Why Should Crypto Portfolios Favor Bitcoin?

TL;DR

A majority of a crypto portfolio should be held in Bitcoin because altcoins are more speculative and generally lose value against Bitcoin over macro time scales. Bitcoin dominance helps investors judge performance in satoshis rather than depreciating fiat, while broader portfolios can still include index funds, gold, CDs, money market funds, or Treasury bills according to age, wealth, and risk tolerance.

Transcript

over the long haul, alts are oscillators at best against Bitcoin and 99.999% of them are just bleeding against Bitcoin over the macro scale anyways. So yeah, I I think that if if altcoins were at the range lows, uh then you know, you you could argue it would be worth the risk a little bit more, but even at all times in the cycle, no matter what, I ... Read More

Key Insights

• Bitcoin is Cowen's preferred majority holding within a crypto portfolio because it has been steadier over long periods, while most other cryptocurrencies are more speculative and tend to lose value against Bitcoin across macro time scales.
• Altcoins are oscillators at best against Bitcoin over the long haul, according to Cowen, and many depend on promises about future utility that never materialize. Their changing performance makes consistently selecting long-term winners difficult.
• Bitcoin dominance is a tool for evaluating whether the broader cryptocurrency market is outperforming or underperforming Bitcoin. Cowen describes it as a key to understanding crypto because dollar-denominated gains can conceal declining value when measured in satoshis.
• Positive volatility is not necessarily harmful because rising prices are the outcome investors want. Cowen therefore considers the Sortino ratio more useful for risk-adjusted portfolio construction than the Sharpe ratio, since the Sortino ratio does not punish positive volatility.
• Risk tolerance is shaped by age, net worth, and investment objectives. Cowen accepted more volatility when he was younger and had less money, but increasingly prefers preservation and lower volatility instead of chasing highly speculative opportunities.
• Gold is a limited portfolio allocation for Cowen because precious metals can remain stagnant for decades. He previously suggested approximately 3 to 5 percent and raised that range to roughly 7 to 8 percent during the discussed cycle.
• Fiat purchasing power declines because money printing and inflation make goods more expensive over time. Cowen contrasts this spending incentive with Bitcoin, which holders may avoid spending when they expect its future value to exceed its current value.
• Diversification is appropriate beyond the crypto portion of a portfolio because no one knows the future. Cowen identifies low-cost index funds, CDs, money market funds, Treasury bills, gold, and Bitcoin as holdings that can address different risk and liquidity needs.

Questions & Answers

Q: Why should a crypto portfolio hold mostly Bitcoin?

A crypto portfolio should hold mostly Bitcoin, in Cowen's view, because every other cryptocurrency carries greater risk and most altcoins lose value against Bitcoin over macro time scales. Individual altcoins may outperform for months or even a year, but the strongest performers often change annually. Holding mostly Bitcoin reduces the need to identify each temporary winner and can make the portfolio easier to manage.

Q: What is Bitcoin dominance and why does it matter?

Bitcoin dominance is a way to assess Bitcoin's position relative to the rest of the cryptocurrency market. Cowen calls it a key to unlocking the cryptoverse because it encourages investors to evaluate crypto holdings in satoshis, not merely US dollars. If an altcoin rises in dollars but falls against Bitcoin, its apparent gain may not justify the additional risk taken by owning it.

Q: Why does Cowen measure altcoins in satoshis?

Cowen measures altcoins in satoshis because fiat currency loses purchasing power over long periods, so a dollar price increase does not necessarily demonstrate superior crypto performance. Comparing an altcoin directly with Bitcoin reveals whether accepting its greater risk produced a greater reward. He notes that altcoin satoshi valuations were lower this year than last year, and lower last year than the preceding year.

Q: How should age affect investment risk tolerance?

Age should affect risk tolerance because younger investors generally have more time to recover from unsuccessful investments before retirement. Cowen says taking greater risk made more sense when he was younger and had little money to lose. Investors in their 60s may lack sufficient recovery time after a major decline, so concentrating all their wealth in one volatile asset can be inappropriate.

Q: What is the difference between positive and negative volatility?

Positive volatility means an asset's price is moving upward, while negative volatility involves unfavorable downward movement. Cowen does not want portfolio metrics to treat both forms as equally harmful because investors generally welcome price appreciation. He therefore looks at measures such as the Sortino ratio, which does not punish positive volatility, when considering crypto allocations and risk-adjusted returns.

Q: Why does Cowen prefer the Sortino ratio to the Sharpe ratio?

Cowen prefers the Sortino ratio for constructing a crypto portfolio because it does not penalize positive volatility. He says the Sharpe ratio treats upward and downward volatility as factors that can reduce an asset's apparent attractiveness. Since rising prices are desirable, he believes a measure focused on harmful volatility better reflects the type of risk that investors actually want to manage.

Q: How much gold does Cowen consider appropriate?

Cowen says gold can have a place in a diversified portfolio, but he does not favor excessive precious-metals exposure. In previous cycles, he suggested an allocation of roughly 3 to 5 percent, while during the discussed cycle he suggested approximately 7 to 8 percent. His caution comes from gold's ability to spend decades without substantial price progress compared with risk assets.

Q: When can cash-like investments support a Bitcoin strategy?

Cash-like investments can support a Bitcoin strategy when an investor needs stability, income at the risk-free rate, or available capital during a Bitcoin decline. Cowen identifies money market funds, CDs, and Treasury bills as appropriate in certain circumstances. He notes that Bitcoin recently fell near $73,000 to $74,000, and safer holdings could provide funds for buying during such volatility.

Summary & Key Takeaways

• Cowen argues that Bitcoin should represent most of a crypto portfolio because altcoins are more speculative, frequently disappear, and generally decline against Bitcoin over long periods. Although individual altcoins can outperform temporarily, the winning assets change from year to year, making sustained selection difficult for ordinary investors seeking reliable risk-adjusted returns.

• Bitcoin dominance provides a framework for comparing cryptocurrency performance in satoshis instead of only measuring gains in US dollars. An altcoin should deliver greater returns because it carries more risk than Bitcoin, yet Cowen says this cycle has not provided a strong period for betting on declining Bitcoin dominance, at least not yet.

• Portfolio construction should reflect age, net worth, time horizon, and the difference between preserving wealth and pursuing growth. Younger investors can tolerate risk because they have decades to recover, while older investors may prefer safer holdings. CDs, money market funds, Treasury bills, index funds, gold, and Bitcoin can serve different purposes.