How to Build an Optimal Crypto Portfolio | Top Crypto Investors Explain

How much of your savings is prudent.

To invest in cryptocurrency?

I tell new individuals to put 1 to 2% in. I've got a lot more than that, but I kind of live on top of the bitcoin price.

What percentage of your crypto portfolio should be in Bitcoin?

Bitcoin is the bellwether. You have to have that in the portfolio. Is it 50%? Is it 30%?

How much should you bet on altcoins and defi projects? You gotta really size it down accordingly just because it is gonna whip around so much. Like it just wouldn't be prudent to have like a huge position in it.

Learn how to build an optimal Crypto Portfol portfolio with Mike Novogratz, Dan Matuszewski, Cole Aisma, Robert Materazzi and Ron Neuner. These are the highlights from Cointelegraph Crypto Traders live panel with these esteemed guests talking about how to build the optimal crypto portfolio. And when I looked at this topic, I thought to myself, this is a very strange panel to be running because everyone has different risks and different needs and requirements and so they must not be one crypto portfolio for all people. Mike, I'm going to send this question to you. Do you think that Bitcoin is now becoming an option as a digital gold or as a commodity, almost as a safe haven? A safe haven when equity markets collapse and a safe haven when governments print more money. Are we there?

Well, I think those two separate things. So yes, I think the most important thing that's happened this year is Bitcoin has been credentialized as a proper macro tool in the toolkit, you know, part of the arsenal of investors, corporate hedge fund investors, individual investors and institutional investors. It is in crypto world taking the, taking the lane or the narrative of digital gold, right? It's, it's the only pure store of value. Bitcoin's only as good as the social construct makes it. It's valuable because we say it's valuable, right? I think all the rest of the cryptos who have some of that store value in smaller communities are going to have to prove use case. They're going to have to be, they're going to have to be useful doing something else. But I think Bitcoin is a finished product and I think that's why the bulk of the energy from the new participants and institutions are all going into Bitcoin. Gold is a $10 trillion market cap. Bitcoin is a little more than 200 billion. We're really early on the adoption cycle. Bitcoin still is hard as hell to buy for most institutions, for most people. I had three different people call me yesterday and were trying to figure out how they could buy it in their funds. And so I think we're in early stages of people moving into institutions, moving into the space. I think they'll all, all will 100% start with Bitcoin. And so in lots of ways for big capital, it's going to be the dominant piece of any portfolio. It doesn't mean if you have a smaller amount of money or smaller fund, there's not lots of money to be made in some of the other, other cryptos. But if you're talking to anybody who's moving big capital, it's all bitcoin.

Now, when we look at the crypto markets today, and specifically you spoke of institutions, are the institutions looking at anything else but bitcoin at the moment? I'm going to open that question up to anyone on the floor who wants to answer it.

Let me finish and I'll let those guys go. The way I look at it is everything else is in your venture bucket. If you're an institution, you should have a big venture bet in the blockchain, in defi. Defi is going to change the way we do finance in the next 10 years, but it's not in the next one year. I put that in venture. There are some people that are putting Ethereum in as well that are saying, okay, Ethereum, and maybe I do an index of Ethereum and even XRP and some of the other top five just to get diversity. But mostly it's Bitcoin and then, hey, should I have more of the Ethereum? Ethereum seems to be way out in front now in the protocol race.

Mike, you've always been an Ethereum lover. We've all drunk the Kool Aid. We are all well down the crypto rabbit hole. And I mean, we're spending our lives in crypto. But let's try and remove ourselves and look at the outside world, the traditional fund managers. If you were talking to a traditional fund manager with a equities fixed income portfolio, et cetera, what percentage of their fund do you think would be prudent to allocate to crypto today? And I know it's difficult because I know every fund has a different thesis, but let's try and generalize it.

Crypto's Bitcoin's trading at, I think implied volume is 80. It was 50 last week, so call it 65.

Volume.

Right. And so if currencies are usually 10 volume and gold can trade historically a little higher than that. You know, it's volume adjusted. It's not that large of a position. Right. I tell new individuals to put 1 to 2% in. I've got a lot more than that in my life, but I kind of live on top of the bitcoin price. But you know, if you're an equity PM, 4% is a pretty big position in a stock, but there are some funds that go up to 15 or 20%. So it's a little bit of volume adjusted based on your strategy, but it's probably somewhere in the 3 to 5%. For aggressive. For aggressive funds, yeah.

It's.

Carry on, go on.

It's gotta be small. I mean, like, it's just, it's so volatile and relative to everything else, I think it's like 80 realized on the year. I mean, obviously March was like wild, but you gotta really size it down accordingly just because it is gonna whip around so much. Like, it just wouldn't be prudent to have like a huge position in it. So I think you're gonna see very small allocations, especially until that ball comes in significantly, which it does not appear to be.

So let's talk about that. If we're agreeing that the percentage in a big fund is between 3 and 5%, if you were one of those fund managers or advising one of those fund managers, what percentage would you tell that fund manager to put into bitcoin? And if it's not 100%, where would you tell them to put the balance? Knowing that they're not as close to the fire as we are in terms of being able to trade in and out of different crypto assets, they have a lot more friction.

So, Ran, if you're a big fund, it's probably almost all bitcoin, because the liquidity in the other cryptos just doesn't pass the liquidity test. Right. And so if you're an individual, you might have a. You might have looked at the Ethereum bitcoin chart and shifted 70, 30 Ethereum Bitcoin, just because you can move in and out. But if you're talking to, you know, the funds that have to buy 100 million or $150 million worth of Bitcoin, they're not going to be flipping it in and out of Bitcoin and Ethereum. And so they're going to be mostly Bitcoin. And so a lot depends on sizing. If you're a retail customer, I would probably maybe have half bitcoin and half everything else.

Let's just. When you say half everything else, I'm interested to know what you mean by everything else because I've looked at CoinMarketCap. There are a lot of everything else's in my portfolio.

Personally, when I look at Galaxy, in my portion of galaxy, it's probably 50% bitcoin, 5% other coins and then 45% venture bets. And so investments in other funds, investments in infrastructure and exchanges and custody businesses, in new products, in what I hope to be the next version of things that get built on defi. And so I've got a big venture portfolio.

Yeah, the venture piece is like, look, that's the other way, right? Like you either buy bitcoin, you buy little ether, you stick it in the corporates. And this is why the venture funds have had so much better time raising than the active trading funds, right? Like you see a lot of like 60 to 100, 150 million venture like funds coming together to invest in the corporates. On the crypto side, you don't see a lot of the same sort of tickets getting punched for the active management side. And a lot of that is the liquidity, right? You can plow 10, 15 million into like a handful of deals and you can make that money go to work. But Once you're over 100 million, you're just beta to bitcoin anyway. So you might as well just buy it outright. It's hard to give that money to then somebody to go manage.

Daniel, I'm interested to know your portfolio or your fund that you speak about. What's the breakdown of assets in the fund at the moment? Bitcoin, other coins and venture.

Yeah, so it's probably 30, 30, 30. So that would be like a steady state where it's like a third bitcoin eth, a third sort of the board, and then a third of stuff that's not liquid, right? Like either tokens that we have vesting on or equity positions that we have no chance of getting liquidity on in any foreseeable future. And that 30, that's the board that moves around wild, right? We're churning intraday between days. It's very unlikely. We're keeping positions multi month. It's a lot of where's this hot ball of money going? What's interesting, where's the action? And you sort of follow with that. But that's because we have a very active bias. So like that pool of names moves around a lot for us unless we have a really strong thesis about like something and then we're going to keep it for a longer time horizon. But for the most part, like that's a very evolving sort of bucket of like risk that we have.

Paul, when I look at you, what do you believe is the optimal split today in a portfolio for you or for someone like you, between Bitcoin and all the other coins and venture?

Sure, that's a good question. I'd just like to caveat. This is not investment advice and obviously we're not allowed to talk about anything proprietary to the business that we do. Just a caveat. That said, I think, listen, what both Mike and Dan has said is very correct. You want actual companies you want to invest in. Those are actual real projects where, you know, with material, you know, almost call option like optionality. Right. You know, and then, you know, you want to have a proportion obviously to, I mean Bitcoin is the bellwether. You have to have that in the portfolio. Is it 50%, is it 30%? It's going to be a good portion of your portfolio because it's, you know, that's going to be, you know, leading, you know, potentially the rest of the coins for I guess the alternative coins, which is a euphemism that are further out in the risk spectrum. I think, you know, again, to keep to this options like analogy, you need a few call options where you're willing to burn the premium. In other words, you're willing to lose all your money but then have that upside optionality, should they actually pay out. So I think if you think of a diversified portfolio that I think dan's structure of 30, 30, 30 I think is a good place to start. And then within those buckets you can shift around, you know, your structure, for example, to different factors. For example, within, you know, within the ecosystem. Very much like how Mike described, you know, infrastructure plays, you know, essentially that, you know, this is a gold rush that we always like to talk about. You know, what are the picks and shovels? Who are the entrepreneurs that are stepping into the space to fill in the gaps of this still developing ecosystem. Those are the types of companies that actually make us really excited. And those are actual companies, not necessarily at the token level.

Rob, last one. Very quickly, the split between Bitcoin and other coins and then we're going to dig much more into how to actually construct a crypto portfolio.

Sure.

I mean my advice is obviously a bit, a bit focused differently. I mean, when we're talking about the post trade side of operations and you're adding More coins and more liquidity providers. All of those dimensions add more complexity, which can add very material costs if they're not thought of while setting up the portfolios. So you know, just even your wallet providers, how you're classifying things for tax purposes, how many financial controllers you need, all of those things. So I just say, you know, just bitcoin, you're pretty simple. You know, you probably don't need some advanced software to manage the, the back office for that. When you start adding the other coins, you know, by the nature of how the ecosystems evolved, you need to go out to different exchanges or trading desks to acquire them and that adds more complexity and then more back office costs.

Okay, so let's look at the top 10 coins on CoinMarketCap today we've got Bitcoin, ETH, XRP and so the list goes down. Do you guys think that that is representative of the future of this industry? Is that a good litmus test of who we think are going to be the winners in the industry? You got Bitcoin and ETH leading by country mile and then you've got Cardano, xrp, bch, BSB working their way down. Is that a true representation of the possible winning protocols three to five years from now?

Yeah, absolutely not.

Yeah, hit a Dan.

Look, if you made me make a.

Bet, like how many of those are going to like stay in like the next five years? Like I don't know, three? Like bitcoin, it is probably not going anywhere. And then like give me a third is like a toss up. Maybe Ripple just has so much like inertia that you can't like move it out. But like that, that list is going to move around a lot.

Okay, I'm looking at it a little different way, Rand. So what's a crypto currency so far, right? It's been a social construct. It's not the code of Bitcoin that gives it value. Like we could, we could, we could fork the code and call it Ran ran coin and it might not be worth that much. That's a great idea, right? It's that we believe that we've created that there's this community of over 100 million people that own at least a piece of a bitcoin that there are these people that believe in it, it's built this brand that it's a store of value because we say it is. And so a lot of this is about the community. And so like listen, Ripple has a really aggressive community, mostly based in Asia, you know, the XRP army and they have a use case, right? It's cross border payments. There's a story that gets people buying it and so they stop you.

Can I stop you for one second about community? I want to stop you around communities because the way I understand communities is developer communities developing cool stuff on a protocol, VC communities or funding communities, investing in the smart people that are building on the protocol. And then there's user communities. Now when you talk about communities and specifically in the XRP context, yes, I get that there is an XRP army. I've been attacked by them several times for mentioning XRP on my show. But how many people are actually building and funding projects built.

Let me answer that specifically. I think 75, 80, 90% of the smartest people in the space are working on things in and around the Ethereum project. Right. So they've got the most developers and probably have the best chance of being the base level trust blockchain that shit gets built on. It doesn't invalidate that bitcoin's got a far higher market cap and I think it will continue to have a far higher market cap even though not that many people are building on bitcoin. Right. Bitcoin has this lane of digital gold. It's a finished product. And so if XRP actually can become this cross border payments app, you know, and they're having some success in Mexico and if they become, you know, the inner bank for that, they have a shot. And so even some of the smaller ones, I mean, I badmouth litecoin a couple times, just, you know, tongue in cheek. I was like, litecoin's a poor man's bitcoin and it's a, it's a test net and oh my God, I got attacked. I thought I had to get bodyguards almost, but I've learned to change my view. There's a group of people that believe litecoin has value and so to them it has value. It'll never be nearly as big as the other ones because it doesn't really have a lane. And so the way I look at these is do you have a lane and a purpose? And can you create people in some cases to build on your thing to create a broader community, but some way to get people to believe in that thing you're doing. In the periodic table, only gold is store of value just because it's store of value. The other 113 elements, all we use them for. Something like copper is valuable because we use it. We build cars and wires and gutters and all kinds of shit. With copper Gold we don't do anything with. We just stare at it or put it on jewelry and wear it. And so I think you can think of it that way. But it doesn't mean, you know, smaller cryptos won't have a purpose. They're just not going to ever be as big and a lot of them are going to go away because people lose. You know, it costs something to keep the project up, right? Like right now it's the energy equivalent of the Three Gorges Dam that bitcoin mining uses every single day.

Let's break the discussion and talk about actually what we were supposed to talk about, which is how to actually build a crypto portfolio. Yesterday there are a lot of the viewers here who are thinking, you know, I logged in and actually what I wanted to do after this session was come out with takeouts about how to build an optimal crypto portfolio. So let's take your average investor, the average investor has a little bit of spare cash. Let's call spare cash, $10,000. And this average investor wants, oh, let's say $100,000. And we can break it up. If you have $100,000, you're in your 30s, you've just started out. How would you go about building a crypto portfolio? And let's do. Well, let's work under the assumption that you're going to hold this portfolio for three years or five years.

I would. Now, is that their. If their whole net worth is 100, whatever, a hundred thousand.

Their leftover income, the money they can afford to invest. And let's say for argument's sake that that is 10% of the entire asset holdings around the world or portfolio.

If this is just for crypto and I'm a three year holding period, I would put 40% in Bitcoin, 30% in Ethereum, 10% in some other projects that I might like that are smaller. What are those projects?

One of those projects. This is what people want to hear. I want to know what Mike Novogratz likes.

So I don't have to be. To be honest, I don't have a lot of coins right now. Outside we have a lot of venture bits. Look at, look at like the compound. Who do you think made money on compound? People that bought the token or the people that backed the team early on that when they put compound out, it's trading 40 times what they originally. They made 40 times their money. And on compound, like most cryptos, it traded up with the frenzy and straight back down.

How much money would you put into venture? What percentage that portfolio would you put into venture at early stage?

30% of it. 35% of it.

35% of the money goes to venture, 40% goes to Bitcoin, 30% goes to ETH. But we've over allocated. Make each other, make it, make it, make you smaller. Before I move on to the next, we're gonna go through all of you guys. But Mike, before I go on to the next guys. If you want to put a stack of chips on Defi today, do you put your money into individual projects or do you put it into the Ethereum network? Because that's kind of like a becomes a defi protocol.

I think you put it into individual products. I'm not smart enough, I'm not sure anyone is to know how does Ethereum become this base case with has a decent market cap but isn't where the growth is and the real growth is on the projects that are built on top of it. If you're compound and you literally become the interest rate clearing market for the world, not just for the small little crypto test kitchen we have right now, but it becomes like the potential market cap of compound is immense. Right. If you're the derivative version of compound, it could be immense. And so I actually think more values being created on top of the blockchain than the blockchain itself. But that's a thought as a hunch. I'm not positive on that. I talk to all the guys and you try to do. Because right now Ethereum is not being valued by any kind of discounted cash flow model. How much it's used, it's being valued kind of like Bitcoin. There's a community that says this is valuable because we think it's valuable. Right. It's purely speculative at this point.

Because you have the collective power of so many smart individuals building and the collective power of all the venture capitalists saying we're comfortable to invest in projects that are building on Ethereum because we know the base layer protocol is solid.

Yeah. But ran everything in the world almost other than gold at one point you have to value it with some discounted cash flow model. Like even crazy Tesla with its $300 billion market cap. People say well they'll sell every car in the world and they'll dominate batteries. They tie it back to something and at one point those assumptions have to be right or the price goes back down. That's why in 1999 the Internet crashed and then out of that the companies that actually made money became the most valued companies in the world. And so we're still too early to understand that Ethereum pricing model. Right. Gas gets too expensive. How do they fix the Ethereum inflation pricing that you can even make some mathematical assessment of what it could be. Got it. So right now, until we do that, it's just speculatives.

Robert, I want to go to you in terms of this person building $100,000 portfolio in your mind, where do you tell them to put their money?

I'm pretty basic. A big portion of the population in the world still doesn't have crypto. And when they think about it, Bitcoin is the Kleenex of crypto. So I usually recommend that. When my mom says, hey, I want to buy some crypto, she doesn't say that actually. She says, I want to buy some bitcoin. I'm a big fan of the Ethereum protocol and it hosts a lot of assets, so I stay pretty simple. And then I always recommend obviously to make sure you understand the tax consequences. Right. I mean if you're. And how that ripples through because it's not always straightforward when you're trading crypto and ultimately that impacts your income.

Daniel, you guys actually have a fund. I'm assuming that you're going to tell people to allocate their, their assets as per your fund or something along those.

They can just allocate them to Daniel's fund.

Yeah, he said he's not taking outside money. He said it's partner's money. Apparently it's like a billion dollars of like partners money. That'd be sweet.

No, it's not, not that many commas yet. But I saw.

Wait, hold on. I wanted.

Do I understand it? It's 100,000 to get allocated or my net worth is 100,000, like what to.

Be allocated and that represents 10% of your network.

Okay.

And you're 35 years old, all right.

You buy a min ticket GBTC and you forget about it and you roll that in six months and you keep doing that. You put 30 grand in eth and you just lend it out and then you take that 10% and I don't know, you spray and pray, whatever like names you like that are hot that you think have some and if you want to like take a more concentrated bets on an industry, like if you want defi, you go buy the defi basket curve backwardated on FTX and you just roll it as well and you get some extra yield on top of it. I think that's how you do it. If you got to put 100k to work.

Maybe I'm not understanding something, but if you keep rolling these contracts, are you not paying tax every time a contract expires? Are you not getting taxed on income every time a contract expires?

Yeah, so I'm not a tax guy, so I might not be doing this.

Efficiently, but maybe you don't roll it.

Depending on like where your cost basis is. Like, maybe you use the roll as like an efficient way to like harvest like your losses. I would also spend a thousand of that, 100,000 to get tax advice.

Okay, great advice. Paul, your portfolio. This guy, $100,000, 35 years old, coming in, coming in. Hot Bitcoin's just gone from 9,000 to 11,000. He is coming in and wants to put his money somewhere. Where does he put his money?

So I think to echo what the guys have already said, I think it's pretty consistent, right? I mean the majority say 30 or 40% has to go within Bitcoin and eth probably overweight Bitcoin. I think the next 30 to 40%. I think you really got to think about ventures, actual companies that again, if this is gold rush, you want picks and shovels. You know, ironically, I didn't know, you know, Robert from LUCA was going to be on the panel. LUCA is one of these companies. They're an accounting audit tax lawyer for the blockchain and crypto industry. And in fact it is in XPTO's ventures portfolio. So it's actually companies like that, you know, we're big in the derivative space. You know, we think, you know, again entrepreneurs stepping in to fill the gaps that are not there. Great elegant technology solutions such as Paradigm, which is a, you know, a crypto, institutional OTC chat and settlement for derivatives. X margin is another good one that is basically a zero knowledge margin calculator that makes basically trading and collateral efficiency across counterparties. So you really need the ventures part, you really need further out in the risk spectrum. And I would honestly, I would leave the last probably 10 to 20% to hedging. I mean, you need to hedge your portfolio, right? So you want to go to deribit and get exposure to BTC and ETH options to hedge the beta, right? You want to maybe go to the cme. You want to maybe use X margin, which actually now you can actually do bilateral options trades efficiently through X margin. This is getting a little bit more down the rabbit, but that's too far.

Down the rabbit hole for this 55 year old. So we've got a few minutes.

I would tell people that the options in general, in life, when you're trading at 50, 80, 90 volume you don't make money on. There are very few people I know that have made it 80 Vol for options.

Yeah.

So you can, if you cut your timing exactly perfectly. And so I think you've got to be, if you're a retail investor coming in, you want to participate in crypto, you know, to some degree, keep it simple, stupid. And don't think you're going to become a billionaire overnight, you know, exactly.

Well.

And like you want some quality of life, right? Like you don't want to be like watching this thing in the middle of the night. What do you mean?

I thought, I thought that's all we do in lockdown is watch the prices go up. People ask me, what are you doing tonight? I'm watching bitcoin go through 10,000 again.

And you got to look at bitcoin as a movie. You got to look at bitcoin as a multi year bet. I think we could get to 20,000 literally within a year, maybe by the end of the year. Things all happen, right? We're in this weird macro world where things are shifting quick, that's close to double your money, but it's not 10 times your money.

Mike, I'm going to challenge you on that point specifically. And I have a theory, I want to run the theory by you and then I've got two questions that I want to ask all of you guys. So my theory is that if you look at commodities, you look at silver, you look at gold. Those silver and gold trades have run way past the all time highs. They've broken through all resistance levels. You know, Gold's trailing on $2,000 where it's never ever been before. Bitcoin seems to me like the digital version or the commodity that hasn't even retraced to 60% of its all time high. Don't you think that when the gold price gets too high, when the gold price gets to 2,200, 2,300 institutions are going to look at this and they're already doing this and say, hold on a second, Gold's too expensive, it's run too much. Silver is too expensive, it's run too much. Copper coming through the roof. There's another option out there which is 60% of its all time high. And the amount of money that we need to get bitcoin way past the $20,000 mark is insignificant in the big scheme of things.

So here would be my counter, right? Like if you pitch that to me and you're like, buy this thing, it's 60% from its high, but this other stuff's at its all time high. I'm just like, I'm not saying this is how I deal with it because I actually do think some of that, like, thought process will stick and it'll carry it. But you could just be like, this thing's clearly a dog. Why am I gonna buy it? It's lagging everything else.

Right?

Like, well, I'm gonna stick with the winners and I'm gonna run with the stuff that's clearly working and like the thesis I have. So, like, it's not necessarily like a home run just because it's lagging, but.

It'S a great alternative to the existing hedges that they're applying to the equity portfolio. Right.

I think it's hard to get people to even buy in that logic already. Right. I don't think it's just like a foregone conclusion that you're like, oh, I can just swap gold for bitcoin. I think that takes a little bit of work still to get through. I don't think you converted that.

I think, listen, gold I think should be given obviously the macro environment that Mike spoke about should be in everyone's portfolio. And I think, listen, we're trying to prognosticate as best we can, which is obviously very difficult, but I think it's all about proportion and sizing and then managing your downside risk. So I think if you get that, say quality exposure, which is one of the factors you want to look at besides size and momentum. It could also be a momentum factor depending on how you define these factors and then how you size these. Position sizing, some type of Kelly criterion. It's really all about position sizing. Knowing your downside risk, having whatever that percentage size with a defined downsize risk in your portfolio. I think gold's got to be in there. And obviously digital gold, which I'm partial to, has to be in there as well.

Okay, fantastic. Now, I was hoping to get Mike back and he seems to have logged off the call. But I want to ask you guys, we're all deep down this rabbit hole. We're far down it. And you know, our lives are all around crypto and blockchain. What percentage of your personal total assets today are exposed to this industry? Bitcoin, crypto, vc? I'm trying to get a feel for how responsible we are having gone down this rabbit hole. How much of our personal, how much conviction do we have in the space relative to our total asset base. And I'm going to ask Daniel. You go first.

Yeah. So I'd say I'm probably the most irresponsible. Besides my, like, residences, I own 80% and, like, probably more. If you, like, consider any, like, equity value on cms.

Okay. Paul?

Yeah, it's not as high as Dan, but it's definitely north of 50. I mean, it's, you know, I'm a big believer in the space. And, you know, it's not only about timing, but how long, you know, your time horizon is, so. But yeah, it's. I mean, it's north of 50. I'm a believer in the space. It's not going away. And we're. We're really in front of really almost a tsunami, almost a wave that will never break. We're all still in front of it, even though we're even a decade in.

Robert, over to you.

Yeah, I'd say I'd have more in if I could sell a couple of my investment properties right now. But outside of the properties I'm all in, however, the majority of that is in the venture side.

Wow.

So I'd love to know what Mike's answer is to this, but it seems like we've lost him, and I guess he's going to leave us guessing what percentage of his personal wealth is not in crypto. I imagine it's very, very high. Gentlemen, thank you very, very much. It's been an amazing, amazing panel, and you guys have given a whole lot of great information helping people build up their crypto portfolios. And I look forward to catching up with you guys again and finding out how good all this went. Thank you very much.

Thanks, Ryan.

Thanks, Cointelegraph. Like subscribe and Hodl.

Sam.