The Case for Diversified Crypto Exposure

When it comes to crypto assets, bitcoin is king. But history suggests investors would benefit from owning a basket of them.

Something big happened last week: Ethereum started to wake up.

After a brutal few months, which saw Ethereum fall nearly 60%, the second-largest crypto asset has rebounded sharply. It’s up 53% from its April 12 low—and rose an incredible 37% in the past week alone.

There are multiple reasons for the move, including the successful implementation of a major upgrade to the blockchain and a general risk-on shift in the market.

The run-up has many investors asking whether they should diversify their crypto holdings beyond bitcoin.

It’s a good question.

Bitcoin is the king of crypto assets—the largest, most liquid, and most established. In my opinion, it’s akin to “digital gold” and is the only crypto asset with a shot at being a globally important currency.

And yet I think most investors should own other crypto assets.

Why? History is instructive. 

Internet Investing in 2004

Imagine you wanted to invest in the internet in 2004. At the time, search was the dominant business, and Google was king.

You could have said: The internet is going to be massive. I’m going to buy the dominant player in its most dominant market.

This would have been a great strategy. Over the past 20 years, Google is up 6,309%.

But the internet is a general purpose technology. It can be used for search, but it can also be used for other things: retail, social media, video, B2B software, etc.

That means that, in 2004, instead of just buying Google, you could have bought Google and the leader in each of these verticals: Amazon, Netflix, Salesforce, and so on.

Here’s how that would have worked out.

Performance of Tech Giants, 2004-Present

Source: Bitwise Asset Management with data from Yahoo Finance

Google did exceptionally well. Today it’s one of the most valuable assets in the world. But other categories did well, too—in fact, the best performer turned out to be Netflix. That wasn’t obvious in 2004.

Blockchains Are a General Purpose Technology

Like the internet, blockchains are a general purpose technology. 

You can use a blockchain to create a better form of money (Bitcoin) or to create a programmable network for transferring “real-world assets” (Ethereum, Solana, Avalanche). You can build new types of applications (DeFi, DePin) or middleware that services other blockchains (Chainlink). You can also build traditional businesses that support the crypto economy (Coinbase, Circle, Marathon Digital).

I suspect we’ll be able to do a lot of things with blockchains that we haven’t even considered today.

The fact that blockchains do different things means that, contrary to what you may hear, they offer very different returns over time. Here are the calendar-year returns for Bitcoin, Ethereum, Solana, and Chainlink over the past five years.

Crypto Asset Performance, 2020-2024

Source: Bitwise Asset Management

Which will be the best performer between now and 2030? Good question!

What This Means for Investors

This doesn’t mean everyone should invest beyond bitcoin.

If you think blockchains are really only useful for protecting against the abuse of fiat currencies, my recommendation is just to buy bitcoin. Bitcoin is the only crypto asset with a clear shot at being “money.” It will be extremely hard if not impossible for a competitor to surpass bitcoin in this role.

But if you agree with me that blockchains are a general use technology—if, for instance, you’re intrigued by the idea of nearly all the world’s assets moving onchain—history suggests you’d want to own a basket of crypto assets: Bitcoin, Ethereum, Solana, Chainlink, and more.

I'll close with one stat that, for all of my experience in the ETF and crypto industries, still amazes me: Over the past 20 years, actively managed U.S. equity funds have underperformed their benchmark indexes 97% of the time.¹

In a field as fast-moving, vast, and unpredictable as crypto, a statistic like that is worth coming back to.

My advice: Don't fret about picking winners; invest in the big picture.

Note:

(1) Source: SPIVA® U.S. Scorecard, S&P Dow Jones Indices LLC, eVestment Alliance.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.