Meet Roe, an ambitious investor who has been keeping a close eye on the world of crypto. She has heard the stories of overnight millionaires who struck it big by investing in Bitcoin and other cryptocurrencies. The idea of achieving financial independence is alluring, and she can't help but wonder if it’s the key to reaching her financial goals.
But Roe also knows that investing in cryptocurrency can be risky and volatile. She’s heard the horror stories of investors who lost their life savings. Roe is unsure if investing in cryptocurrency is the right move for her, but she can't ignore the potential for high returns.
If you can relate to Roe’s dilemma, you're not alone. The world of cryptocurrency can be confusing and overwhelming, especially for new investors. However, with the right investment strategy and approach, investing in cryptocurrency can be a valuable addition to a diversified portfolio.
In this article, we'll explore the opportunities in this emerging space and show that by utilizing a diversified crypto investment strategy it is feasible to leverage this asset class for more efficient attainment of your financial goals.
Significant Opportunities: 12 Real World Use-Cases
Bitwise, our trusted partner for crypto asset management, has identified 12 tangible use cases for cryptocurrencies that have sparked great enthusiasm for their long-term potential. These use cases serve as a lens through which we can navigate the short-term volatility of this emerging economy and recognize the significant opportunities that lie ahead.
Below are the 12 use cases described in detail in the Bitwise, April 2023 article: “Crypto Use Cases: 12 Real-World Stories of How Millions of People Are Using Crypto Services Today”.
Farcaster: Fixing What’s Broken in Social Media. Thousands of early adopters and public figures are using Farcaster to free themselves from corporate control, censorship, and misinformation.
Stablecoins: Moving Dollars at the Speed of the Internet. The slow and expensive world of wire transfers, ACH, and checks is giving way to USD stablecoins: instant dollar transfers with no wire fees or minimums, anytime, anywhere.
Hivemapper: Crowdsourcing a Better Real-Time Map. Drivers around the world are earning crypto assets while helping build a higher-resolution map that’s updated more frequently than existing services.
Starbucks: Customer Rewards 2.0. The coffee giant’s new blockchain-based rewards program allows members to buy and sell earned prizes.
Uniswap and DeFi: Improving Financial Services by Replacing Humans With Blockchain Automation. Over four million people have used Uniswap, a leading DeFi application, to trade over $1 trillion in assets.
Music NFTs: Artists Sharing Royalties With Fans. A new Rihanna NFT collection offers fans something never before possible: part ownership in her music.
International Payroll: Using Bitcoin To Activate the Global Gig Economy. Global companies like Premise are using bitcoin to make micro payments to a large number of workers around the globe.
Nike and the $250 Million Digital Fashion Gold Rush. Global brands like Nike are cashing in big on virtual apparel enabled by decentralized blockchains, as social signaling enters the online world.
DAOs: The Biggest Organizational Innovation Since the C-Corp, Native to the Digital Era. Decentralized Autonomous Organizations (DAOs) use decentralized blockchains to create rules and governance for groups of people, who organize online around shared goals or interests.
ENS: Domain Names for a Web3 World. Ethereum Name Service (ENS) is to blockchain as .com is to the internet. Already over half a million people have reserved almost three million domains.
Crypto Gaming: Digital Ownership in Games. As in-game purchases continue to rise, the case for crypto-based gaming is accelerating.
Bitcoin: An Emerging Digital Store of Value. Bitcoin offers investors a digital, non-sovereign store of value, which may be useful in certain portfolios.
Although we are still discovering the full range of applications, billions of dollars are being utilized by millions of individuals and companies worldwide in various real-world use cases involving gaming, music, social media, payments, DeFi, stablecoins, and more. Bitwise has identified a dozen promising use cases, and many more potential breakthroughs are likely to emerge from the growing community of developers and entrepreneurs devoted to inventing the future.
It's like the early days of the internet, where the biggest tech companies of the next wave are still in incubation.
Cryptocurrency: a small allocation can go a long way
Our investment philosophy seeks to attain outsized returns while minimizing risk, whereby a small investment has the potential to generate substantial gains. However, given the volatility of this rapidly evolving technology, the possibility of total loss cannot be ignored. To alleviate this risk, we employ two essential strategies.
Overlay: a 1-5% allocation to our crypto strategy is made on top of our traditional risk-based portfolios. This approach not only mitigates the overall risk of the portfolio, but also maintains the potential for high returns that the cryptocurrency market can offer.
Diversify: the portfolio is constructed through a meticulous screening process that considers specific risk factors, with the constituents being weighted by market capitalization. The resulting portfolio comprises up to 10 of the most liquid and sizable cryptocurrencies available, offering enhanced risk management through diversification across individual, reputable coins.
Investors can potentially maximize their returns while minimizing risks by adopting a hybrid investment approach that combines traditional and cryptocurrency assets. This method capitalizes on the high return potential of cryptocurrency while diversifying the portfolio with a range of assets to spread risk. Empirical evidence supports this approach, as shown by the following chart which illustrates the benefits of adding various bitcoin allocations to a traditional 60/40 portfolio.
See important disclosures.
The Cost of Overconfidence: How DIY Investors Underperform the Market
Investing can seem like a straightforward way to build wealth, but the reality is that it requires knowledge, experience, and discipline to succeed. Unfortunately, research has consistently shown that the average DIY investor tends to struggle with all three of these requirements, often resulting in underperformance compared to the overall market. A study conducted by DALBAR, a financial research firm, found that the average DIY investor earned an annualized return of just 5.3% over a 20-year period, while the S&P 500 earned an annualized return of 9.9% over the same period. This significant underperformance can be attributed to a variety of factors, including behavioral biases, lack of diversification, and poor risk management. While DIY investing can be a tempting way to save on fees and take control of one's financial future, it's important to recognize the challenges and limitations that come with this approach.
By working with a skilled and experienced professional, investors can take advantage of their expertise, insights, and resources to create a well-diversified portfolio that is tailored to their unique financial goals and risk tolerance. Moreover, a professional investment manager can help to keep investors on track during market volatility, which can prevent costly emotional decisions and missed opportunities.
Intent Investment Management is the leading-edge, tech-enabled Investment Advisor of the future. We specialize in managing diversified investment portfolios that incorporate traditional assets, cryptocurrency, and institutional alternatives, delivered through a seamless digital platform. Our approach involves conducting thorough research and analysis of each asset class to identify investment opportunities and manage risk. Specific allocations are then tailored to each client's unique financial goals and risk tolerance. We provide ongoing monitoring and management to ensure investments are performing as expected and to adjust as needed.
We help clients make more informed investment decisions and reduce the risk of costly mistakes, which increases the probability of reaching their financial goals.
Final Thoughts
Investing in cryptocurrency offers a promising opportunity to augment the risk/reward profile of client portfolios. However, the new and rapidly changing nature of this asset class poses a high degree of risk. Therefore, implementing a professional investment strategy is crucial to mitigating potential risks. The crypto space has a considerable potential for growth and widespread adoption, making it an exciting area to monitor in the coming years. As such, investors may want to consider getting involved early on to reap the benefits of this emerging asset class.
JUSTIN WOLLMAN
PRINCIPAL | INVESTMENT ADVISOR
INTENT INVESTMENT MANAGEMENT
415-717-2661
References:
DALBAR. (2020). Quantitative Analysis of Investor Behavior 2020. (https://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/QAIB2020-Press-Release.pdf)
Disclosure:
Bitwise Asset Management with data from IEX Cloud. Note: Traditional Portfolio consists of 60% equities (represented by the Vanguard Total Stock ETF, VT) and 40% bonds (represented by the Vanguard Total Bond ETF, BND). For risks and important information of the ETFs discussed here, please see the Appendix at the end of this document. Not considering taxes nor transaction costs. Bitcoin (BTC) is analyzed here because its longer price history allows for more comprehensive historical analysis than other crypto assets. Performance of individual crypto assets may differ significantly from the performance of bitcoin. For more details, please refer to our white paper “The Case For Crypto in an Institutional Portfolio” published in August 2021 and available at https://bitwiseinvestments.com/crypto-market-insights/the-case-for-crypto-in-an-institutional-portfolio.
Past performance does not predict or guarantee future results. Nothing contained herein is intended to predict the performance of any investment. There can be no assurance that actual outcomes will match the assumptions or that actual returns will match any expected returns. Historical performance of sample portfolios has been generated and maximized with the benefit of hindsight. The returns do not represent the returns of an actual account and do not include the fees and expenses charged by funds. Performance and correlation information is provided for informational purposes only.