One of the fundamental differences between crypto markets and traditional markets is that in crypto markets, retail investors are able to invest in what are effectively seed-stage startups. Crypto projects are tradeable by retail investors on crypto exchanges from the project’s inception and can reach billion dollar valuations before achieving product-market fit or generating revenue. By comparison, most traditional startups aren’t accessible by retail investors until an IPO, at which point the upside for new investors is reduced.
However, just because crypto projects are tradeable early on does not mean that they can’t implode. Research published in 2023 revealed that 39% of all cryptocurrencies vanish from the market entirely, and only 10% survive beyond 1,000 days. Even more striking, half of those that fail have lifespans shorter than 80 days.1 In such a combustible environment, survival of a project is not a given and therefore, a highly concentrated portfolio is exposed to significantly more risk.
To deal with this, retail investors would be best to seek diversification from day one, managing their portfolios in an approach similar to how venture capital investors (VCs) approach early-stage startup investing. VCs expect high failure rates across their portfolio, and rely on diversification to maximise their chances of backing one or two unicorn startups. These unicorn investments drive the majority of their portfolio returns and more than compensate for portfolio losses.
Once an investor decides to build a diversified portfolio, the next question is how to select the constituents: what to keep in and what to kick out. As the John West saying goes, 'It's the fish John West rejects that makes John West the best.'
Investors can use a thesis, macro trend or narrative to structure their portfolio, and this eliminates the need to undertake detailed token-level research. We believe this approach is better suited to investors who are not full-time crypto traders, and who cannot access the level of project insider information or dedicate the hours of research and due diligence required to make high-conviction bets on individual crypto projects.
Below are some examples of asset selection starting points, using Themelia’s index builder.
Crypto Themes: Build a portfolio around trending themes such as AI Agents, DeFi, Gaming, or Memecoins. Themes often drive capital flows, making them a compelling starting point. Investors may be wise to exclude themes that they consider to be fading.
Token Supply Models: Filters can be used to create portfolios around tokens with limited supply (e.g. Bitcoin), inflationary models (e.g. Dogecoin), or a more dynamic supply mechanism (e.g. Ethereum).
Token Age: Focus on newly launched tokens with higher speculative growth potential or more established tokens with a proven track record of resilience and adoption.
Market Cap Segmentation: Build a portfolio of smaller-cap tokens for higher risk/higher reward, or larger-cap tokens for lower risk/ lower reward.
Ecosystem Focus: Concentrate on projects within a specific ecosystem (e.g., Ethereum, Solana, or Cosmos), capitalising on the growth of that ecosystem’s network effects and innovation or perhaps exclude any ecosystems that are struggling with adoption.
Volatility Metrics: Filter in or out tokens with high or low price volatility to create a portfolio with the overall volatility which matches their preferences.
Exchange: The listing of a crypto token on a centralised exchange is somewhat analogous to the listing of a traditional stock on a public stock exchange. At this point in the token lifecycle some investors might perceive that the majority of the price appreciation is now in the past and choose to exclude tokens which are listed on centralised exchanges. Alternatively, investors may choose to only include tokens listed on centralised exchanges in the hope of building a portfolio with greater price stability.
Conclusion
When it comes to cryptocurrency investing, success lies in adapting to the market’s unique dynamics rather than applying traditional investing strategies. The high failure rate of crypto projects demands a mindset shift toward diversification and systematic asset selection. By focusing on macro drivers, thematics, and other factor-led approaches, investors can simplify the complexities of token-level research while positioning themselves to capture the exceptional returns that this market offers. With tools like Themelia’s index builder, investors gain the flexibility to create portfolios aligned with their strategies, making the volatile crypto landscape more navigable and rewarding.
