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Building a Cryptocurrency Portfolio

I like cryptocurrencies. I like the idea of them. I’m a Libertarian, and I like markets over central planning. I don’t believe all the money printed by the Federal Reserve is going to end well. That’s probably why cryptocurrencies speak to me.

As the market for cryptocurrencies matures, it’s important to bring some of the same fundamentals of investing most people use with stocks and other types of investment. Diversification is a key aspect to investing to reduce your overall risk-adjusted return. When thinking about cryptocurrency, I think it’s important to build a framework for evaluation and then use that framework to build a portfolio.

Investment Criteria

When investing, it’s important to develop a framework for how to evaluate potential investments. Cryptocurrency is not unlike investing in other asset classes. If you want your investments in crypto to go the distance, they’ll need to do well in the following categories:

  • Product / Function: Do they own a functional niche? Do they have a defendable product and unique functionality?
  • Size of Community / Adoption: Do they have a rabid following of users? Do they have an invested and interested community?
  • Technology / Moat: Do they solve a problem with a novel method? Do they implement interesting, defendable technology?
  • Aligned Incentives / Governance: Are the investors systematically aligned with incentives? Is there proper systems and process for governance? Is there mining and/or other incentives or did they generate all the coins at once?
  • Market Opportunity: how big is the problem trying to get solved? What is the total addressable market?

We will use an unscientific rating from 1–10 for each of these to evaluate several currencies below. (P/C/T/I/O) evaluations (e.g 10/4/7/3/7).

Portfolio of Cryptocurrencies

If you’re using cryptocurrencies for broader diversification of asset classes in your investment portfolio, I would look to invest in 3–7 cryptocurrencies. I recommend doing that for the same reason you diversify across many asset classes. It allows you to decrease exposure risk and to improve your risk-adjusted return. If you want to analyze which currencies are non-correlative, check out this table.

Major Currencies: Core Assets

I think every cryptocurrency should start with both Bitcoin (BTC) and Ether (ETH). Bitcoin is the granddaddy of them all and has first-mover advantage. It’s proved itself to be the currency used as a store of value and it has the most partners/vendors in the market. Ethereum has built in the idea of “smart contracts,” which allows for so much of the innovation that’s coming over the next 10 years using blockchain technology. Being at the core, Ethereum has a great chance to capture value. I would have a majority of my crypto investment in these two currencies.

  • Bitcoin (BTC) now at $9,178.26 (9/10/8/10/9)
  • Ethereum (ETH) now at $745.35 (10/9/10/9/10)

“Zombie” Currencies

I would be careful with what I call “zombie” currencies. These are currencies where they may have been large or had potential some time in the past, but the market has spoken and they weren’t chosen.

Bring caution to these 3 though because of their lack of a unique value proposition. Bitcoin Cash is trying to be the currency for a medium of exchange with their faster transactions times over Bitcoin. That is a tenuous position and adoption by miners has plateaued. Ethereum Classic (ETC) has been shed to the wayside with Ethereum (ETH) being the winner of that battle. Litecoin is supposed to be “the silver to bitcoin’s gold”, but there are a lot of coins competing for that slot. Until they can prove they’re the dominant coin for being a medium of exchange (or some other unique value), I would not invest in it. Be careful about investing in zombie currencies. They may rise with the total market, but at some point their value may fall precipitously with their lack of a unique value proposition.

Platform Cryptocurrencies

There are a set of cryptocurrencies that are centralized platforms in and of themselves trying to best solve a problem using Blockchain technology. Ripple tries to tackle the international payment remittance market. NEO provides a platform to programmatically extend smart contracts and NEM is a blockchain technology platform for managing and building smart assets. DASH has a community of people trying to solve digital payments in a novel way.

  • Ripple (XRP) at $0.25 (8/9/9/7/8)
  • NEM (NEM) at $33.88 (8/8/8/7/9)
  • NEO (NEO) at $73.22 (9/7/8/7/9)
  • Dash (DASH) at $447.63 (8/9/6/9/8)

Anonymous Cryptocurrencies

There are several cryptocurrencies devoted to providing more privacy in the transaction. Each of them works a little differently. Since privacy is such a big selling component of why to use cryptocurrency, I think one of these belong in your portfolio.

  • Zcash (ZEC) at $273.24 (10/8/8/7/8)
  • Monero (XMR) at $225.57 (9/8/6/8/8)

Protocol Coins

Since we’re in the early stages of building our decentralized and Blockchain applications, many of the early platforms are focused at the protocol layer. In the future, more coins will be focused at the specific application layer, but since we need the build-out of Blockchain infrastructure, I would invest in at least one of these currencies.

  • EOS (EOS) at $18.02 (9/9/9/9/9)
  • IOTA (MIOTA) at $2.22 (10/8/9/8)
  • MaidSafe (MAID) at $0.36 (9/9/8/8/9)
  • BAT Token (BAT) at $0.38 (7/7/8/8/8)

Other Future Coins and Tokens for Your Consideration

In my opinion, the following list of cryptocurrencies are speculative now but show promise. Many of these below focus on applications that will be built on the protocols we talk about above. I would probably hold off investing in these until they mature a little and until you’ve had some time to build a core cryptocurrency portfolio. Keep an eye out for these:

More Scrutiny Required

I would not invest in BitConnect because many think it’s a scam. BitConnect still has a market cap $1,100,000,000. It’s hard to believe, but there aren’t really any regulatory bodies enforcing and people are captivated by their guarantee of high returns. All things point to this being a Ponzi scheme. Caveat Emptor.

Avoid ICOs

I would steer clear of ICOs. Right now we’re in a bubble with ICOs scams everywhere. Most companies offering ICOs don’t have a product built, let alone any revenues. No clear value is being created with 90% of the ICOs these days. Most coins are trading lower than the ICO price after the ICO.

The regulators, like the SEC in the U.S., are eventually going to come and “enforce” regulation. That’s going to be painful for everyone involved. So, until we get enforcement of regulation and a clear indication that true value is getting created in the ICO event, I recommend avoiding ICOs.

Model Portfolio

A model portfolio may look something like this:

  • BTC (35%) — Core: Major currency, Tier 1 asset
  • ETH (35%) — Core: Major currency, Tier1 asset
  • XRP (10%) — Tier 2 asset: Platform for Remittance, Diversification
  • ZEC (5%) — Anonymous/Privacy, ZKPs w/ important use case
  • EOS (10%) — Protocol Coin: Building on top of Ether, big market opportunity, long-term wait 1-2 years
  • IOTA (5%) — Protocol Coin: Building for the IoT, big market opportunity, long-term wait 1–2 years

Having a portfolio of 3–9 cryptocurrencies will optimize your risk-adjusted return. Spreading out bets will reduce your risk. Moreover, you’ll get to own some of the coins that haven’t yet had quite the run that bitcoin and ether have. I would probably set a minimum threshold of coin market cap before investing. For example, I wouldn’t invest in any coins with a market cap of $100mm or less.

A final note, this is NOT evergreen content. The model portfolio described here may not be relevant in the future because of the dynamic nature of the market and landscape. This is a very new market and I expect many rapid changes over the next year and beyond. So, make sure to take the principals described here and apply them for the current and future state.

Happy Hunting!


Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Please do your own homework.

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Jake Ryan

CIO at Tradecraft Capital & Author of CRYPTO DECRYPTED & Crypto Investing in the Age of Autonomy, published by Wiley