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Portfolio management advisors seeking to help clients build digital asset portfolios may start with Bitcoin and Ethereum. However, many high-net-worth clients want more sophisticated digital asset strategies. The digital asset universe is vast and complex, making it challenging to know where to start when building a diversified portfolio. Using a familiar sector-based allocation framework, you can structure a portfolio and make data-driven decisions.
The "Core-Satellite" Approach for Digital Assets
The "Core-Satellite" strategy is a practical strategy to help manage risk and capture upside in a digital asset portfolio. This approach views Bitcoin and Ethereum as foundational, blue-chip assets. Digital asset allocations made to specific subsectors are known as satellites. A portfolio should focus on core assets, with some additional satellites to capture alpha and enhance diversification.
A Framework for Sector-Based Diversification
The Core-Satellite strategy is an effective general approach to crypto for wealth managers, and you can build more diverse portfolios by breaking assets down further into several sectors, such as:
Sector 1: L1s and L2s
Layer 1 (L1) encompasses blockchains, and Layer 2 (L2) comprises the scaling solutions built on top that enhance the speed and cost-effectiveness of these solutions. These are the core operating systems in the digital economy. Key metrics to track in this sector include daily users, fees, and developer activity.
Sector 2: DeFi
Decentralized finance (DeFi) is the new financial system. DeFi protocols reflect and innovate on traditional financial services, such as lending and borrowing, without the need for centralized intermediaries. Key metrics to track for DeFi portfolio construction include total value locked (TVL), protocol revenue, and user growth.
Sector 3: RWAs
Real-world assets (RWAs) serve as the bridge to traditional finance (TradFi). Tokenizing tangible off-chain assets, such as real estate or private credit, can bring them into the blockchain. Key metrics to track for tokenized RWA investing include underlying yield, collateral quality, and peg stability.
Sector 4: Infrastructure
The classic "picks and shovels" investment thesis focuses on investing in essential services that the digital asset ecosystem requires to operate, such as oracles, data indexing, and decentralized storage. Key metrics in this sector include adoption, revenue, and token utility.
Portfolio Construction and Client Communication
Once you understand the key sectors, you can start building a diversified crypto portfolio while maintaining effective communication with your clients. You can begin by determining sector weights based on the client's risk profile. Start with a Core-Satellite approach, then weight other sectors based on risk tolerance. Sectors 3 and 4 may be less prevalent or nonexistent in a more conservative client.
After establishing a portfolio, build a disciplined rebalancing strategy. Digital assets are more volatile, so portfolios should have time or threshold-based triggers to review and rebalance. As you develop and adapt the portfolio, communicate unique sector-specific risks to clients. Also, manage their expectations and portfolio goals by setting realistic performance benchmarks and emphasizing a long-term focus.
Why Trust Amberdata?
You can trust us for access to high-quality data. We collaborate with the best minds in blockchain and cryptocurrency to transform raw data into actionable insights. Leading financial institutions trust our insights. We deliver the granular on-chain data you need to construct sophisticated, diverse portfolios for your high-net-worth investors.
From Speculation to Strategic Allocation
The sector-based framework gives you a strategic method for diversifying digital asset portfolios. Access professional-grade data to support diversification with solutions from Amberdata. Learn more about the enterprise data solutions we provide.
