A Smarter Way to Crypto Diversification?

The investment conversation around crypto has transitioned from questioning the survival of cryptocurrencies to discussing efficient allocation strategies. Most notably, institutional investors are moving on from testing the waters with bitcoin to seeking diversified exposure to the broad crypto market.

With a total market cap of over $3 trillion, cryptocurrencies represent approximately 1.5% of the market portfolio of all listed, investable assets that are easily accessible to investors (Bloomberg, WisdomTree, 1/31/2025).

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Figure 1: The market portfolio

Source: Bloomberg, WisdomTree. Data as of 31 December 2024. Market caps are shown in USD billion. Historical performance is not an indication of future performance, and any investment may go down in value.

In 2024, institutional investors started to recognize that the market-neutral position for multi-asset portfolios involves investing approximately 1.5% in cryptocurrencies, as determined by the market portfolio. They also realized that including cryptocurrencies in diversified multi-asset portfolios can also potentially improve their risk/return profiles.

While allocating approximately 1.5% to cryptocurrencies became a reasonable strategy for investors without a specific investment thesis against the asset class, a question arose as to whether investors should allocate the entire 1.5% to bitcoin or diversify that allocation across multiple cryptocurrencies.

Figure 2: Cryptocurrency market caps

Source: Artemis Terminal, WisdomTree. As of 31 January 2025, using US Dollar market caps. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.

For background, bitcoin dominates the cryptocurrency market, accounting for 55% of the total market capitalization. The next 19 largest cryptocurrencies collectively make up around 33%, while the remaining 12% is distributed among all other cryptocurrencies.

This distribution has sparked a debate among institutional investors about the optimal approach to crypto investing. Advocates of a focused strategy often champion the idea of investing exclusively in bitcoin. This preference is largely driven by bitcoin's established track record and its perception as a digital store of value akin to gold. Bitcoin’s resilience and historical performance have rendered it an attractive option for those seeking a relatively safer entry into the world of cryptocurrencies.

However, there are also strong proponents of diversification. These investors argue that spreading investments across a basket of cryptocurrencies can harness the growth potential of emerging digital assets, while simultaneously mitigating the risks associated with the volatility of any single cryptocurrency. By diversifying, investors can potentially benefit from the rise of new innovative projects and technologies within the space, aligning their portfolios with the broader developments in the digital economy.

Ultimately, the decision to focus solely on bitcoin or to adopt a diversified investment strategy depends on individual investor preferences, risk tolerance and market outlook. Investors without a strong opinion on the long-term crypto market winners seeking a long-term investment may find a market cap-weighted approach to diversification advantageous. As the space matures, investors will likely seek allocations that evolve over time in tandem with the broader cryptocurrency market.

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.