Web3 Investing:The Traditional Investor
The Traditional Investor is relatively risk-averse. This investor understands the potential of Web3 and wants some exposure to it in their investment portfolio. However, they do not want to take big risks. Therefore, they simply allocate a small proportion of their overall capital to the largest cryptoassets — Bitcoin and Ethereum.
Bitcoin is a decentralised digital currency that is based on blockchain technology. It was the first cryptoasset to be launched and remains the world’s largest digital asset by market cap today. Bitcoin is designed to be an alternative to traditional fiat currencies. It is not controlled by any central authority or government — meaning that it cannot be manipulated in the same way that traditional currencies can be.
Ethereum is a decentralised blockchain platform that enables smart contracts to be built and run without any downtime, fraud, or third-party interference. When people talk about trading Ethereum, they are actually talking about trading “Ether” — a tradeable token designed to fuel the Ethereum ecosystem. Ether is the second-largest cryptoasset by market cap after Bitcoin.
Smart contracts are digital agreements that can be used to settle complex transactions under predetermined conditions. They allow two parties to agree to the terms of a contract and automatically execute those terms — including the movement of funds – when certain conditions are met.
For example, a smart contract could be set up to automatically transfer ownership of a property from one person to another when payment is received. Because the terms of the contract are written into the code and stored on the blockchain, the contract is secure and cannot be altered.
The main difference between Bitcoin and Ether is that Bitcoin is primarily used as a digital currency, while Ether is used to run smart contracts on the Ethereum platform. Bitcoin is also limited in supply (a maximum of 21 million Bitcoins can be created), while the supply of Ether is not fixed. Some analysts predict that Bitcoin's price could continue to rise in the long term, as it becomes more widely adopted as a store of value and Ether’s price could continue to rise in the long term as the use cases for the Ethereum network expand and more dApps are developed on top of it.
By adding cryptoassets to your portfolio, you are tapping into a market that has grown rapidly in recent years and is expected to continue its upward trajectory.
In recent years, a number of studies have found that adding a small amount of crypto exposure to a balanced portfolio can be beneficial from a risk/return perspective.
For example, in 2020, Fidelity compared the performance of a standard 60/40 equity/bond portfolio with the performance of some balanced portfolios that contained a small amount of Bitcoin (1–3%). Fidelity found that the portfolios with Bitcoin exposure generated substantially higher returns over the long term than the standard portfolios, without a significantly higher level of risk. The Sharpe ratio — which measures a portfolio’s risk-adjusted return — was much higher for the portfolios with Bitcoin exposure.
More recently, a study by crypto research firm Messari found that a 60/40 portfolio with 5% exposure to Bitcoin and 5% exposure to Ethereum outperformed a standard 60/40 portfolio between January 2018 and January 2023.
Given the research, a wide range of institutions, including major banks such as Morgan Stanley and Goldman Sachs and investment management firms such as BlackRock and Fidelity are now embracing digital assets. It’s worth noting that in 2022, 81% of 1,052 institutional investors surveyed by Fidelity said that they believe digital assets now have a place within a balanced portfolio.
Retail investors have been embracing the asset class too. For example, eToro’s “Retail Investor Beat” report for Q4 2022 showed that the percentage of investors holding crypto in their portfolios now stands at 36%, up from 31% in Q2 2022 and 24% in Q4 2021. This suggests that new entrants have been buying the dip while existing retail investors have continued to hold their digital assets.
As well as having the potential to boost portfolio returns, cryptoassets can also increase an investor’s diversification. Digital assets tend to have a low correlation to traditional assets such as stocks and bonds and even currencies such as the US dollar. For example, Bitcoin and the S&P 500 Index had a correlation of 0.58 (in 2022). This indicates that the digital currency and the stock market index don’t move in sync. So, adding cryptoassets to a portfolio of stocks and bonds increases the diversification of the portfolio.
Correlation Matrix (1Y time frame 2021-2022)
BTC
ETH
0.89
S&P 500
0.58
Gold
0.12
Copper
0.15
US dollar index
-0.32
US bond
0.19
VIX
-0.47
Source: Bloomberg and eToro
As well as having financial advantages, cryptoassets also have several structural benefits:
Cryptoassets are based on blockchain technology, which uses advanced cryptographic techniques to secure transactions and protect against fraud.
Cryptoassets are decentralised, meaning that there is no central authority controlling them. This makes them more secure than traditional assets that can be vulnerable to manipulation and credit risk.
Cryptoassets offer more transparency and accountability than traditional assets. Since blockchain technology records all transactions in a public ledger, investors can view the entire transaction history of a cryptoasset.
However, it is important to bear in mind that the crypto market is still relatively new and that the technology is constantly evolving. As a result, the market tends to experience periods of growth as well as periods of weakness (aka “crypto winters”). As with other investments, it is important to take a long-term view and “zoom out” to understand the market cycles.
Given the volatile nature of cryptoassets, experts generally recommend having no more than 15% of your total portfolio in cryptoassets. Having a higher exposure than this can increase your risk levels significantly and potentially lead to lower long-term investment returns.
Past performance is not an indication of future results.
There are several ways in which the Traditional Investor can gain exposure to the largest cryptoassets. One strategy is to invest in one of eToro’s cryptoasset-focused Smart Portfolios. Those only seeking access to Bitcoin and Ethereum may want to consider the Crypto-currency Smart Portfolio. This provides one-click access to both digital assets and is weighted by market cap. Those seeking exposure to a wider range of cryptoassets may want to check out the CryptoPortfolio or CryptoEqual Portfolios. The former provides access to a range of different cryptoassets and is weighted by market cap, while the latter provides access to a range of different cryptoassets and is weighted equally. An alternative approach is to invest directly in Bitcoin and Ethereum. These assets can be purchased directly on the eToro platform.
