Portfolio Structure

Portfolio Structure

Portfolio Structure

Most cryptocurrencies are correlated. Account for this in both your crypto portfolio and your overall portfolio.

Portfolio structure is an important aspect of investing in cryptocurrencies, just as it is in any other type of investment.

A well-structured portfolio can help you manage risk, maximize returns, and achieve their investment goals.

Cryptocurrencies are highly volatile, with prices that can fluctuate wildly in a short period of time.

This means that if you hold a concentrated position in a single cryptocurrency, you’re at risk of significant losses if the price of that cryptocurrency drops.

By diversifying your portfolio across multiple cryptocurrencies and other assets, you can reduce the impact of volatility on your overall portfolio.

In addition to reducing risk, diversification can also help you maximize returns. By holding a variety of cryptocurrencies and other assets, investors can capitalize on the unique strengths and growth potential of each individual asset, rather than putting all of your eggs in one basket.

The problem? Most cryptocurrencies are correlated. So even if you’re diversified into a few different solid cryptocurrencies, if the asset class as a whole takes a huge hit, there are few safe havens.

This is why we want to look for cryptocurrencies with negative correlations when possible, especially in a bear market.

Holding assets with negative correlations (one asset tends to go up while the other goes down and vice versa) off-sets volatility and reduces portfolio draw-down.

Simply holding passively has its drawbacks vs actively rotating capital as risk-on/risk-off regimes change

Capital rotations (Active) vs Passive MPT

An active capital rotation strategy involves actively adjusting the allocation of capital among different asset classes or individual investments in order to capitalize on market conditions and maximize returns.

This approach can be beneficial because it allows you to take advantage of opportunities as they arise and potentially generate higher returns than a passive strategy.

However, there are also some potential drawbacks to an active capital rotation strategy such as the higher level of risk involved. Because you’re making more frequent and often more aggressive changes to your investment portfolio, there is a higher risk of losing money.

Additionally, an active strategy requires a significant amount of time, effort, and expertise to implement effectively, which may not be practical.

In contrast, a passive modern portfolio theory strategy involves creating and maintaining a diversified portfolio of assets that is designed to maximize returns while minimizing risk. This approach is based on the idea that markets are efficient and that it is difficult for investors to consistently outperform the market. Instead of trying to beat the market, the investor seeks to match the market's returns by investing in a broad range of assets that are representative of the overall market.

One major advantage of a passive modern portfolio theory strategy is that it is relatively low risk compared to an active strategy. Because the investor is not making frequent changes to their portfolio, there is less risk of losing money due to market volatility or poor investment decisions.

Additionally, a passive strategy requires less time, effort, and expertise to implement and maintain, making it a more accessible option for many investors.

However, there are also some potential drawbacks to a passive modern portfolio theory strategy. One major disadvantage is that the investor may not be able to capitalize on short-term market opportunities, which could lead to lower returns than an active strategy. Additionally, a passive strategy may not be suitable for investors with more aggressive return goals or who have a high tolerance for risk.

Okay so by now the big mistake most crypto investors make should be obvious: faux diversification.

Crypto investors think they are properly diversified because they have some Bitcoin, some Ethereum, a few layer 1s, and a variety of mid-low cap coins that ‘seem promising’.

This type of diversification (diversifying across large caps, mid caps, and low caps) simply increases your potential returns vs holding strictly large caps, but does not do much for your risk-adjusted returns. In fact, this diversification is likely hurting your risk adjusted returns.

Here is a great tool for finding the correlation among crypto assets:


You can also add the ‘correlation coefficient’ indicator into any chart on TradingView to compare two assets.

Lastly, I like to overlay dominance charts on CoinTraderPro to see which assets perform well in a given regime. For example, Chainlink has a history of performing well in a bear market.