Why Bitcoin Alone isn’t enough — The Case For Investing in Blockchain Ventures
By Nassim Olive — General Partner at Eterna Capital
SUMMARY
- Diversify for Opportunity: Blockchain is entering a phase akin to that of the early internet, offering exponential opportunities across diverse use cases, beyond Bitcoin and Ethereum.
- Capture Innovation: Building a portfolio including diverse sectors like DeFi, entertainment, asset tokenization mitigates risk and enhances potential returns.
- Maximize Shots on Goal: Investors should consider blockchain native VC funds to gain exposure to emerging themes and disruptive technologies, ensuring they capture tomorrow’s innovations today.
INTRODUCTION
Digital assets is one of the most promising, yet underappreciated, markets for diversification. Bitcoin and Ethereum dominate by market capitalization, (approximately 70% of the market), despite a growing number of innovative new projects. While spot ETFs have amplified this concentration, we believe that investors should aim to build a more diversified portfolio.
THE CASE FOR DIVERSIFICATION
Diversification improves risk-adjusted returns, especially when it comes to blockchain investing. Individually, smaller projects may carry higher risk but investing across a broad mix of projects can reduce volatility and improve risk-return metrics like the Sharpe ratio. The purpose of this short blog is to outline that there’s more to diversification than higher Sharpe ratios.
CAPTURING INNOVATION
According to BCG, blockchain is at the same stage the internet was in the late 1990s in terms of user adoption[1]. The message is clear: there is plenty of growth to come. In fact, as more resources and developers converge towards adopting blockchain technology, the number of its use cases will exponentially increase. We like to look at the growth of the internet versus the growth of blockchain — and we believe the pace of adoption will actually be much faster, as the up-take of new technology is much quicker than it used to be two decades ago.
Investing in one internet stock 30 years ago would have been unwise. Today, investors risk missing promising opportunities by not diversifying beyond Bitcoin and Ethereum.
In an industry as dynamic as blockchain, diversification is essential to gain exposure to the varied and evolving mix of narratives and verticals built around the technology. Diversification addresses the power law distribution of returns, whereby a portfolio’s return is driven by a small number of outsized returns against a larger number of low-yielding investments. Diversifying ensures your portfolio has enough shots on goal.
BEYOND MARKET CAPITALIZATION
Building a portfolio of the 10 largest digital assets by market capitalization may, erroneously, be considered as “diversified”: however, it would merely result in a mix of layer-1 protocols and stablecoins. This is risky because it would certainly fail to capture most of the current innovation.
A portfolio comprising the 150 largest digital assets by market capitalization, would capture more innovative opportunities such as:
- Layer-1 or Layer-2 protocols and related infrastructure, like scalability solutions and interoperability
- Decentralized Finance (DeFi), from trading and lending/borrowing to asset management
- Entertainment, including gaming and fan engagement
- Decentralized Physical Infrastructure Networks (DePIN), including projects for distributed compute power with tie-ins to AI
- Real-World Assets (RWAs), including tokenization of treasuries, commodities, etc.
THE CHALLENGES OF ACTIVE MANAGEMENT
While the above gives exposure to a more representative mix of the current hot themes, it is extremely complicated to manage such a portfolio. More importantly, it still wouldn’t provide investors with exposure to what is next — the innovation of tomorrow. For investors to consider a holistic exposure to our industry, we believe it is fundamental to build a more balanced portfolio that captures:
- beta exposure to the market: achieved by having exposure to Bitcoin and, maybe, Ethereum;
- alpha by picking a few mature projects: achieved with exposure to some of the 100 largest digital assets by market capitalization; and
- ‘real’ alpha by investing in ventures: achieved by allocating to Venture Capital (VC) funds with strong expertise in backing early-stage blockchain projects.
THE NECESSITY OF VC INVESTMENT
Only one thing is certain: as the pace of innovation increases, disruption will continue to be the norm.
We strongly believe that “just” having exposure to Bitcoin or to a benchmark of liquid digital assets is not enough, leading to missing significant upside. Investors should consider a position in VC funds with strong track record in capturing emerging themes, new ideas and new directions as disruptive projects continue to innovate. Even in the more developed parts of the blockchain ecosystem (payments, layer-1s, layer-2s), we believe it is still too early to call long-term winners.
LONG-TERM PERSPECTIVE: The only way to really capture the upside offered by this asset class, is by allocating to VC funds. Building a well-diversified portfolio does not mean just buying more, smaller assets. It means taking a long-term active view (5–10 years horizon) on the scale and scope of the blockchain ecosystem. That’s the role an early-stage VC fund should play — this is what we focus on at Eterna Capital since launching in 2018.
CAPTURING DISRUPTIVE USE CASES: The conclusion we’ve drawn, after hundreds of investor meetings around the world, is that investor portfolios are still under-exposed to this asset class and, when they have exposure, they are not exposed enough to the disruptive use cases being tested today and implemented tomorrow. Budding themes such as the intersection of blockchain and artificial intelligence, asset tokenization, the improvement of scaling solutions, decentralization of social media, the improvement of developer and end-user experiences — all require a deep look past Bitcoin and should encompass portfolios spanning many verticals and projects.
Diversifying doesn’t weaken a portfolio — it provides investors with more chances to capture winning assets while offering proven risk benefits. Diversification gives you more for less — if executed correctly.
References
[1] What Does the Future Hold for Crypto Exchanges? (July 2022). BCG, Bitget, Foresight Ventures
Disclaimer: The information herein is for general information purposes only and is not investment advice. This should not be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction. An investment in our products involves a high degree of risk. Past performance is not indicative of future performance.
