Written by: Coinbase
Translated by: Luffy, Foresight News
Web 1.0 and Web 2.0 transformed global data communication and social media, but the financial sector has lagged behind. Today, 'Web 3.0' is transforming the currency and financial sectors using blockchain protocols. These protocols are evolving rapidly, and companies are adopting them to remain competitive.
The development of disruptive technologies follows a predictable trajectory, but the time to 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 instance, 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 shortcomings, allowing currency to flow freely on the internet, granting users ownership, and operating without intermediaries.
Currently, institutional adoption of blockchain is accelerating, laying the foundation for consumer-level disruption of traditional Web 2.0 platforms, which policymakers have also taken note of. The GENIUS Act has now become law, regulating the issuance of stablecoins, which has strategic implications for the dollar's strong position globally. The CLARITY Act has passed in the House, aiming to clarify the regulatory approaches of the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) towards cryptocurrencies. Importantly, both bills enjoy bipartisan support. Lastly, the SEC has just announced Project Crypto, an initiative of the whole committee aimed at modernizing securities rules and regulations, fully integrating 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, limiting interoperability between different ecosystems. Blockchain protocols will break this situation, creating open, permissionless, and interoperable markets. Three major trends are driving this shift:
Bitcoin Protocol
Bitcoin has a fixed supply of 21 million coins and is a decentralized network secured through cryptography, with a market cap exceeding $2 trillion and hundreds of millions of users. Bitcoin was originally envisioned as peer-to-peer cash but has now 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 multiple governments. Bitcoin's daily trading volume in spot and derivatives markets reaches $70-100 billion, ensuring ample liquidity globally. Interoperability initiatives like 'wrapped Bitcoin' on Ethereum enhance the network effect, allowing Bitcoin to be utilized across thousands of third-party applications and networks. Consequently, the Bitcoin economy is rapidly evolving, driving demand for this scarce asset.
Stablecoin Applications
Stablecoins are tokenized fiat currencies that hold over $270 billion in assets across more than 175 million wallets. Although smaller in scale compared to traditional fiat currencies, stablecoins are expected to reach an annual transfer volume close to $50 trillion by 2025, becoming a killer application in the crypto space.
Stablecoins are among the top 20 holders of U.S. Treasury securities. Stablecoins are so efficient, transferring faster and cheaper than fiat currency, that the U.S. government has prioritized clarifying the regulation of stablecoin usage. Therefore, platforms like PayPal and Visa, which have been impacted, must adapt and actively embrace these technologies, as they can no longer rely on the oligopoly of the banking system.
The U.S. Treasury Secretary expects that by 2028, the asset scale of stablecoins may exceed $2 trillion and handle 30% of global remittance business. One can expect that the stablecoin economy will bring billions of dollars in fee income to on-chain platforms like Coinbase.
Decentralized Finance (DeFi) Protocols
DeFi provides programmable asset management services, with hundreds of protocols locking up approximately $140 billion in funds, offering around-the-clock trading, lending, and tokenization services. DeFi applications like AAVE and Morpho allow permissionless lending, while perpetual contracts on decentralized exchanges (DEXs) offer complex strategies like funding rate arbitrage.
BlackRock's BUIDL (BlackRock Dollar Institutional Digital Liquidity Fund) will disrupt and change asset management models, shifting power to on-chain distributors. A new generation of asset managers is emerging in these areas, while existing traditional platforms face survival challenges, being at risk of obsolescence if they do not adapt.
Bitcoin and stablecoins are nearing comprehensive regulatory clarity and mass adoption. It is expected that clearer regulation will be established for DeFi in the coming years, improving scalability. Companies conducting on-chain business today will lead the next wave of innovation. These three major trends will bring substantial transformations in corporate growth and portfolio returns. Investors currently with zero exposure to crypto assets should pay attention.
Moving Away from Zero Allocation: An Investment Portfolio Approach
Cryptocurrency is still young, with Bitcoin being only 16 years old and Ethereum 10 years old, and it wasn't until Ethereum's recent upgrade to proof-of-stake consensus that it became a powerful network. Stablecoins have just passed their 7th year, and their regulation has been clarified with the passing of the GENIUS Act.
However, these technologies are entering a golden age, rapidly maturing as stablecoins integrate into banking, payments, automation, artificial intelligence agents, and other industries.
Just 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 just begun, and the first step is always the same: moving away from zero crypto asset allocation.
Five Strategies to Move Away from Zero Allocation
To promote the adoption of cryptocurrency in institutional portfolios, we evaluated five strategies that leverage portfolio analysis, capital market assumptions, and index approaches. The following three charts summarize these strategies: Portfolio A) Bitcoin (BTC), B) Coinbase 50 Index (COIN50), C) Active Asset Management (ACTIVE), D) Value Storage Index (SOV), and E) Listed Crypto Stocks (MAG7), which aim to address the diversification and risk-adjusted return issues in traditional 60/40 stock-bond portfolios.
Portfolio A: Bitcoin (5% allocation)
The simplest way to move away from zero allocation is to include Bitcoin in the portfolio. To simplify risk exposure, we consider a 5% allocation 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 on a downward trend. (Performance data can be found in Figure 1).
Even a modest 5% Bitcoin allocation (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 (which measures excess return relative to downside volatility) has increased by 34% with rising institutional adoption rates. (Performance data can be found in Figure 2).
Portfolio B: Passive Coinbase 50 Index (5% allocation)
Many investors focused on cryptocurrency are seeking a broader risk exposure to adapt to the developments in the cryptocurrency asset market. Rule-based indices and systematic rebalancing mechanisms enable institutions to capture broader trends in the crypto market without concentrating on micro-level asset selection; everything is determined by rules. The Coinbase 50 Index (COIN50) is our benchmark index.
The results of allocating 5% to Bitcoin and 5% to 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 NFTs, artificial intelligence, and meme coin-related trends. If investors seek broader exposure to the crypto market, this index is the preferred strategy. In a shorter sample period with rising Bitcoin market share, it slightly outperformed in terms of return contribution and risk-adjusted performance, but downside risks were also slightly higher. (Performance data can be found in Figures 1 - 3).
Portfolio C: Active asset management (5% allocation)
Can actively managed crypto strategies increase investment value? The answer is complex, with both positives and negatives. Data from BlackRock Preqin provides a benchmark for actively managed crypto funds since 2020. It covers five strategies: long Bitcoin, pure long cryptocurrency strategies, multi-strategy, market-neutral hedge strategies, and quantitative funds. Over a longer time span, risk-adjusted returns are slightly better than the benchmark, but they have significantly lagged during the institutionalization phase (e.g., from 2022 to present).
The primary motivation for turning to hedge fund strategies is to better manage downside risk. However, the hedge fund industry has yet to achieve success in this regard, with its drawdown situation similar to that of Bitcoin and the COIN50 index, while also reflecting a downside volatility akin to passive strategies. This may be a challenge brought about by scaling, as active strategies take on more directional risk to meet asset demand.
The crypto industry is still in its early stages, and the current poor performance of active strategies may reflect characteristics of this phase.
Portfolio D: Value Storage Index = Bitcoin + Gold (10% allocation)
Is Bitcoin a threat to gold or a complement to it? Bitcoin has taken on the role of a store of value. Nearly 300 entities (including state and federal governments, corporations, etc.) have developed Bitcoin reserve strategies, more than double the number from a year ago. However, Bitcoin is not the only store of value asset; it competes with other assets like gold for that status.
Gold has a market cap of $20 trillion, while Bitcoin's market cap is $2 trillion. We believe that 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 a current environment of low volatility, the weight of Bitcoin in the index will increase.
We view the 'Value Storage' index as part of the institutionalization process. This represents the creation of a new asset class, where asset allocators hold both gold and Bitcoin, aimed at addressing the currency devaluation caused by increasing high government debt in wealthy countries. This differs from the current view that Bitcoin is just another commodity.
The portfolio returns (as shown) support this point. A 10% allocation to the value storage index reflects lower volatility, thus normalizing portfolio volatility during the sample period. In the short term, as the value storage concept gains widespread recognition among institutions, adding Bitcoin to the portfolio is very beneficial in terms of return contribution and significantly outperforms pure cryptocurrency strategies in risk-adjusted performance.
However, in the long term, this advantage is not significant, emphasizing that asset allocators must adopt a dynamic investment approach towards value storage 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 stocks of cryptocurrency-related companies and existing platforms that rapidly integrate 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 found that incorporating a 10% MAG7 crypto basket into the portfolio improved performance while also increasing volatility. Given the higher volatility of growth stocks, replacing bonds with crypto stocks would generally lead to an increase in overall portfolio volatility. The risk-adjusted results lag behind the value storage index but are slightly stronger than holding Bitcoin alone. The cost is the increased complexity of the investment, with a more severe drawdown. (Performance data can be found in Figures 1 - 3).
Investors seeking to meet specific investment criteria may consider cryptocurrency-related stocks, but this is the most complex and indirect way to invest in crypto assets among the strategies discussed in this article.
Where are we headed?
How does cryptocurrency fit into the institutional investment framework? Addressing this question is crucial for 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 are depressing long-term return expectations. According to rigorous capital market assumptions and forward-looking models, the expected annual return for U.S. stocks is 7%, and for U.S. bonds, it is 4%, which is roughly in line with cash returns. In this low-yield environment, investors must explore innovative capital preservation strategies, with Bitcoin emerging as a prominent choice.
We believe that Bitcoin-led value storage assets deserve a unique capital market category driven by macro factors such as shifts in monetary policy and inflation hedging. We expect an annualized return of 10%, with very low correlation to the bond market, which has negligible real returns over the next decade (Figure 8).
Bitcoin's fixed supply and decentralized nature make it a hedge against high inflation, enhancing portfolio resilience. However, its value storage appeal is not just a hedge; allocating Bitcoin can maximize future capital flexibility.
Conclusion
Cryptocurrency is reshaping the financial landscape. Institutional investors seeking exposure to cryptocurrency can consider a variety of liquidity market strategies, from direct passive allocations in Bitcoin or the Coinbase 50 Index to actively managed funds and strategies that blend traditional finance with crypto finance. The first step to moving away from zero allocation is often the most challenging.
