A beginner’s guide to adding cryptocurrency exposure to a responsible portfolio
Unless you’ve been living in a cave for the past couple of years (highly possible and not the worst Covid avoidance technique), you’ll have been made aware of the inexorable rise of Bitcoin and its often ironically named counterparts. Talk of dollar replacement aside, crypto has loudly emerged as the most popular of a number of alternative asset classes whose exponential growth and digital-only form have grabbed headlines. Chances are, you’ve either invested already (and likely seen large growth) or you’ve been sitting on the sidelines feeling like you’re missing out. Either way, care must be taken moving forward.
Firstly, it’s important to clarify that here at Strabo, we’re not traders. While there is certainly a place in the market for that, it simply doesn’t fit into our long term investment strategy. We’re interested in including cryptocurrency exposure as part of a risk-adjusted long term portfolio, and at least for now, it certainly falls in the “alternative assets” category. Conventional literature suggests this should be capped at a fairly small percentage of total portfolio value, and we’re inclined to broadly agree. However, the fact that most large coins have wildly outperformed other asset classes could have increased exposure beyond this, and we’re not necessarily suggesting trimming your holdings. So what does the landscape look like, and is it too late to join the party?
Given the fluctuations, it’s hard to talk about precise snapshots, but the total crypto market cap this year surpassed $2tn for the first time (you can see how it’s doing today here). To put that into perspective, that’s more than the market cap of global silver ($1.5tn), closing in on the FTSE 100 ($2.8tn) and not insignificant against gold ($12.1tn) or the S&P 500 ($31.6tn). So it’s big.
Take a look at the chart, where we’ve split the total market in 10. The largest couple will probably sound familiar, but as you move down the list they become less recognisable. Naturally, the largest coins or those with the strongest founding team and mission will be the “safest,” while those without come with an elevated level of risk you may or may not feel comfortable with. Here at Strabo, the team maintains some exposure to several large coins, while speculating “fun” money on some of the smaller ones, which we fully expect to lose! We like how Silicon Valley guru Naval Ravikant frames it. By adding some exposure, you’re making an asymmetric bet — either crypto becomes digital gold and you make one of the best investing decisions of your life, or you lose a small part of your portfolio. Do therefore remember the risks alongside the potential outcomes.
We personally like the following, to various degrees (please note, this does not constitute investment advice):
- BTC (Bitcoin): the forerunner, Bitcoin was first conceived under a pseudonym by anonymous developer Satoshi Nakomoto in 2008. Capped at 21m coins, with each divisible to the 8th decimal place, it is still being distributed and acts as the ‘reserve currency’ against which all other coins trade. Will likely remain a store of value, and is beginning to find traction in developing countries
- ETH (Ethereum): created in 2013, Ethereum is the original and dominant platform for issuing smart contracts, which are stored on a public blockchain. It also forms the backbone of most smaller coin launches, as projects are able to issue fungible Ethereum tokens to early investors.
- ADA (Cardano): positioned as the third generational blockchain, ADA aims to implement the best features from Liectoin, Bitcoin and Ethereum into one currency. Security and reliability are higher than Bitcoin, p2p transactions are faster and cheaper than Litecoin, and smart contracts are better implemented than Ethereum. Analysts are generally optimistic about it given the strength of the team and improvement work it has attracted
- DOT (Polkadot): Polkadot is a shared network for communcation across the Blockchain, connecting multiple blockchains into one unified network. It is unique in that customised side-chains can connect with public blockchains.
- USDT (USD Tether): The most popular and liquid stablecoin, USDT is actually redeemable for a single fiat US dollar from Tether (the company), making it an ideal intermediary for transferring to and from smaller coins on less well-known platforms.
So you’ve decided to add some exposure. Where’s the best place to buy? Well, Coinbase is the most famous. Since becoming the first crypto exchange to go public this year, it’s certainly the benchmark when it comes to simplicity and security for beginners. You won’t go accidentally buying the wrong coin or complex derivatives, for example. Of course, it’s compatible with Strabo so you can monitor your holdings as part of your full portfolio with us.
However, you won’t find even some of the larger coins on Coinbase: they have a drawn out due diligence process that prohibts full access, which may deter some users. For this reason, we’re using Binance. You can toggle between beginner and pro modes, the selection of coins is far broader, and advanced users can perform more complicated trades. However, it does take a while to get the hang of, and portfolio performance isn’t displayed too clearly. Of course, it’s also compatible with Strabo so that shouldn’t be a problem.
Finally, some of our friends use Kraken. Again, more comprehensive than Coinbase but slightly smaller and a little less user friendly. Again, available on Strabo.
Please do share with us your portfolio allocations, and how you’ve found integrating crypto exposure to your long-term portfolio. We’ve just added crypto exchange APIs to the platform and we’d be interested in hearing what particular insights you’d like to see. We want to make sure that you’re extractive maximum value from us, and can view your crypto assets easily and effectively as part of your wider portfolio, along with the insights and forecasts you need to continue investing responsibly.
