Cryptocurrency’s “Nifty Fifty”

++ Usually in bull markets, the “high beta”, riskier securities outperform. This is what we saw over the last 7 months. Bitcoin rallied impressively, but was dramatically outperformed by the more volatile and more speculative Ethereum, which was itself outperformed by some of the even more speculative and smaller cryptocurrencies. The tail end of such rallies are often “junk rallies”, with the strongest gains accruing to the fundamentally least attractive securities.

++ But this pattern doesn’t always hold true, and I think we’re about to see the exception. I think we’re likely to see a strong cryptocurrency rally that’s led by a handful of high market cap cryptocurrencies. For a historical analogue, consider the “Nifty Fifty” in the 1960s and 1970s. Institutional investors became enamored with about 50 growth stocks that came to be viewed as “single decision” stocks. People felt they could buy those equities with confidence they were both safe and high performing assets. That belief becomes self-reinforcing for a time – as money flows in and people buy every dip, the securities do indeed look both very stable and very lucrative.

++ Which securities are the cryptocurrency “Nifty Fifty?” Consider where institutional and retail money can flow most easily. Look at the cryptocurrencies offered by Coinbase, Gemini, and the investment trusts offered by Grayscale, and the equivalent companies in Asia. Look at the most liquid, most stable, and oldest cryptocurrencies, the ones that would be most appetizing to, say, a Family Office that wants to broadly invest in cryptocurrency in as passive a form as possible. What cryptocurrencies can most easily be thought of as “established”?

About Ari Paul

Ari Paul is co-founder and CIO of BlockTower Capital. He was previously a portfolio manager for the University of Chicago's $8 billion endowment, and a derivatives market maker and proprietary trader for Susquehanna International Group (SIG). Ari earned a BA in political science from the University of Pennsylvania, and an MBA from the University of Chicago with concentrations in economics, entrepreneurship, strategic management, and econometrics & statistics. Ari is a CFA charterholder.
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8 Responses to Cryptocurrency’s “Nifty Fifty”

  1. Rad says:

    It does make sense, but nothing mentioned as to *why* you think it’s a good possibility. Share your thought process, or else there isn’t much value to this post.

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  2. Great thinking as always Ari. I think the thought process is tied to the post about the evolution of who cryptocurrency investors are (next phase is Wall Street adoption). I think this makes sense. Personally, I focus on the top 20 coins by market cap and pick the ones I think are best from that set. For an advisor/fiduciary, it would be hard to defend losing money on a lower market cap coin (especially if it turns out to be a scam and/or mismanaged). Diversification is important in cryptocurrency just as it is in any asset class.

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  3. Joe says:

    Due to the low trading costs and volatility, how often should you be rebalancing your basket of crypto currencies. Monthly, quarterly, or Yearly. I fully agree distribution and liquidity of the currencies are the most important to picking the currencies. High market cap and low volume currencies scare me due to the ease of potentially being manipulated. One thing not mentioned here is understanding the underlying technology and whether it can gain traction before running out of money. There are a lot of concepts out there that have no chance being around in 10 years and when people realize that, those will go to 0.

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    • Ken says:

      I’m interested in this as well.
      “Due to the low trading costs and volatility, how often should you be rebalancing your basket of crypto currencies. Monthly, quarterly, or Yearly.”

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  4. pacific says:

    I think this will likely play out but will be something like The Great Eight or The Formidable Four. The access factor you mentioned is part of it – another factor is that many of the highest cap coins at this point are platforms that underly the whole ecosystem of other tokens and benefit from the growth of all the tokens built on them. For instance, the value of Ethereum benefits from the use of tokens built on it like Augur and Golem. So coins at the protocol/platform layer are likely to thrive and more often than not the more established platforms will beat out the new platforms on the block like EOS, since they essentially have a network effect i.e., they have greater utility due to all the coins built on them and have attracted a greater mindshare and talent pool of developers. Investing in a platform like Ethereum is arguably the equivalent of investing in TCP/IP at the dawn of the internet era – if it had been an investable asset. The one major caveat here is security. The prominent platforms will be targeted the most and may face existential threats.

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  5. Jeff says:

    Hi Ari
    If you were a hypothetical long term holder–someone with no info/analytical advantage but yearns to risk 3% of their money– how would you allocate portfolio % of this basket: btc/eth/Ltc or other coins?

    Thanks , jeff

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  6. maurymccoy says:

    I would think most family offices wouldn’t try this themselves and would instead be willing to pay a competent technology-focused hedge fund to do the research necessary unless they just wanted to buy BTC and ETH.

    Along those lines, I’d imagine many of the best hedge funds would likely avoid BTC and ETH and focus on cryptocurrencies that are up and coming in order to justify their fees and achieve superior returns.

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