Why You Should Diversify Your Digital Asset Portfolio

Digital
assets
may
be
one
of
the
few
markets
where
diversification
still
seems
underappreciated.
Bitcoin
and
Ethereum
remain
dominant
by
market
cap
despite
a
growing
number
of
innovative
new
projects,
and
many
investment
products
provide
only
a
handful
of
concentrated
positions.

At
Outerlands
Capital
we
have

written
about
the
benefit
to
risk-adjusted
returns
from
diversification.
Individually,
smaller
projects
may
carry
higher
risk,
but
investing
across
a
broad
mix
of
projects
can
reduce
volatility
and
improve
risk-return
metrics
like
the
Sharpe
ratio
(returns
normalized
for
volatility).
However,
there’s
more
to
diversification
than
higher
Sharpe
ratios.

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In
a
market
as
dynamic
as
crypto,
diversification
is
essential
to
gain
exposure
to
the
varied
and
evolving
mix
of
themes
and
sectors
built
around
blockchain
technology.
Diversification
is
about
solving
for
the
power
law
distribution
of
returns,
whereby
a
portfolio’s
return
is
driven
by
a
small
number
of
highly
positive
outcomes
against
a
larger
number
of
investments
that
deliver
lower,
or
negative,
returns.
This
phenomenon
is
well
documented
in
venture
capital
(VC)
investing,
and
the
concept
carries
over
to
digital
asset
investments,
which
are
akin
to
investments
in
disruptive
tech
startups.
Diversifying
makes
sure
your
portfolio
has
enough
shots-on-goal
to
capture
the
biggest
winners
over
time.

A
concentrated
portfolio
of
just
a
handful
of
tokens
will
struggle
to
capture
the
range
of
exciting
crypto
use-cases
being
developed
today.
Take,
for
example,
the
10
largest
cryptocurrencies
by
market
capitalization
–
a
popular
take
on
a
ready-made
“diversified”
portfolio.
You
have
here,
essentially,
a
mix
of
currencies
and
Layer
1s.
While
these
larger
tokens
are
sometimes
seen
as
less
risky
on
account
of
scale,
such
a
selection
fails
to
capture
much
of
the
current
innovation
happening
in
crypto.

Expand
to
an
actively
managed
portfolio
encompassing
tokens
from
the
Top
150
by
market
cap
and
you
start
to
see
a
much
more
dynamic
picture,
spanning
Layer
1s
and
related
infrastructure
(like
scaling
solutions
and
interoperability),
DeFi
(from
trading
and
lending
to
asset
management),
entertainment
(including
gaming
and
the
metaverse),
decentralized
physical
infrastructure
networks
(DePIN,
including
projects
for
distributed
compute
power
with
tie-ins
to
AI),
real-world-assets
(RWAs),
and
more.
While
some
of
these
projects
may
carry
greater
risk
on
their
own,
diversification
helps
manage
the
risk
of
the
overall
portfolio.

Portfolios
should
be
positioned
to
capture
emerging
themes
and
new
directions
as
projects
across
the
space
continue
to
innovate,
searching
for
product-market-fit.
Even
in
the
more
developed
parts
of
the
crypto
ecosystem,
such
as
payments
or
Layer
1s,
we
believe
it
is
still
much
too
early
to
call
winners.
The
pace
of
innovation
means
disruption
will
continue
to
be
the
norm.

The
nascency
of
the
market
and
its
fast-paced
evolution
also
mean
that
an
active
approach
to
portfolio
management
is
imperative:
Diversified
is
not
equal
to
passive.
Building
a
well
diversified
portfolio
does
not
mean
just
buying
more,
smaller
assets.
It
means
taking
a
long-term
perspective
on
the
scale
and
scope
of
the
digital
assets
ecosystem,
and
positioning
a
portfolio
to
take
advantage
of
the
many
different
potential
outcomes.

Coming
out
of
crypto
conferences
like
Consensus,
AIMA
Digital
Assets,
Token2049,
and
DAS,
we
are
again
emboldened
in
our
assessment
that
the
average
institutional
crypto
portfolio
is
simply
not
exposed
to
enough
of
the
disruptive
use-cases
being
tested
in
digital
assets
today.
Budding
themes
such
as
DePIN,
innovative
scaling
solutions
for
Ethereum
and
also
Bitcoin,
and
bringing
real-world-assets
on-chain
all
require
a
deep
look
past
the
largest
tokens,
and
should
encourage
portfolios
of
digital
assets
spanning
many
sectors
and
project
sizes.

Remember
that
diversifying
doesn’t
make
a
portfolio
less
potent
–
it
actually
gives
investors

more
opportunities
to
capture
winners,
while
still
providing
time-tested
risk
benefits.
In
essence,
diversification
gives
you
more
for
less.

Disclosure:
The
information
herein
is
for
general
information
purposes
only
and
is
not
investment
advice.
An
investment
involves
a
high
degree
of
risk.
Past
performance
is
not
necessarily
indicative
of
future
results.