Introduction
Investing in cryptocurrencies can be complex. With more than 18,000 cryptos as of March 2022, and new cryptos being launched every single day, investors often find themselves lost.
It’s helpful to have a standard way to think about the differences and similarities among digital assets, such that they can be categorized for investment decisions.
To the outside looking in, this industry can be extremely opaque to understand and evaluate. How value will be created, on what time horizon and how does one form opinions on the quality of the project they’re looking at. While there is infinite nuance between projects, protocols, dApps, etc., most digital assets fall within common buckets, that have formed the informal standard crypto theses. This mental model is helpful for any observer, technologist or fund that has been researching or thinking about allocating capital or time into this industry. It also might help us understand new opportunities for value that fall outside of these established categories.
“I understand and believe in Bitcoin and Ethereum. Everything else is just playing copy-cat and trying to play the same game”.
In a broad sense, this is generally how the industry has evolved. Bitcoin became dominant, and then many built alternatives (“alt”-coins) broadly solving for a similar goal, and then Ethereum introduced a new type of protocol that was quickly followed by its own inspired alternatives.
The funds investing in this industry have had to build their theses around this reality. As such, you’ll often find funds with a deep conviction for Bitcoin and Ethereum, and then, to a lesser extent, a series of “hedges” into alternatives that could grow in relevance and in some cases potentially overtake the projects that first inspired them. Many of these alternatives have taken different technical approaches, but in general, seek to solve the same problem and target the same ‘blockchain-converted’ developer or investor audience.
These investment themes behind Bitcoin and Ethereum are similar in that they are both digital assets, but they’re different in the problems they seek to solve.
Within these two broad categories (Bitcoin as a digital asset Glogall state-free money and Ethereum as Decentralized internet, there are nuances and further sub-categories, but at the highest level, this is a helpful frame to better understand where a particular project fits, and what alternatives it should be compared against. This framing should also help to better understand why Bitcoin and Ethereum are fundamentally not competing technologies.
So when looking at how this market might have evolved since 2017 evolve, the real breakthroughs will likely lie with projects that have a disproportionate chance of dominating these two categories or projects that define a brand new category with massive market potential.
Thematic Investing
Thematic investing is about putting capital towards major future drivers of growth. These drivers are usually investments that are constructed with the goal of outperforming in the long term the broad indexes that reflect the movement of the entire market. These long-term bets have the potential to outperform indices because the themes that investors usually select are expected to transform, or structurally change, existing paradigms.
Exchange-Traded Funds (ETFs) can be useful tools for investors seeking to participate in specific and, targeted economic opportunities. Often, these are referred to as “themes”, which may be based in advancements such as technology or they can be solution driven — solutions investors seek to combat particular market conditions, like inflation. While ETFs that target themes generally tend to be concentrated portfolios, their addition to a portfolio is intended to add value not only from a return perspective, but to also aid with diversification and overall risk.
Investors who are considering using ETFs within their portfolios to target particular themes should first do their due diligence. It is important to understand the key attributes of the strategy you’re considering; like index rules or the investment methodology, purity of exposure to a theme and also the potential longevity of a theme.
Harness the power of themes
Many highly dynamic trends are driving the global capital markets. Against this backdrop, thematic investments can add value to an investment portfolio and set it up well for future success.
Thematic satellites for your portfolio
Thematic investments are nothing new, of course, but sometimes all you need to do to break new ground is take various ideas that have already proven their worth and combine them. For example, thematic investments can easily be embedded into a core-satellite strategy.
This approach to portfolio management has been well known for a long time and has withstood many a test.
The basic idea behind it is that the portfolio’s assets are divided among a core investment and a number of satellites. Representing the bulk of the portfolio, the core investment is one that holds its value well. It is usually broadly diversified across a wide range of investment instruments and all asset classes. Investors choose the components of their core portfolio in line with their personal preferences and risk tolerance, often opting for equity portfolios that are close to a benchmark or ETFs.
The satellites, meanwhile, are individual investments that are independent of each other. Since they are not tied to the core, they can be seen as like moons orbiting around a planet. Their job is to generate additional returns and enhance the long-term strategy with tactical plays.
Seizing opportunities while keeping risks in check. The diversified core of a core-satellite portfolio can thus be used to seize opportunities that arise on the broader market while keeping risks in check. Thematic investments employed as satellites can act as additional return drivers. Offering greater potential returns than the core investment, they should be a source of excess return, also known as alpha. Ideally, a satellite should show little or no correlation to the more defensive core portfolio if it is to have any chance of outperforming. However, higher expected returns also mean higher levels of risk, so care must be taken to ensure that the types and number of satellites taken into consideration match the investor’s personal risk profile. As a general rule, the aim should be to capture trends right at the start.
What, then, can lend thematic satellites better return prospects? The basic idea behind thematic investing is to harness the earnings power of “another good idea” — the theme. The focus is not on a specific crypto, sector or region but on the activities of companies that stand to profit from a particular trend and thus gain value. In other words, if the trend benefits their business, boosting sales and earnings, demand for their tokens will hopefully increase, and with it their token price. The success of an investment theme hinges for the duration of the investment on where and how the profits and risks accumulate.
Just because a trend is taking shape from which investment themes can be derived, this does not necessarily mean that it will result in positive returns. It might simply be too soon for some investments, too late for others. The aim should be to capture a potentially strong trend right at the start. Once a theme has been discovered by the broad mass of investors, there is a risk that mounting interest will push up equity valuations. It is thus clear that, in addition to identifying trends at an early stage, fast access to the market and a certain amount of flexibility when it comes to making adjustments are essential.
How can investors get exposure to these innovative technologies’ growth potential?
Investing in a single Token is one way — but this approach can be expensive and time-consuming. Without dedicated portfolio management, short-term volatility across even just a few tokens could expose your portfolio to more risk than you’re prepared for.
Thematic investing can generally be risky. That’s why, to address this risk, one should build thematic portfolios with a mixture of themed and balancing assets. This approach allows each investor to tailor their portfolio based on their risk appetite, maximizing their exposure to themed assets without exceeding their chosen risk level.
Invest in game-changing tech without exposing your money to unnecessary risk. Our Technology Enablers portfolio gives investors diverse exposure to the trends that can change the world and grow in the long term. Stay tuned for the next article.
About PECULIUM
PECULIUM has always been a company driven to democratize access to investment opportunities previously only available to the very wealthy. The development of blockchain technology has been a key factor in enabling this ongoing financial revolution. But blockchain goes beyond offering a more efficient replica of the traditional financial ecosystem-it enables new business models that are better aligned with the incentives of all market participants.
PECULIUM has developed saieve.io, a crypto investment and asset management platform that connects to exchange accounts and allows users to instantly access vetted trading strategies and investment portfolios. Founded to simplify trading strategy for users without any technical experience, PECULIUM has a growing offering of automated investment products.
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