Original title: It’s time for investors to Get Off Zero
Original author: Coinbase
Original translation: Luffy, Foresight News
Web 1.0 and Web 2.0 changed global data communication and social media, but the financial sector has not kept pace. Now, 'Web 3.0' is transforming the currency and financial sectors using blockchain protocols. These protocols are developing rapidly, with companies adopting them to stay competitive.
The development of disruptive technologies follows a predictable trajectory, but the time it takes for adoption is rapidly shortening. It took 75 years for the telephone to reach 100 million users, 30 years for the internet, 16 years for mobile phones, and today, mobile applications can achieve massive adoption in just a few months. For example, ChatGPT reached 100 million users in less than two months! Web 2.0 platforms reduced transaction friction but centralized control, capturing most of the economic value and user data. Blockchain protocols address these flaws, allowing money to flow freely on the internet, granting ownership to users, and operating without intermediaries.
Currently, institutional adoption of blockchain is accelerating, laying the groundwork for disrupting traditional Web 2.0 platforms at the consumer level, and policymakers have also taken note. The GENIUS Act has now become law, regulating the issuance of stablecoins, which has strategic significance for the dollar's strong position globally. The CLARITY Act has passed the House, aiming to clarify the regulatory approach of the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) towards cryptocurrencies. Importantly, both bills have received bipartisan support. Finally, the SEC has just announced Project Crypto, a full-committee initiative aimed at modernizing securities rules and regulations to fully integrate blockchain technology into U.S. financial markets. Crypto technology is rewriting history.
Three Major Trends: Platforms Facing Disruption
Web 2.0 platforms rely on centralization, which limits interoperability between different ecosystems. Blockchain protocols will break this situation and create open, permissionless, and interoperable markets. Three major trends are driving this transition:
Bitcoin Protocol
Bitcoin has a fixed supply of 21 million coins and operates on a decentralized network secured by cryptography, with a market capitalization exceeding $2 trillion and hundreds of millions of users. Originally envisioned as peer-to-peer cash, Bitcoin has evolved into a store of value, favored by institutions such as Coinbase (with 105 million users) and BlackRock (whose Bitcoin ETF reached $80 billion in size the fastest) as well as several governments. Bitcoin’s daily trading volume in the spot and derivatives markets ranges from $70 to $100 billion, ensuring ample liquidity globally. Interoperability initiatives like 'wrapped Bitcoin' on Ethereum enhance network effects, allowing Bitcoin to be utilized across thousands of third-party applications and networks. Thus, the Bitcoin economy is rapidly developing, driving demand for this scarce asset.
Stablecoin Applications
Stablecoins are on-chain tokenized fiat currencies, holding over $270 billion in assets across more than 175 million wallets. Although smaller in scale compared to traditional fiat currencies, the annual transfer volume of stablecoins is expected to approach $50 trillion by 2025, becoming a true killer app in the crypto space.
Stablecoins are one of the top 20 holders of U.S. Treasury securities. Stablecoins are so efficient, faster and cheaper than fiat currency transfers, that the U.S. government has prioritized clarifying the regulation of stablecoin usage. Therefore, platforms like PayPal and Visa that are affected must adapt and actively embrace these technologies; they can no longer rely on the oligopoly of the banking system.
The U.S. Treasury Secretary predicts that by 2028, the asset size of stablecoins could exceed $2 trillion, handling 30% of global remittance business. It is expected that the stablecoin economy will bring billions of dollars in fee revenue to on-chain platforms like Coinbase.
Decentralized Finance (DeFi) Protocols
DeFi provides programmable asset management services, with hundreds of protocols locking approximately $140 billion in funds, offering 24/7 trading, lending, and tokenization services. DeFi applications like AAVE and Morpho allow permissionless lending, while perpetual contracts on decentralized exchanges (DEXs) provide complex strategies like funding rate arbitrage.
BlackRock's BUIDL (BlackRock Dollar Institutional Digital Liquidity Fund) will disrupt and change the asset management model, transferring power to on-chain distributors. A new wave of asset managers is emerging in these areas, while existing traditional platforms face survival challenges; those that do not adapt will be eliminated.
Bitcoin and stablecoins are approaching comprehensive regulatory clarity and mass adoption. It is expected that clearer regulations for DeFi will emerge in the coming years, enhancing scalability. Companies engaging in on-chain business today will lead the next wave of innovation. These three major trends will bring about significant changes in corporate growth and portfolio returns, and investors currently exposed to zero in crypto assets should pay attention.
Moving Away from Zero Allocation: A Portfolio Approach
Cryptocurrencies are still young, with Bitcoin being just 16 years old and Ethereum 10 years old, and it was only recently that Ethereum evolved into a powerful network after upgrading to a proof-of-stake consensus mechanism. Stablecoins have just surpassed 7 years since their inception, and their regulation has been clarified following the passage of the GENIUS Act.
But these technologies are entering their golden age, as stablecoins integrate into industries such as banking, payments, automation, and AI agents, rapidly maturing.
As governments bring cryptocurrencies into the mainstream through prudent policy adjustments, institutional investors are also evaluating frameworks for incorporating crypto technology into their portfolios. This process has only just begun, and the first step is always the same: moving away from zero crypto asset allocation.
5 Strategies to Move Away from Zero Allocation
To promote the adoption of cryptocurrencies in institutional portfolios, we assessed five strategies that leverage portfolio analysis, capital market assumptions, and index methods. The following three charts outline these strategies: Portfolio A) Bitcoin (BTC), B) Coinbase 50 Index (COIN50), C) Active Asset Management (ACTIVE), D) Store of Value Index (SOV), and E) Listed Crypto Stocks (MAG7), designed to address diversification and risk-adjusted return issues in the traditional 60/40 stock-bond portfolio.
Portfolio A: Bitcoin (5% allocation)
The simplest way to move away from zero allocation is to add Bitcoin to the portfolio. To simplify risk exposure, we consider allocating 5% to Bitcoin. From January 2017 to June 2025, a 5% Bitcoin allocation significantly enhanced the portfolio's return rate. During this period, Bitcoin's compound annual growth rate (CAGR) was 73%, with an annualized volatility currently at 72% and showing a declining trend. (Performance data can be found in Figure 1).
Even a modest 5% allocation to Bitcoin (replacing bond allocation) can significantly improve portfolio performance compared to the 60/40 stock-bond benchmark strategy, adding nearly 500 basis points to annual portfolio performance while enhancing risk-adjusted returns and reducing downside volatility.
Given the rise in institutional adoption since the launch of Bitcoin exchange-traded products (ETPs) in 2024, it is necessary to analyze a shorter sample period separately. Not only do the overall results still hold, but risk-adjusted returns are even stronger. The Sortino ratio (measuring excess return relative to downside volatility) increased by 34% with the rise in institutional adoption. (Performance data can be found in Figure 2).
Portfolio B: Passive Coinbase 50 Index (5% allocation)
Many investors focused on cryptocurrency seek broader risk exposure to adapt to the development of the crypto asset market. Rule-based indices and systematic rebalancing mechanisms allow institutions to capture broader crypto market trends without focusing on micro-level asset selection; everything is determined by rules. The Coinbase 50 Index (COIN50) is our benchmark index.
The results of allocating 5% in Bitcoin versus allocating 5% in the COIN50 Index show no substantial difference. Over a longer period, the index captured the first wave of growth in DeFi and other market events, such as those related to NFTs, artificial intelligence, and meme coins. If investors wish to gain broader exposure to the crypto market, this index is the preferred strategy. During a shorter sample period when Bitcoin's market share increased, it slightly outperformed in terms of return contribution and risk-adjusted performance, but also carried slightly higher downside risk. (Performance data can be found in Figures 1 - 3).
Portfolio C: Active Asset Management (5% allocation)
Can actively managed crypto strategies add investment value? The answer is complex, with both pros and cons. BlackRock Preqin data provides a benchmark for actively managed crypto funds since 2020, covering five strategies: long Bitcoin, pure long crypto strategies, multi-strategy, market-neutral hedge strategies, and quantitative funds. Over a longer time span, risk-adjusted returns slightly outperform the benchmark, but during the institutionalization phase (e.g., since 2022), they have significantly lagged.
The primary motivation for shifting towards hedge fund strategies is to better manage downside risk. However, the hedge fund industry has yet to achieve success in this regard, as its drawdowns are similar to those of Bitcoin and the COIN50 Index, reflecting downside volatility similar to passive strategies. This could be a challenge brought on by scaling, as active strategies may take on more directional risk to meet asset demands.
The crypto industry is still in its early stages; the underperformance of active strategies may be characteristic of this phase.
Portfolio D: Store of Value Index = Bitcoin + Gold (10% allocation)
Is Bitcoin a threat to gold, or a complement to it? Bitcoin has already taken on the role of a store of value. Nearly 300 entities (including state and federal governments, corporations, etc.) have formulated Bitcoin reserve strategies, more than double the number from a year ago. However, Bitcoin is not the only store of value asset; it competes for this status with other assets like gold.
Gold has a market capitalization of $20 trillion, while Bitcoin's market capitalization is $2 trillion. We believe gold and Bitcoin can complement each other. We created an index based on Bitcoin and gold, where Bitcoin's weight is inversely proportional to its volatility. In the current low-volatility long-term environment, Bitcoin's weight in the index will increase.
We view the 'store of value' index as part of the institutionalization process. This represents the creation of a new asset class where allocators hold both gold and Bitcoin to address the currency depreciation resulting from rising government debt in wealthy countries. This contrasts with the current view that Bitcoin is merely another commodity.
The portfolio's returns (as shown below) support this view. A 10% allocation to the store of value index reflects lower volatility, thereby normalizing the portfolio's volatility during the sample period. In the short term, adding Bitcoin to the portfolio is very beneficial in terms of return contribution as the store of value concept gains widespread recognition among institutions, and it significantly outperforms pure crypto strategies on a risk-adjusted basis.
However, this advantage is not apparent in the long run, emphasizing that allocators must adopt a dynamic investment approach to store of value assets. A rigorous combination of gold and Bitcoin represents the right allocation at the right time.
Portfolio E: Cryptocurrency-related stocks (10% allocation)
In our final assessment of moving away from zero allocation methods, we explored investments in cryptocurrency-related companies and existing platforms rapidly integrating crypto technology. We created the 'MAG7 Crypto Basket', which includes publicly traded stocks from BlackRock, Block Inc., Coinbase, Circle, Marathon, Strategy, and PayPal.
During periods when growth companies outperform the market, we find that including a 10% MAG7 crypto basket in the portfolio improves performance while also increasing volatility. Given the higher volatility of growth stocks, replacing bonds with crypto stocks will naturally increase the overall volatility of the portfolio. The risk-adjusted results are inferior to the store of value index but slightly better than holding Bitcoin alone. The trade-off is increased complexity of the investment, with drawdowns being the most severe. (Performance data can be found in Figures 1 - 3).
Investors seeking to meet specific investment standards may consider cryptocurrency-related stocks, but this is the most complex and indirect method of investing in crypto assets among the strategies discussed in this article.
Where are we headed?
How can cryptocurrency be integrated into institutional investment frameworks? Addressing this question is crucial to unlocking institutional adoption of crypto assets. This process requires a solid asset allocation framework based on capital market assumptions that shape long-term price expectations and guide portfolio construction.
High stock valuations and ongoing government borrowing have depressed long-term return expectations. Based on rigorous capital market assumptions and forward-looking models, the annual return for U.S. stocks is expected to be 7%, and for U.S. bonds, 4%, which is roughly consistent with cash returns. In this low-yield environment, investors are forced to explore innovative capital preservation strategies, with Bitcoin emerging as a prominent choice.
We believe that Bitcoin-led store of value assets deserve a unique capital market category, driven by macro factors such as shifts in monetary policy and inflation hedging. We anticipate an annualized return of 10%, with extremely low correlation to the bond market, which has seen negligible real returns over the past decade (Figure 8).
The fixed supply and decentralized nature of Bitcoin make it a hedge against high inflation, enhancing the resilience of investment portfolios. However, its appeal as a store of value is not just as a hedge; allocating Bitcoin can maximize future capital flexibility.
Conclusion
Cryptocurrency is reshaping the financial landscape. Institutional investors seeking exposure to cryptocurrency may consider various liquidity market strategies, from passive allocations in Bitcoin or the Coinbase 50 Index to actively managed funds and strategies that blend traditional and crypto finance. The first step to moving away from zero allocation is often the hardest.
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