Advisors Reassessing Crypto Diversification Strategies

Beyond Bitcoin: How advisors utilize indices to expand crypto exposure.

(Illia Kholin/ Unsplash)

What to know:

You’re reading Crypto for Advisors, CoinDesk’s weekly newsletter that examines digital assets for financial advisors. Subscribe here to receive it each Thursday.

In today’s newsletter, Glenn Williams Jr from ProShares discusses the increasing investment in cryptocurrencies beyond bitcoin.

Subsequently, Michael Sena from Recall Labs addresses inquiries regarding portfolio construction and diversification in Ask an Expert.

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– Sarah Morton

Investors are expanding their crypto perspectives

As the variety of cryptocurrencies has increased, the desire for broader exposure among investors has risen. Starting from a single transaction in 2009, the crypto ecosystem now supports millions of transactions daily, with its market capitalization soaring from virtually zero to over $3 trillion.

Bitcoin, the asset central to crypto’s inception, continues to be regarded as a benchmark for the entire asset class. Although bitcoin currently accounts for nearly 60% of the global crypto value, the cryptocurrency landscape is swiftly evolving, with numerous new digital assets gaining market share and attracting significant investor interest.

The rise of alternative assets

Since 2023, the market capitalization of cryptocurrencies, excluding bitcoin, has surged by 175%. Ether, the second-largest crypto asset globally, has increased by 142% during this timeframe. Concurrently, the use cases for crypto assets are advancing at a rapid pace. While bitcoin is often perceived as a store of value, other cryptocurrencies provide functionalities like decentralized lending and borrowing.

Investors are also exploring structural differences within the digital asset realm. Some digital assets operate on their own blockchains (e.g., Bitcoin, Ethereum, Solana), while others are built on existing ones, such as Uniswap and Aave. This distinction influences everything from governance rights to potential cash flows. In essence, the variety among crypto assets is continuously evolving, and investing in just one (or a couple) limits exposure to the full spectrum of the asset class.

Crypto market capitalization, excluding bitcoin

Source: TradingView, data from Jan. 1, 2023-Jan. 27,2026.

An indexed approach for changing times

Indices like the CoinDesk 20 Index (CD20) are designed to furnish investors with extensive and diversified exposure to cryptocurrencies as a whole. As capital enters the digital asset market, performance variation among index components may become more pronounced.

The potential for internal rotation within cryptocurrencies can be likened to sector rotation in traditional finance. For instance, correlations between CoinDesk 20 constituents and U.S. equities are dynamic, with fluctuations reflecting an evolving asset class. Despite this, over longer durations, correlations between cryptocurrencies and equity markets have been moderate.

Evaluating the performance of the top 20 digital assets by market capitalization (excluding stablecoins and other coins), the CD20 accounts for 90% of the overall crypto asset market share. Eligibility is determined by ranking the largest digital assets based on liquidity, custody, and exchange-listing criteria. The index undergoes quarterly reconstitution and rebalancing to align with shifts in the crypto asset landscape. Furthermore, the CoinDesk 20 methodology imposes a 30% cap on its largest asset and a 20% cap on all others to mitigate concentration risks in any single coin.

Benchmarks are essential

For any emerging asset class, the establishment of benchmarks is crucial. Over time, investors have grown accustomed to them and refer to them regularly. The CoinDesk 20 aims to provide the same for digital assets, organizing their inherent (yet sometimes unrecognized) diversification into a liquid and investable unit of exposure.

This information is not intended as investment advice. Any forward-looking statements made herein reflect the expectations of ProShare Advisors LLC at this time. However, whether actual results and developments will align with ProShare Advisors LLC’s expectations and forecasts is subject to various risks and uncertainties, including general economic, market, and business conditions; changes in laws or regulations or other actions by governmental authorities or regulatory bodies; and other global economic and political developments. ProShare Advisors LLC assumes no obligation to update or revise any forward-looking statements, whether due to new information, future events, or otherwise. Investing involves risks, including the potential loss of principal.

– Glenn C. Williams, Jr., CMT, manager and investment specialist, ProShares

Ask an expert

Q: In the current crypto market, what does meaningful diversification look like beyond merely holding multiple tokens?

Meaningful diversification in crypto isn’t merely about accumulating tokens but comprehending risks. If all assets in your portfolio move in unison, you lack diversification and are exposed to the same cycle in different forms. Genuine diversification requires consideration beyond price charts, ensuring necessary exposure across categories like infrastructure, decentralized finance (DeFi), real-world assets, and digital commodities, coupled with various business models that generate sustainable value.

It also entails diversifying operational methods. Custody solutions, liquidity providers, exchanges, and regulatory environments significantly influence outcomes, just as much as the assets themselves. The objective is to balance innovation with stability, seizing growth while safeguarding capital.

Diversification isn’t simply a numbers game but a disciplined risk management strategy within a complex market.

Q: As correlations between crypto and traditional assets fluctuate, how should investors reevaluate diversification in a more macro-driven environment?

Investors must acknowledge that crypto is now embedded within the larger financial system. As markets evolve, digital assets respond to the same forces affecting traditional assets: interest rates, liquidity, geopolitics, and regulations. Consequently, diversification should commence with a macro perspective rather than a mere list of tokens.

The critical inquiry has shifted from “how many assets do I own” to “what risks am I exposed to?” In times of tightened global liquidity, Bitcoin, equities, and technology can all behave similarly. True diversification necessitates balancing risk factors: inflation sensitivity, yield exposure, geography, and regulatory landscapes.

Portfolios should be constructed around strategies. Merging liquid assets with revenue-generating enterprises and real-world exposure fosters resilience in correlated markets, allowing for better survival and recovery. That’s precisely what we accomplish at BTF.

Q: During volatile periods, where do you see investors commonly misunderstanding risk while trying to diversify their crypto exposure?

The most frequent error is equating activity with diversification. Investors purchase more tokens, chains, and narratives, assuming they have mitigated risk. In truth, they often amplify the same exposure. During volatility, correlations tend to converge, causing portfolios that appeared diversified on paper to collapse simultaneously. Liquidity risk is also often misconstrued. Assets that seem liquid in stable markets can become difficult to exit when circumstances shift, which many do not anticipate until it occurs.

Operational risk represents another overlooked area. Custody providers, exchanges, stablecoins, and counterparties can be more influential than the assets themselves. Genuine diversification involves not merely owning more but understanding what truly safeguards capital during stressful scenarios. Anyone who comprehends and aligns their strategy accordingly is likely to succeed.

Q: Many still regard Bitcoin as a proxy for the entire crypto market from a treasury strategist’s viewpoint. How does diversification across infrastructure, issuance models, and risk profiles genuinely protect capital?

Bitcoin serves as the cornerstone of crypto, but it does not encapsulate the entire narrative. From a treasury standpoint, regarding one asset as a representative for an entire industry is inherently flawed.

Today, crypto constitutes an ecosystem with various return sources. Infrastructure generates recurring fees. Tokenized assets are tied to real-world economics. Distinct issuance models create varying risk profiles. Active strategies react differently than passive exposure. These factors do not move in synchrony, particularly in turbulent markets.

Diversification safeguards capital when risk is spread across how value is produced. A professional approach transcends a single asset and cultivates exposure to the broader mechanics of the industry.

– Michael Sena, chief marketing officer, Recall Labs

Keep reading

• A U.S. Senate committee officially advanced the crypto market structure bill on Jan. 6.
• The Canadian Investment Regulator Organization (CIRO) has launched a new Digital Asset Custody Framework to strengthen regulations surrounding the custody of crypto assets in the nation.
• Bitcoin maintains crucial support as investor sentiment remains notably bearish.