Bitcoin is being outpaced by smaller crypto assets slugging it out for dominance of a new blockchain-dominated financial architecture known as decentralised finance (DeFi).
Bitcoin (BTC) might have grown by a compound average rate of 200% for the last decade, but that’s beginning to pale alongside the super-charged growth of smaller cryptos like Ethereum (ETH), Cardano (ADA), Solana (SOL) and Polkadot (DOT), all of which are contenders for dominance of the DeFi space.
ADA is up 2 456% over 12 months, ETH 895%, and SOL is up 40-fold.
ETH remains the king of DeFi for the time being, but the technology behind Solana and Cardano could unsettle this. You can already use your cryptos as collateral to lend, borrow and earn interest, but a host of new financial services and business processes, from insurance to company audits, will soon be widely available on these blockchains.
The big criticism of BTC is that it is a speculative asset, a form of digital gold, with no real business behind it. That’s not true of Ethereum and other coins battling it out for control of the emerging financial architecture called DeFi.
Picking winners in the crypto space is never easy, but one proven way to capture some of growth in the up-and-comers is through bundled investments such as that offered by Revix, BitFund, EC10 and Blue Token.
All of these offer diversification and exposure to some of the more exciting stories in the crypto space.
These are the crypto equivalent of unit trusts in the stock market, and they all differ in how the constituents are selected and in capping the weighting placed on the constituents.
In most cases, this prevents bitcoin (which accounts for more than 50% of the crypto market cap) exercising too much dominance in the fund.
As the results below demonstrate, all these funds outperformed a direct investment in BTC over the last 12 months.
Revix’s Top 10 Bundle spreads your investment across the top 10 cryptos as measured by market cap, with a 10% weighting in each. The bundle is reweighted monthly so that the underlying cryptos maintain their 10% weighting.
Revix’s Top 10 Bundle is showing a 642% gain over 12 months, against 306% for a direct investment in Bitcoin. The Top 10 Bundle’s performance was boosted by giving 10% weightings to smaller, faster-growing coins like SOL and ADA, and placing a cap on the slower-growing BTC.
EC10 spreads your investment across the top 10 cryptos measured by market cap, which means BTC makes up about 54% and ETH 25% of the portfolio.
The chart below (measured in rands) shows that an investment in EC10 would have generated a return of more than 300% over 12 months, against 256% for a Bitcoin-only investment.
Blue Token is a digital token with 14 underlying constituents, comprising the 14 largest crypto assets (with no one crypto exceeding 25% of the total). The two largest crypto assets, BTC and ETH, account for 50% of the token’s value, with the remaining 12 crypto assets making up the remaining 50%. The minimum weighting is 2.5% for any constituent.
Blue Token achieved a return of 556% over the 12 months to September 1, powered by some strong gains by ETH, Cardano and Solana.
Blue Token is controlled by Digital Horizon, with the technology provided by Stratum.
Blue Token 12-month returns
BitFund has a Balanced 10 and a Capped 20 portfolio – made up of the top 10 and 20 coins as measured by market cap. The Balanced 10 fund has roughly 60% exposure to BTC and 22% to ETH. The Capped 20 portfolio caps exposure to any single coin to 15%. Both funds are rebalanced weekly to maintain market cap weightings.
Says BitFund co-founder Josh Miltz: “When holding a portfolio whose constituents depend on market cap, it is important to devise a strategy that outlines when cryptos enter and exit your portfolio. For example, if you are holding the top 10 cryptos, and a new crypto enters the top 10, at what point do you sell out of one to buy the other?
“There are various things to consider here. For one, if you were to trade every time the top 10 constituents change, you could end up trading multiple times per week or even per day in a volatile market.
“In this scenario your returns can be severely affected by trading costs,” says Miltz.
“On the other hand, if you only trade once every month or less, you risk missing out on further gains that a new constituent might make if it continues on its trajectory that brought it into the top 10 in the first place. You also risk holding on to an asset for too long that might have dropped out of the top 10 due to its own downwards trajectory.”
BitFund rebalances weekly, which is frequent enough to tap into the natural performance of the market, but infrequently enough to avoid pushing trading costs up too high, says Miltz.
After fees of 2.4% a year, both portfolios significantly outperformed BTC. Over the past year, BTC has returned roughly 240%. Over the same period, the Balanced 10 performance was 315% and the Capped 20 performance was 419%. In a market where the altcoins have been performing very strongly, it is clear that the early exposure to smaller coins in the top 20 portfolio has led to greater performance.
The outperformance of smaller coins might be a feature of bull markets, but what about bear markets?
During declining markets, BTC has shown itself less volatile than smaller coins. Those funds holding fewer, but more well established cryptos, seem to hold their value better.
Bitcoin vs Capped 20 portfolio
Bitcoin vs Balanced 10 Fund
The bottom line: you cannot escape the volatility of cryptos, but you can soften it somewhat by investing in a crypto portfolio. Apart from diversification, an investment in these funds gives you exposure to some truly extraordinary crypto assets like ADA and SOL.