets more accessible and tradable.
Data Security and Privacy: Blockchain provides a secure and tamper-proof environment for storing and sharing data. It can give individuals control over their personal information and allow them to selectively share it with trusted entities. This can have implications for industries handling sensitive data like healthcare, identity verification, and personal finance.
Financial Services and Payments: Blockchain-based Digital Assets offer faster, more secure, and cost-effective cross-border transactions. They can facilitate financial inclusion for the unbanked population, reduce fees associated with traditional remittances, and enable microtransactions. Additionally, blockchain-based platforms can revolutionise lending, crowdfunding, and peer-to-peer lending, bypassing traditional financial intermediaries.
Intellectual Property Rights: Blockchain can create immutable records of intellectual property ownership, enabling creators to protect their work and establish ownership rights. This will be a boon to media and entertainment industries, where piracy and copyright infringement are common challenges.

Source: Fluree, Medium

Innovation and Adoption

Growth rate of Digital Asset adoption is surpassing the growth rate of the early days of the internet (c.1998). According to conservative estimates by BCG, the number of Web3 users is projected to reach 1 billion by 2030. However, if we consider the growth rate of the number of Web3 users from 2022, which is estimated at 39% according to data from Crypto.com, then we can expect to reach the 1 billion milestone by 2026.

Identifying the Winners of Tomorrow

The tricky bit! If investment in emerging markets isn’t quite as impossible as the Alchemists’ hunt for the Philosopher’s Stone, it can feel as though the fools’ gold and the real thing are frighteningly indiscernible. As with any portfolio, therefore, research and strategy are key. During our 2nd Roundtable, we dive a deeper into the tools we can use to identify value, but, in the meantime, we leave you with the following thought: Superior Technology is Not a Sustainable Moat! In other words, strategy, people, partnerships, and capturing the zeitgeist will matter as much as the tech.

Just like in Web2, we believe there will be a handful of winners who will dominate the new Internet and these can be identified based on a thorough evaluation of the sustainability of the project’s competitive advantages. There are also patterns and parallels that can be identified. We leave you with a few, to get you thinking about the potential and the possible landscape of the Internet of tomorrow!