Crypto differs markedly from traditional asset classes in many ways, including the decentralized legal structures that underpin the tokens and highly controversial valuation methods. A notable list of critics, from Warren Buffett and the Vanguard Group to local industry super fund UniSuper, believe the asset class is not something to invest in due to the inherent volatility and prevalence of scams and cybercrime. , among a myriad of concerns.

But clearly, many investors are unfazed, given the Treasury data and the sheer number of people who don’t own crypto but they describe themselves as “crypto-curious”.

Diversification Rules

Galvin’s argument is that despite the unique features of crypto investing, the old-school rules of portfolio construction apply, including diversification.

And that means having exposure to “altcoins”: the thousands of digital tokens other than the original bitcoin. Since many are in their early stages, that’s where the “alpha” really lies, or the ability to generate above-market returns, he says.

As a financial adviser, Cody Harmon says that diversification is important, adding that that doesn’t mean crypto investors should go too far down the rabbit hole by deploying their capital to hide altcoins, which critics sometimes disparagingly call “altcoins.” shit”.

That’s because ethereum, which, with a market share of around 20 percent, is almost four times the size of the next largest tether token, and is among the most significant “layer one” blockchain ecosystems on the which other tokens are built. Blockchain is the technology that underpins crypto assets: a networked public ledger that records transactions.

There is widespread confusion among investors about the difference between these “layer one” assets and other tokens, says Harmon, who runs the Cruz Family Office and has an active interest in digital asset markets.

Some tokens like ethereum, solana, terra, cardano, and lunar represent separate and alternative blockchain ecosystems, meaning they “compete for developer and miner attention and business capital.” Many other altcoins represent applications and businesses built on top of those blockchain networks.

“Ethereum is already very diversified,” says Harmon. He likens buying his native currency, known as ether, to buying an exchange-traded fund (ETF) that tracks the big-tech Nasdaq index.

It’s broader than an individual stock holding, but still a bit more specialized than a broad-based national market like the Australian Stock Exchange or the New York Stock Exchange.

Since many altcoins are tied to apps built on ethereum, buying them while holding units in the ether token is a bit like buying an ASX 200 ETF but also owning top-tier ASX stocks like BHP, Harmon adds, borrowing Galvin’s analogy.

Investors can also access an emerging range of tokens that provide exposure to a broader range of tokens, similar to the way an ETF is listed on an exchange, but also invests in companies that are listed on that same exchange.

Harmon gives the example of the DeFi Pulse Index, a token that tracks the performance of decentralized finance (DeFi) assets across the cryptocurrency market. DeFi applications seek to exclude banks and other financial intermediaries from transactions through the use of blockchain technology.

However, for investors who want to take more risk and try their hand at active altcoin selection, Harmon has two pieces of advice. First, they must read the “white paper” associated with each token. Second, they should think about “utility”.

Collecting coins is not easy

While many tokens are very early stage and either have no obvious real-world use cases or are very “crypto-native” in that they largely serve other blockchain-based operations, Harmon suggests evaluating whether its stated purpose probably makes sense. as the market matures.

For example, SushiSwap is an app that allows users to exchange one digital token for another, a feature that Harmon says is not unlike the multi-billion dollar foreign exchange (FX) market for fiat currencies that many investors will be familiar with. “Is this an idea that has legs?” he asks. “Absolutely.”

But Galvin says that like stock picking, single coin picking is a difficult business, and possibly much more so, as the assets are in their infancy and there is little in the way of research and access to reliable investments. of third parties. hard.

“The challenge for the individual investor is which coins or tokens to own and then how to buy them, as not all of them are on centralized exchanges like Coinbase or Independent Reserve,” he says.

Unsurprisingly, Galvin’s solution is to invest in a fund managed by experienced portfolio managers and crypto specialists. But most are only open to wholesale and sophisticated investors with at least $2.5 million in assets and have minimum purchases greater than $200,000.

That is why Mark Monfort, data analyst and co-founder of the Australian DeFi Association, would like to see major publicly traded ETFs play a role in giving retail investors access to altcoins.

Australia’s first cryptocurrency ETFs are set to start trading on the Cboe Australia exchange later this week after a delay, and will also begin trading on the main ASX exchange in the coming months.

But corporate regulator ASIC restricted the market to bitcoin and etherruling that only the two large-cap crypto tokens have the necessary scale, pricing mechanisms, and major institutional investors to be eligible as underlying assets for ETFs.

“If ASIC had expanded the scope, it would have created a broader range of options for existing and new ETF issuers to provide options to the ETF investing public,” says Monfort, who also founded the ETFtracker analysis tool.

“Instead, we’ll have to watch how others innovate and hopefully we won’t be too late to catch up.”