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Hello readers,
Everyone talks about holding. Few talk about managing.
How many assets are too many?
When do you press on risk vs cutting it?
And can you really beat Bitcoin?
This week, we share our learnings from managing a crypto portfolio through multiple cycles + our framework for asset allocation.
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.
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Let’s go.
We think every portfolio should start with a few concentrated, high-conviction bets.
As Mark Twain once said “put all your eggs in one basket — and watch that basket.”
For us, this means BTC anchors the portfolio. It’s always been our largest position, and may always be that way.
Why?
We view BTC as the only “special snowflake” in crypto.
It’s the only asset that doesn’t need cash flows in our opinion (similar to Gold). It’s the only asset tied to energy via Proof of Work. It’s the only asset with a fixed supply. It’s the only asset that has zero competition (it already won its category). And it’s the only asset with a pure inception story (no pre-mines or insider allocations).
We have a clean thesis for why BTC should ultimately capture Gold’s market cap, which is currently $23 trillion. We’re still 10x from those levels.
As long as that thesis holds, BTC anchors the portfolio.
We think Bitcoin is digital gold. That’s a large addressable market. But we also hold the view that all assets will move onto public blockchains. All of finance. All of payments.
Essentially, the entire economy.
We think there will be a few large winners in this category when it’s all said and done. We want to have exposure to that. And so we believe at least one or two L1s should be part of the “core asset” part of the portfolio.
We’ve historically held at least two L1s in our portfolio, with weightings shifting during key inflection points in the cycles.
As noted, we believe the entire economy will ultimately move onto public blockchains. Of course, there are many services that can be offered to the market as this plays out.
We want to own stock in the companies we believe are best positioned to benefit from this transition.
In some ways, crypto equities can provide “index-like” exposure to the entire crypto asset class. Trading. Staking. Stablecoins. L2s. DeFi. Custody. Institutional services.
You can get exposure to all of that via crypto equities.
We have two long-term holds as part of our core assets.
We like to concentrate our bets into the assets we have the highest conviction in.
We study these assets to no end, revisiting the thesis often.
70-80% of our portfolio is typically in “core assets.”
We typically hold 4-5, making adjustments to weightings at various inflection points throughout cycles. For example, we trimmed our BTC position and eliminated our exposure to SOL in Q4/Q1 as the position had grown 10x + and became “outsized” within our core asset portfolio. We then rotated capital to ETH in Q2. As a result, BTC (while still our largest holding) is currently at its lowest % of our portfolio relative to the past few years. ETH is #2 and at its highest % relative to the last few years.
Our experience, instincts, and frameworks help us navigate cycles with the ultimate goal of outperforming BTC. We’ve done that well this cycle. But we try not to take anything for granted. We get stuff wrong, too. The key is to be fearless when it comes to making mistakes, while managing the downside. Mistakes often lead to breakthroughs.
We also like to leave room in the portfolio for projects that we can build a strong thesis for, but introduce more risk (and potentially more upside).
Worldcoin is an example of a longer-term hold that falls outside our core assets. It’s currently 3.45% of our portfolio.
We like Worldcoin in this category because it’s a project we can build a long-term thesis for. It has KPIs and fundamentals we can track to support our thesis. It has a large addressable market. It solves a really important problem for the internet. It dominates its category. Has mindshare. And a strong team and backers.
If we’re right about Worldcoin, we think it could be a long-term 20-40x. Meanwhile, if we follow our framework for buying at “fair value,” we think our downside is fairly limited if we are wrong. Furthermore, risk is managed with the smaller allocation.
Finally, we get “venture-like” exposure to high upside with an asset like Worldcoin while staying liquid. We may change our mind on Worldcoin at some point. Because it’s a liquid asset, we could make money on it — even if our thesis does not play out as expected.
That’s the beauty of crypto assets.
Assets in our “non-core longer term hold” category are there to outperform the “core assets.” This is critical. If it doesn’t have a chance to outperform the “core assets,” taking extra risk doesn’t make sense.
We typically allocate 10-15% to this category.
Finally, the “hot sauce.”
We study sectors and assets across the entire crypto landscape. Because we’re curious. And because we want to deeply understand capital flows and capital rotations at various inflection points in the market.
For example, we are not afraid to allocate to memecoins and other “high-risk” assets. These are trades that are informed by market inflections, liquidity conditions, fundamental analysis & onchain data, sentiment, and our crypto native instinct.
We study memecoins because we want to have conviction on a select few for when these market inflections take place. We want to have already done the work, have a set of KPIs that we are monitoring, and move fast.
An example is that we were early to Bonk in Q4-23. We ran the same playbook on SPX6900 and Giga in Q3-24.
You can think of the high beta “risk-on” assets as the “early stage venture” portion of the portfolio. The difference is that you can get venture-like returns over a 6-12 month timeframe.
Again. That’s the beauty of crypto assets.
Of course, the risk is much higher here, hence the smaller allocations. We shared more long-form thoughts & analysis on memes here and here.
The high beta “risk-on” portion of the portfolio is typically 5-10%.
How many assets should you hold in a crypto portfolio? It’s a personal question, and it depends on your style. The goal of any crypto portfolio should be to outperform BTC, the benchmark.
We like to keep our portfolio concentrated amongst 5-6 assets. With that said, we sometimes will have 10-15 assets in the portfolio (as we do now).
For us, the number of assets we hold tends to increase later in the cycle, as capital moves out on the risk curve. That’s why we have more than 10 assets today.
In closing, a few core ideas and principles that have worked well for us:
Have conviction and double down on core assets. The key is to do the work so that you have conviction. This will help you zig while others zag during periods of volatility.
Look for other assets that solve big problems but are higher risk. These selections should have the potential to significantly outperform your core assets. Since they are higher risk, the allocation should be smaller.
It’s ok to buy a little before you develop conviction. We like to scale into core positions, rather than buy all at once.
The price you pay is the most important thing. For every asset we add to the portfolio, we have a framework to help us understand “fair value.” This is absolutely critical if you want to outperform BTC.
Have a framework for the “macro cycle” and how that correlates with the “crypto cycle” and capital rotations within that.
Pay attention to your own psychology. Never, ever get complacent. Never fall in love with an asset. And maintain an “abundance mindset.” You may not want to sell your winners out of fear of not being able to find another one. We want to avoid this line of thinking.
Always maintain steady cash flow (your job) and keep plenty of cash on the sidelines. You never want to put yourself in a position where you can’t sleep at night.
Avoid leverage. This is a personal choice, as we don’t see the need for leverage given the venture-like returns that one can get in crypto. Not to mention, the high beta “risk-on” portion of the portfolio acts like leverage (without taking any liquidation risk).
Be endlessly curious. Turn over every rock. Stay open-minded. Develop conviction, but hold it loosely. Don’t be afraid to change your mind. Stay out of tribes.
“Luck” occurs at the intersection of preparation and opportunity. Some might say we were “lucky” to hit on a few memecoin plays this cycle. But we did a lot of work that prepared us to “see the opportunity.” You have to do the work if you want to get “lucky.”
For those who would like to follow along as we manage our portfolio through cycles, you can gain full access through TDR Pro.
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Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.