Crypto Skeptical But Crypto Curious? This Portfolio Could Be The Perfect Fit
It’s true: the speculative frenzy around crypto is similar to the dot-com bubble in the 1990s, and we all know how that ended. But with the underlying technology – the internet – having gone on to change the world, it’s worth remembering that the blockchains on which cryptos are built look set to do exactly the same thing. So if you don’t want to end up on the wrong side of history but you’re also cautious about the asset class, there’s one portfolio that could be perfect for you…
What is this portfolio?
As a crypto-curious investor with a classical finance background, I’m on the lookout for concepts that I can take from traditional asset class investing and apply them to the crypto world.
One important concept is centered around building balanced portfolios, and an example of such a portfolio comes from notable investor Harry Browne. His so-called “Permanent Portfolio” splits the pot into four and allocates an equal amount to stocks, government bonds, gold, and cash.
Source: BullionVault
This conservative strategy aims to provide reasonable returns regardless of economic conditions. So I asked myself: can I build a Permanent Crypto Portfolio that aims to do well regardless of crypto market conditions?
The 25% “gold” allocation: bitcoin
Bitcoin is increasingly being viewed as digital gold. After all, it shares many similar characteristics with the shiny metal: it’s in limited supply, it’s durable, it’s fungible, it can’t be counterfeited, it can be divided into smaller “nuggets” (Satoshis), and so on. Despite this, bitcoin’s total market value of around $1 trillion is less than a tenth of gold’s total market value of over $11 trillion, implying the crypto has a lot more room to run.
Gold’s role in the traditional Permanent Portfolio is twofold: to protect against rising inflation and to act as a safe haven during times of crisis. Bitcoin’s similar characteristics to gold could give it the same role. For one thing, it could act as a store of value during times of rising inflation – especially when central banks are the ones causing that inflation by printing money and devaluing fiat currencies. Admittedly, though, we don’t have enough pricing history to test how bitcoin would’ve performed during some high-inflation periods in the past, like the 1970s.
So what about bitcoin as a safe haven? Tim Draper made the interesting point that the older generation will most likely continue to turn to gold during downturns, but that the younger generation will increasingly turn to bitcoin. What’s more, bitcoin benefits from a “flight to safety” when there’s a downturn specifically in the crypto market, considering it’s the oldest, biggest, and most established coin out there.
The 25% “stocks” allocation: coins of promising blockchains
The traditional Permanent Portfolio has a 25% allocation to stocks. In our Permanent Crypto Portfolio, we’d allocate 25% to coins of promising blockchains. Stocks’ role in the traditional Permanent Portfolio is, quite simply, to grow – that is, to benefit from the wider economic growth that pushes up corporate profits and, in turn, stock prices. In the crypto world, you can stand to benefit from the increasing use of blockchain – and all the decentralized applications being built on top of them – by investing in the coins that power well-established blockchains, as well as upcoming ones.
An example of the former is ether, which powers and is used as payment in a network – Ethereum – that hosts all sorts of in-demand blockchain-based solutions. Those solutions include decentralized finance (DeFi), NFT-hosting, decentralized autonomous organizations (DAOs), and a lot more. Ethereum is the most widely used blockchain after bitcoin, but the sheer complexity of the network has created significant challenges, including a lack of scalability and high transaction fees. It’s no wonder, then, that a number of Ethereum competitors have emerged, like Avalanche (AVAX), Solana (SOL), Cardano (ADA), Polkadot (DOT), and Algorand (ALGO).
Without a crystal ball, it’s hard to say if Ethereum will fix its issues in its long-anticipated upgrade (Ethereum 2.0) and continue to dominate the blockchain market, or if one of the competitors will steal the crown. So in our Permanent Crypto Portfolio, a sensible strategy for our 25% allocation to coins could be to put half of the allocation in ether, and split the rest evenly across the five competitors mentioned above. But if you have an educated view on why one of the competitors has a better shot, you can overweight it and underweight the rest.
The 25% “bonds” allocation: income via staking and yield farming
The traditional Permanent Portfolio has a 25% allocation to bonds. They play a few roles, but one of their main ones is to provide the investor with an income stream.
So in our Permanent Crypto Portfolio, we’ll dedicate 25% of it to different crypto income strategies (all of which you can find here). A simple example is buying some stablecoins like USDC or DIA, and then depositing them in DeFi lending platforms like Compound or Aave to earn some interest.
Current USDC and DIA lending rates on Compound or Aave range between 2.7-7.3%. Source: Coinbase
Depositing crypto at DeFi lending platforms is actually an example of “yield farming” – a strategy where you contribute crypto to a liquidity pool that then earns you additional crypto. Another example is depositing coins at decentralized cryptocurrency exchanges, which rewards you with a cut of the exchange’s transaction fees in the form of extra crypto. Uniswap is one large DeFi cryptocurrency exchange adopting this approach.
The last way to generate crypto income is staking: staking is a less resource-intensive alternative to crypto mining, and it involves allocating existing crypto to blockchains based on proof-of-stake and being rewarded with, you guessed it, more crypto. Many popular exchanges such as Binance and Coinbase allow you to stake a wide selection of cryptocurrencies
The 25% “cash” allocation: cash
Cash is cash in both the traditional Permanent Portfolio and our crypto version. A quarter of the portfolio allocated to cash might sound high, but as mentioned at the start: this is a conservative portfolio for those just thinking about dabbling in the asset class.
Recall I said that crypto could be going through a similar dynamic to the dot-com bubble in the 1990s: the 25% cash allocation, then, not only serves as protection in case there is a crash, but also as ammunition you can deploy to buy more crypto at lower prices.
And if you’re adamant about not putting a quarter of your crypto portfolio into cash, consider this bucket your opportunity to invest in other areas of the crypto market like NFTs and – as much as it hurts me to say it – memecoins.
