Is Your Crypto Portfolio Truly Diversified | EBC11

Hi everyone. Okay, so we can hear properly. It's working.

Yeah.

Good. So yeah, we are here to talk about diversification in crypto in portfolio and uh overall market structure. So I'm Kantia, managing partner at Blockstone. Um we do believe in diversification. We run a multi strategy fund, multi- manager.

Uh the idea is to uh not put your all your eggs in one basket. We have seven strategy running now to Bitcoin yield um offering to investor in order to get higher riskadjusted return and uh so I'm joined by my uh panelist and I will let them introduce themselves. Go ahead.

Well, hello. The great Howard Marx said, "Investment success comes not from buying good things, but from buying things well." Uh, my name is Jennifer Murphy. I run rooted digital assets with my partner Max. We run liquid token strategies and we focus on buying things well, which is another way of saying buying low and selling high.

So, um, it's natural. All of us like uh hyperlquid when it's in the 40s and it seems very successful and attractive but uh buying hyperlid in the 40s is probably not a recipe for investment success. So we focus a lot on how we buy. We like to buy good things but only in terrible markets. So for us today a great day.

There's a lot of potential buying opportunities.

Good. Thank you.

Hi everyone. My name is Roman Gonzalez. I've been managing a hedge fund here in Madrid. The first one that was regulated by by the Spanish regulator and we are starting to to create new products, new baskets. We focus in in baskets in portfolio diversification and low correlation between assets, low volatility and how to manage and a really well adjusted uh risk portfolio.

And I think that's that's really good with the topic we are trying to talk here about. Thank you.

Hello, my name is Raymon Timberman. I'm head of investor relations for Huddle. We're an digital asset manager based in Rotterdam. We currently have three different types of funds. Uh we do venture capital fund um also a directional fund which is fundamentally research but we also use uh quantitative overlay um to yeah get the right timing in the in the market.

and we also have a market and delta neutral fund. I'm happy to be here and uh I hope you enjoy.

Hi everyone, my name is Marco Yavaron. I'm a theoretical physics now working as a R&D director at Nudian. Nudian is a data intelligence platform to support investors uh to support cryptoenthusiastic and professionals navigate the complexity of web 3. How do we do that? through um computing and try to assess risk based metrics and to inform uh users about that and u we achieved this goal.

We try to achieve this goal just working out um metrics and indexes that allow to quantify risk and related phenomena in the crypto market.

Great. So we got a diversified uh portfolio manager, different strategy, different ways of making money and uh of course today diversification is key with what happened last week and what has what is happening today. What we can see in uh in digital asset like every coins are correlated let's say one to one kind of moreover when the market is collapsing. So how do you play diversification? Um let let's start with you Jennifer.

So we were touching on the on the prep call that it's not only about crypto anymore and maybe it's interesting to touch on that part.

Yeah. The when we started we were coming from equity markets in the United States. We looked at the S&P 500 which is the most uh invested in index in the world. The S&P 500 is organized by sectors. Financial sector, tech sector, uh utility sector.

So that that was the way we organized our diversification in crypto by sectors, currencies, protocols, DeFi, utilities and we diversified by those sectors and when we had markets like today it didn't matter at all. It didn't [laughter] didn't provide any protection against downside that sort of diversification. So what we began to focus on are other types of diversification like for example volatility. So we own a barbelled portfolio generally speaking of lower volatility assets like believe it or not Bitcoin is among the lowest volatility assets in crypto but also things like the carry trade fund um from Superstate for example uh which provides lower return but a lot of ballast in a bad market like this one and we barbell it with high volatility but good fundamental businesses token uh projects like Metaplex like uh maple, things like that that um their prices jump around a lot, but their underlying fundamentals tend to grind it out. And then in the middle, as you're alluding to, Carl, we trade things.

So, for example, uh in the tariff transom tariff tantrum early in this year, stocks went down a lot more than uh they have in the past in a very short period of time. And so, we bought stocks in the portfolio for the first time. We bought Coinbase under $150. you know, it's uh over $300 today. Um just tremendous opportunities, sort of token-like return opportunities in equity markets, and that's become a form of diversification for us as well.

Thank you very much, Roman. So, you you rely on 90 days uh running correlation, right? when you build your portfolio if I recall and um so how do you see the how does a fund does the correlation between stocks break and how do you build your portfolio in that way and how is it truly diversified for on your side

yeah that's right as as Jennifer said once everything is is dropping and the bare market comes back uh the correlation between assets uh try go to go to one so all the thing are it seems all the crypto are are going together. So, uh we think we are still in a bull market by the way because we we see some decoupling between assets. There are really bad days and and bad weeks uh we are seeing but only uh punctual moments where where you see uh high correlation between assets. So we we are we are watching now uh some decorated assets like Binance and and and other ones that are behaving different from the from the main ones. But yeah, that's right.

You need uh you need a systematic way to calculate that the correlation between assets and in crypto everything is changing so so fast that with 90 uh daily working uh days we are really fine with that. So we are analyzing the last 90 days of the crypto prices and watching in a systematic way all the correlation between them the volatility that they have and trying to build portfolios the efficient one the efficient one we are calculating an efficient frontier using uh Marco's uh approach and trying to to find the best portfolios in terms of riskreward attending an at at those 90 uh 90 days of of prices.

Thank you. Thank you. Thank you. And um so so um you had a book which was 20 30 coins just the title of this correlation issue diversity. Can you tell us more about that?

Yes, of course. Um I think what we've seen uh in the last couple of years is that the market is changing pretty quickly. Um I think if you look at more professional players entering the market uh and also institutional players sorry um yeah we we we've seen a lot of change in uh in in how the market behaves. Uh we used to have 20 to 30 positions in our directional portfolio. Uh we used to do more long-term buy and hold which were perfectly fine in earlier uh cycles but we see in this cycle it's it's quite different.

So currently we we have Bitcoin as a base which is our largest position and we have altcoins uh some also for longerterm holding but we're now trading it more actively so we're taking profits early. we moved that back into Bitcoin and uh or stable coins when we think the market is over uh overextended and um yeah so we have a more much more agile approach now to uh yeah to the market

yes Marco for you so which nonpric market best for diversification

well I mean when uh we talk about diversification there The first initial difference that we have to consider between traditional finance and crypto finance because in traditional markets typical diversification relies on the sector and total exposure. So you can create a diversified portfolios maybe investing in assets belonging to different sectors and so on. But with is everything different. Why? Because many tokens rely on the same network.

They undergo the same liquid most of the time the same liquid cycles they can also have the same exposure to BTC is the main one so it's quite complicated is not enough to consider price correlation and so on I think that with such a complexity at least our audience is uh try to understand this phenomenon from different angles that's why we rely on different kinds of data like community and social data, ESG like data and um financial data and combining all this information and extracting information and quantifying information by indexes then it's possible to get some signals and to get some insight on how diversification can be actually achieved. So going beyond pure price correlation. So this is the actual difference and the approach I think we need to take care when we want to diversify a portfolio.

Yeah. You want to say something Jennifer?

Yeah you mentioned um funding rates Carl and what we used to in the past cycles we would are you familiar with coin glass they have a funding rate heat map. We I I would pull that up every morning and look at it. uh in the last cycle the funding rate heat this was the s the top sign but we didn't know it at the time the funding rate heat map had to add new colors because the hot colors couldn't reflect how high the funding rates were so they had to add new colors to the chart that was that was the top of the market um now the funding rate is just the the heat map is just blue every day it's just blue which means there's no heat um but obviously in the markets that's not true so what we found is you have to go to hyperlquid and the other the perexes and look at open interest on on perpetuals because that's where that's where the leverage is hiding. It's not visible in funding rates this cycle at least as far as we can tell.

Yeah. So the old challenge when you run long only strategies is diversification. We try to find ways around but what we see is when excuse my French the fan everything is going down and very highly correlated. Um what about uh diversification in terms of strategies? Um maybe Raymond you can you can speak about what you do.

So you you not you're multi strategy shop digital asset management. So you also run Delta neutral. How does it look for you between the book and when you speak with investors um how do you diversify the allocation between the market neutral part of the book uh you're running and which kind of strategy you're running there? Yeah, we look at the market delta neutral strategy. Uh we started that in uh March this year.

So we're pretty uh yeah, still starting up the the fund. Um but I think diversification in strategies there is is is is key. Um, in the end you want to have a portfolio that is uh yeah that has strategies that are uh uncorrelated to each other uh in in terms to yeah to be able to get a better risk return profile on your uh on your on your fund. Um so for instance we're uh we're running u uh funding ARP uh as well as cross exchange arbitrage and uh yeah we have plans to diversify more into more strategies to yeah to get a better risk return profile and I have a question for you uh Roman um you run ETP right and the market is trading 24/7 how you deal with um with the market during the weekend How do you deal with that on your side? Because you can't do anything during the weekend, can you?

Yeah. Yeah, that's that's that's right. I mean, we are a long only fund in crypto. Our view is that uh this uh new asset class is going to bring you 30 35 plus uh yearly returns in the coming 10 years. That means you are going to multiply your money by 28 in the part of your portfolio that you decide you are allocating to crypto.

That's our view. I mean uh we are not high frequency trading traders. We see plenty of volatility in the weekends. Uh I think you don't need to act most of the time. We cannot but for sure I really think that that if you are not a high frequency trader trader like us, you don't need that.

So we are really really nice. We are really really comfortable using uh European crypto ATPs. We really think that that's the way where an institutional investor should go because you are also delegating the main risk of of crypto that is in our opinion custody. So you are delegating the huge risk associated with crypto in a really good proper and best-in-class uh custodian solutions. Uh the second uh risk is market risk for sure and for that we try to think of crypto as okay this is not equity you cannot put uh you can manage a crypto equity fund with a cap of 3% in a single equity that you can manage a fund like that it's okay but uh every time we see like a cap of let's say 25 30% in any given asset in crypto h we really think that's an a mistake.

So in terms of diversification, we think about there is no cap. That was a really interesting conversation with regulators because you know they they love putting caps in everything. And when we we told them, okay, we need more than 30% sometimes weight waiting in Bitcoin or or Ethan, they get really scared, but that's the way you need to to think about diversification and cash for sure.

Okay. Some cash.

So you you touch on something. So diversification it's it's also coming from the plumbing all the infrastructure we deal with and we can't speak in um we can't trade crypto on the centralized venue and trading we we need to have this diversification between the prime between the exchange the custodian Marco do you want to um to touch on that how the diversification is really important more when you got situation and a big meltdown like last week

yeah of course one of the aspect to consider for instance is the natural concentration that we can observe in the crypto market. concentration in terms of having a few networks that actually are the main one driving and having the longest resilience in time like BTC, ETH and so on and at the same time when we want to diversify a portfolio we have to take this into account and we have we need a tool in order to assess also the other asset that can be related to emerging project in order to assess the quality of emerging project. Then you need to measure quantities like uh the the specific project a token is related to. How good is this uh uh is this project? What kind of solution is offering to users and why it can be considered particularly of interest for a community of people because with the digital asset we not only have a project with offer solution but we have also me coins that are more social like that are more affected by social like dynamics and so on and so forth.

So I think that concentration of the digital asset that is something we have to deal with that is not a bug but at the same time can be an issue from the infrastructural stability of the whole system is something to take care but is somehow expected because being a complex system the the crypto market it has a few tokens that are much much more relevant than others and there are many other that are a little bit less. So if you want to think about that in statistical terms, it's really not been described by a typical gausian behavior where more all the entities behave the same way. They typically behave in a different way with a shape with a statistical shape that is much more heterogeneous. That is a hallmark of complexity not only in the crypto system but also when we analyze social network for instance where we have typically normal people versus influencer when we analyze biological network transportation network and so on and so forth. We need to be aware of the strong differences and then we need the right tool in order to discriminate among the emerging project, the emerging tokens.

What are those that actually deserve more attention that can contribute to actually diversify our portfolio that has to include some of the main network as well as some of the new ones. So balancing correctly the risk but the risk need to be quantified and I think that there are different angles to do that that cannot be related only to numbers but need to be looked at into inside the communities of people because at the end there are people talking about a specific asset. So we need to pay attention into that direction.

Thank you very much and Jennifer. Um so we speak about diversification about universe about ecosystem uh in crypto but also so we got Coinbase we got the miners we got infrastructure company which are listed which kind of alpha generate within a portfolio how do you see that okay trading now in the proxy crypto traditional market is bringing value circles did 8x on the IPO so obviously when you it it's really outperforming everything out there so bitcoin used to be like a week ago go 20% up on the year should be flat or maybe losing money now. Um so how can you with traditional market analytics uh get better return on your crypto hedge fund?

You're right that um the theme this year has been the equitization of crypto. the traditional finance finally arrived uh in crypto the investment banks portfolio managers uh especially in the United States but I assume globally and but they didn't arrive the way we thought you know we thought they were going to come with us and own tokens but they only want stocks it seems or ETFs so it became uh where prior to 2025 we would focus a lot on um things like ecosystem diversification whether we had exposure to base to Salana to Ethereum etc because that was a way to provide diversification and alpha but this year it's all about ETF flows it's all about IPOs you know there have been eight major IPOs in the US stock market this year uh four of them are down tremendously 60 to 70% and four of them are up similarly um and you mentioned Circle and in our view circle came public on June 5th at $31 a share today it's I don't know $130 something like that um that touched off the the equity mania in for crypto in our view and so you had the digital asset treasur treasury companies accelerate along with ETFs and IPOs which continue and the those flows are what tell you the story of what's happening. And so Carl, we're having now to uh you know, up until the last couple of weeks, having exposure to tokens that could have an ETF, that could have a digital asset treasury company, that could have a related IPO was a great thing. And now that all seems to be flipping over and so we have to be looking at what do we own that's going to be on the receiving end of those outflows from ETFs, outflows from the digital asset treasury companies, or certainly uh lack of buying. Um so it's a big area of analysis for us.

Very interesting. Thank you very much. So what do we see on our lens? So we started allocating in um in the digital assets back in 2017 and uh 2018 we were looking to build market neutral portfolio during the M market which was nearly impossible back then because even administrator were not dealing with anything else than bitcoin. So to have an institutional grade fun of fund product was very complicated.

What we see now is you have like five main buckets of strategy which has run in the space. So you have people running market neutral. So the basis trade but you can't just do that because of course like you leverage it. Last year you run 6% V you have 30% return which is great but this year you flat or you lose money if you just not able to have a diversification multistrat doing cross arbitrage for instance cross exchange arbitrage sorry. Then you got people uh running long short momentum all the quan strategy same thing things which work very well in certain market structure and become a way more challenging in market like we have this year because what we see the big inflow are coming to bitcoin mainly Ethereum a bit since the summer Ethereum went up 50%.

And uh we got this traditional money which is looking for crypto proxies and but the momentum is playing well in days like last Friday or like today where they can pick the trend and save your portfolio on the overall uh if you got a long book which is going down 10% on the day. Um those strategy enables you to get some profit on the end. So diversification really does make sense. Then same thing in the market neutral space it's very challenging this year and if you're not able to pivot to defy and to get some yield there you are really underperforming your peers. So you need to look at that as well.

And then the last piece is the market making which is like really the the sweet spot where it's nearly always making money unless you get co in something wrong. So all of these things are are to be looked at and um but maybe then we can speak about not only diversification of portfolio how the portfolio is constructed but also in terms of service provider how you diversify the risk because our role is to be risk managers. This is what we offer to investor to make sure that money is safe. So with a diversified uh custody, diversified prime to get liquidity, you don't want to trade only on one platform and to be shut down like it happened last week for instance. Um and so how do you deal with that in how many service provider you use?

Um how do you leave more than 50% of aum on one exchange, one custodian? Who want to start? Marco. Okay, if you are talking in terms of what sort of services is provided by new tokens, new project and then the lifetime of this project, I think it's a topic that can be related to survivorship of this token somehow is somehow related and if you observe from this perspective the crypto ecosystem and we find that there are some tokens like the most famous one that are able to survive over time different cycles and then there are continuously new ones that are launched In order to fix some problem, in order to get a new technology, in order to offer a new services, well, we need to analyze the way this emerging project are able to fit the market at the right time or not. Uh it's a the crypto market is somehow from this perspective lets me say that can be modeled using even the Darwinian theory of evolution assigning a sort of fitness to each token.

the way it fit the market, the way it fit the system. And in order to calculate that in the very same way it can be analyzed in other contextes like in ecology for probably we need data. So we need to collect enough data. We need to collect uh data and then extract information and to quantifying all this aspect. So it's not the strongest typically but is the one that with the highest adaptability or fitness within a context that is related to a specific project or a challenge that it try to face.

So I mean diversification in this regard when it comes to services offered by tokens have to take us into account there's different angles we analyze uh each single project and each single network.

Thank you. Do you want to touch on something? No.

Yeah. I think if you if you look at diversification in service providers, uh it's always good to have have backups, right? Um so if one service goes down and I think what we've seen uh last Friday where uh putting in orders in into exchanges was quite difficult. Uh then it pays to be able to have access to multiple providers. Uh also when when you touch upon custody um which is of course a very important part of the risk um yeah if you look at the FDX blow up uh in in a couple of years ago um yeah we've seen funds in the space that lost 30% of their coins uh on on quite conservative strategies uh because they did their custody on the exchange and I think that's a very very important part to to have that part covered well.

So I think where it's possible cold call storage is is very important or at least have uh custody providers that that yeah manage those kinds of risks very well.

Thank you. And

yeah completely completely agree. I mean you the worst thing that h that can happens is like you lose some of your clients coins. So I mean the best you can do is to make sure that the custody solutions are are really in a in a good good a proper proper position. The beauty about the European ETPS is that not they are not as concentrated in terms of custody as the US ETFs. The US ETFs as you know are pretty high concentrated in one single custody player that it's coinbased custody.

In the European ETP space, you have a broadly uh more diversification between different providers like uh Sodia, BitGo and and so on. So, we are really happy about that. But yeah, I mean it it doesn't the strategy doesn't matter if if you lose access to your coin or or some exchange is hacked for sure.

Do you want to add something Jennifer? No, you move on. So, okay. Then we got the liquidity in the market as well which is another thing to look at. So when the correlation tell you like okay go in but liquidity is telling you the opposite.

How do you deal with that? Do you go to take some uh because it's all about waiting positioning and uh waiting your bets and your allocation into the investments you're making. So how do you deal with the liquidity in the market?

Wants to start Jennifer. Well, one benefit of buying low and selling high is generally liquidity is coming in your direction. So, um we have for for those positions where um we we track how much depth is in the market uh at 1 to 2% of the current price and how many hours or days would it take us to sell our positions. We do venture into positions where it would take us days to sell them but only a couple. So um we manage our uh liquidity risk that way.

But there are certain things we hold in our portfolio in relatively small size because I know in a market like today that they can't be sold at the price you see on the screen. There is not liquidity to sell them. So um so we we have to uh we we hold through those things. We can't sell them. Uh we have to sell those things.

Why you don't sack with market maker to help you to get um to sell your coins for instance and go to see OTC deals and

yeah we use we use everything we use Coinbase Coinbase has its own trading system we can trade directly we trade on OTC desk we trade on desks that use algorithms um and for things that are relatively illquid where the liquidity isn't there for something you want to buy or sell some of these desks I think we have tried them all uh but some have very effective ive algorithms for um for long long uh VWOPS for example or long uh buy or sell um programs and they seem to do that without affecting the price very much and still getting something done but not always you know there's there's def it's definitely a a challenge on some days and I think you know trying to sell things today that aren't the majors would probably be you know you're going to have a price impact I'm guessing

so yeah you said buy low and sell high which is something like timing the market something very complicated yesterday was a low at 108 today we are low at at the beginning of the panel 104 maybe we are lower now I didn't have a look yet and we never know when it's going to be the low and what kind of low it is so what you guys are looking at so liquidity is one thing and the market is moving a lot when we got very little liquidity in the market but um so how you you um you measure and you wait your entry points in the market. You want to

I mean from from our perspective uh liquidity is not a problem. There is no risk uh no liquidity risk at all in crypto in our opinion. Some somebody has to say that in in this in this panel [laughter]

but you I will the devil advocate you have some liquidity problem like last Friday you got some tokens who went to zero. So

yeah, but with with liquidity, I mean the moment the moment you are properly managing the weighting in your portfolio and the the moment you have really huge and higher weighties in the biggest coins like uh Bitcoin, uh Ether so on and you have lower weights in the in the smaller ones, I think liquidity is not really a a problem because somebody has to tell that and somebody maybe is misleading this in in this conversation here. some of the attendees that make sure that the the lowest the the the lower liquid coin in our portfolio uh it's it's more liquid that the best stock one of the best stocks in the Madrid stock exchange here right now. So I mean I know that uh for sure it's not the same the liquidity in the market stock exchange that in the in the US uh in the US markets but I think really liquid is liquidity is not a problem if you really man are managing well the weight is in in your portfolio.

Thank you. So something we didn't touch on in terms of diversification is memes zombie protocols. So which is also something which can return a lot of money. I won't say names but maybe Jennifer you want to touch on that because we we were speaking about it and we can see like big outperformer whereas they don't have real activity when you look at coins what you need to look at is the activity you got on the blockchain if there is traction if there are builders around which problem are they solving and some of them yeah are not but they still outperform and memecoins they were doing quite well as well last Yeah.

Yeah. This is a big problem I think for all of us. Um uh so for example, Bitwise, Matt Hogan was here earlier. They're a tremendous firm. Uh they run a bunch of uh um you know, index uh crypto portfolios and they but they curate them just like the S&P 500 is curated, so are these indices.

And they curate them to exclude certain things like Dogecoin for example is excluded from many indices. and we exclude it from our universe. Uh but those tokens like Dogecoin have been tremendous winners. Um I would say we have we have excluded things like BNB token, the Binance uh exchange token and Tron uh because of the founders. We don't have confidence in what uh we're getting and what

political.

Yeah, I'm well I'm here. I'm saying it. Um but they've been really really strong performers. Um there are things that we consider useless tokens like XRP um zombie tokens in our view. No one uses XRP that I know of.

But it did benefit from the whole stable coin uh you know narrative it seems. I I don't that's the my only explanation for why it goes up and or maybe I'm dead wrong about it. But we exclude those things and um even though they're zombies, they can outperform Bitcoin for example. So that that thought process of like what's in the universe and what's out is a very important uh decision and I think all a lot of us are intimidated by standing in front of a traditional institutional investor and explaining to them why we own Dogecoin.

Thank you. Yeah, maybe a last word everyone of you because we are we arrive at time. So let's start with Marco.

Okay. So I think that the take-h home message here is that in order to have a diversified portfolio there are different things that need to be taken into account. So it's not enough like measuring a price correlation as we can do in traditional market or looking also only to sectors and so on because probably digital asset can be considered as a sort of a single cluster for some people at least a level of perception. So when it's going up down most of them go down. When it's going up most of them try to go up.

So in order to build this diversification there are different angles. And that's why again I think that this is important to analyze also human aspect a human behavior that can be tracked on social platform like for instance telegrams x and social media and so on and try to capture the sentiment and the way people behave in this regard and since we pay a lot of attention to nudience to risk also to try to understand if there are some potential risk happening related to some tokens specific tokens and so on. So diversification is not that uh as simple as probably can be measured in traditional finance and we need to be strongly aware about that and trying to look at from different perspective. Thank you.

Thank you. Let's let's make it a bit shorter Roman like two words to conclude and then Roman and Jennifer please. Yeah, I think if you look at diversification, there's multiple ways you can uh you can look at it as Marco said. Um I think if you look at crypto, diversification of strategies is is something that's very important. That's something that works.

Um but as correlations tend to be very high, it doesn't make sense to have a lot of allocations to different projects. So uh but also talking earlier about the custody part, very important part to yeah to take that in consideration as well. Roman

flexible crypto ETP. That's that's the way to have crypto in in your portfolio. That's all.

Jennifer,

buy Bitcoin.

That's very centralized. A good call as well. Thank you very much everyone.

Thank you.