Bottom Up Allocation to Crypto

Not what you're thinking, butt still fun

Author

Adam Blumberg
April 20, 2024

🌐 Bottom Up Allocation to Crypto

Not what you’re thinking, butt still fun

I had a conversation with a young financial advisor asking how to start talking about crypto allocation in client portfolios.

As expected, he was asking about all crypto, including bitcoin and crypto assets together as one asset class.

Until now, we have been thinking of an allocation to crypto assets overall as a small percentage of a portfolio, and then determining the diversification to bitcoin, ETH, and possibly other crypto assets.

I think the case can and should be made to treat them as separate investments on their own merits based on client needs, goals, etc. And the allocation decision can be made from the bottom up.

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If you want to see an expert at work, looking at a combination of macro factors and crypto related metrics, to evaluate crypto assets, and crypto-related investments, this is the place.

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What do I mean by bottom up?

I mean identifying a problem in a client’s financial life and proposing bitcoin as a solution.

Look across a client’s balance sheet and income statement.

  • Where are there holes?

  • Is there a susceptibility to inflation?

  • Has your client talked about increased expenses like food and gas?

  • Is there a concern that expenses will continue to go up with inflation?

Now you get to have the store-of-value conversation. Your client has a problem and you have several solutions:

Gold, real estate, oil, bitcoin.

Then you can expound on the benefits of bitcoin over the other traditional stores-of-value, while also talking about the micro factors that might make it increase in value.

A New Allocation

Bitcoin can now be places into the store-of-value allocation sleeve rather than a speculative alternative sleeve…and you’re solving problems.

For too long the bitcoin approach has been a push, forecasting doom and promising outsized growth.

Now it can fill a hole your clients have in their planning and allocation.

But what about other crypto assets?

Do your clients want non-correlated growth assets?

That might be where ETH comes in.

You can ask about investing early in platforms like Amazon and Microsoft.

With your knowledge of blockchain and your understanding of the current use cases, you can ask clients if they think there will be more adoption of the Ethereum blockchain.

BlackRock is using it to tokenize funds. PayPal is using it for its stablecoin.

And the asset ETH makes the system work.

So ETH can fit a growth allocation.

No more 1-5% crypto allocation with some diversification within crypto. BTC and ETH serve different purposes within a portfolio.

Moving on to other crypto assets, we can treat them more like VC-style investments, but with extreme liquidity.

Make the case for a protocol, exchange, etc., then the use case for the token - value accrual, utility, etc. From there you’ll have to have a little knowledge of the tokenomics - how many tokens, issuance policy, holders, etc.

Separating crypto asset investments into their appropriate positions in a portfolio - albeit with correct risks taken into consideration - puts your client in a better financial position and shows you as the knowledgeable advisor with real solutions.

See you next week!

-Adam