Crypto Classic: Is the BTC-ETH Portfolio a Good Investment Strategy?

• The 60-40 is a conservative allocation strategy, but it may not be as effective with crypto investments.
• The 60-40 strategy suggests that investors balance their portfolio between high-risk assets like stocks and low-risk ones like bonds.
• This strategy aims to help investors to diversify investments instead of concentrating their allocations into one asset class.

Diversifying your crypto portfolio to protect it against market volatility is harrowing. We're not talking about going all in on altcoins. But, there can be no harm in taking a page from conventional investing wisdom and trying out the 60-40 strategy.

Crypto portfolio management means deciding the right mix of assets you need to reach short, medium, and long-term investment goals. One of the more conventional strategies is the 60-40 investment strategy, one that simplifies portfolio building and fund management for stock and bond portfolios. But does this translate over to crypto assets?

The 60-40 investment strategy is a retirement portfolio approach that has existed for decades among stock market investors. The idea behind a 60-40 portfolio is to allocate 60% of funds to high-risk assets like stocks and 40% to low-risk and low-yield assets like bonds.

This strategy aims to reduce risk and increase the chance of making significant returns in the long term. A 60-40 asset allocation allows investors to maintain a balanced portfolio during all market cycles. The strategy better ensures consistent returns through diversification, even when markets are volatile.

This is the main idea behind the 60-40, but it has historically only applied to traditional assets. We're about to explore why your crypto portfolio could benefit from this passive investing strategy and how a 60-40 cryptocurrency portfolio allocation could help mitigate risk in the long run.

Even though the 60-40 strategy is a seemingly simple one, there are a few advantages to using it for crypto portfolio management.

1. Diversification: The general idea of this asset allocation strategy is to hold things with little or no correlation to each other. Therefore, splitting your crypto holdings between low- and high-risk assets helps you create a diversified crypto portfolio with inherent benefits unaffected by the other.
2. Risk vs reward: The 60-40 investment strategy is designed to reduce risk while maintaining exposure to assets with growth potential. This asset allocation protects investors from losing money, regardless of if it's a bear market.
3. Simple strategy: A 60-40 asset allocation is straightforward to implement. The only requirement is for users to rebalance their portfolios monthly or annually depending on their needs. Rebalancing requires investors to sell or buy more assets to maintain a 60-40 crypto portfolio allocation. 

The 60-40 asset allocation can be used to create a portfolio that limits some risk while still providing investors exposure to high-growth assets. Though this is not an ideal asset allocation for every investor, the 60-40 portfolio system is an excellent base strategy when navigating the world of crypto investing.

Many investors have balanced their personal crypto funds using the 60-40 crypto portfolio allocation rule. Usually, the investment strategy revolves around Bitcoin (BTC), Ether (ETH), and maybe some of the other top altcoins.

The 60-40 cryptocurrency investment strategy works the same way as traditional portfolio allocation. Since the aim is to protect crypto portfolios from volatility and avoid total capital loss, many investors allocate the largest part of their crypto portfolio to large-cap assets like BTC and ETH and spread out the rest among riskier bets.

Historically, a drop in the price of Bitcoin will lead to a similar plunge in Ethereum and other digital assets. Crypto is a volatile asset class because BTC has a major impact on the value of other crypto assets, such as ETH. That means there's a high correlation between cryptos like BTC and ETH.

Furthermore, other assets use the Bitcoin price as a point of reference for the health of the broader crypto market. When the market experiences high volatility and possible regulatory issues from the SEC or other governing financial bodies, ETH price tends to sway in the same direction as BTC. According to CoinMetrics data, the BTC-ETH price correlation neared an all-time high in December 2022.

While correlation isn't causation, investors ought to be aware of the price movements between the two largest crypto assets. Having a healthy mix of BTC and ETH helps create a balanced crypto portfolio that pays attention to both fundamental and technical analysis. Let’s go further into cryptocurrency portfolio management and explore how a 60-40 asset allocation could work for crypto.

Cryptocurrencies are gaining momentum regarding mass adoption, and projects that prioritize long-term success over short-term hype have made a notable impact. With an ever-growing variety of coins entering the market, Bitcoin's dominance has suffered, yet it still makes up 50% to 60% of most crypto asset allocations since it's the leading cryptocurrency.

But, smart contract platforms like Ethereum have shown great strength over the years, especially considering the growth of DeFi and NFTs. However, due to high fees and slower speeds, Ethereum has lost some market share to competitors like Polygon and Solana. Despite this, ETH remains the second-largest crypto asset and still plays a lead role in any balanced crypto portfolio.

Aside from BTC and ETH, other top cryptos you can incorporate into a diversification strategy include Litecoin (LTC), XRP, and Polygon Matic. These assets have gained traction due to their own unique use cases and potential for high returns.

Disadvantages of the 60-40 allocation for crypto

Most traders are unaware of the risks with the 60-40 allocation for crypto, especially if their funds are mostly only BTC and ETH.

You still need to conduct adequate research and make informed decisions to find the best crypto portfolio allocation for you. With the correlation of BTC, ETH, and other crypto assets in mind, a 60-40 strategy may not be as appropriate for a well-balanced crypto portfolio as it is for stocks and bonds. Perhaps a cryptocurrency portfolio allocation of 45-45-10 between BTC, ETH, and top altcoins may provide better exposure while limiting asset correlation.

The best crypto portfolio allocation for you ultimately depends on your investment goals and risk tolerance. There's no one size fits all crypto asset allocation, but the 60-40 portfolio is a good starting point for understanding what a well-balanced portfolio looks like.

the 60-40 allocation is a simple and beneficial strategy for traditional asset portfolio management. However, the same approach may be less effective when applied to the crypto market. You must understand the quirks of the crypto market, who drives price, and what their influence is. Taking all these factors into account will help you dial in on the asset mix that's right for you.

Diversification is an essential investment principle that helps you reduce overall risk. You can use this by investing in uncorrelated assets, meaning the price movement of one asset doesn't affect the price of another within your portfolio.

Nonetheless, cryptocurrencies are still high-risk assets with high correlation, meaning their prices change concurrently. An investor with a 60-40 portfolio of only ETH and BTC would have a 'safer' ride during various market cycles, but won't see as much growth. A more diverse portfolio with DeFi tokens and other altcoins, in addition to bitcoin and Ethereum, could result in higher returns with a similar risk threshold.

Whatever your crypto investment strategy, an excellent way to track your investment portfolio is by splitting them across multiple cryptocurrency exchanges. Exchanges like Coinbase and Kraken are great options that make it easy to explore the 60-40 rule and conduct periodic rebalancing. Spreading out your assets also reduces the risk of compromising your funds, as you never have all of your assets in a single place.

Like any speculative asset, Bitcoin has both risks and potential rewards. Despite BTC's volatility, institutional investors have reluctantly accepted Bitcoin's potential to change the face of finance. But, this volatility is a major factor when considering what's appropriate for a diverse portfolio.

An investor's decision to allocate a percentage of their portfolio to BTC or other digital assets comes down to their risk appetite and perspective on the future of finance. Bitcoin could disrupt the U.S. dollar and other fiat currencies. That may result in investors holding BTC as a way to protect against runaway inflation and shrinking economies.

While Bitcoin's volatility is still a valid concern for investors, instability decreases as the long-term interests of institutions and governments are further tied to the crypto market and the longevity of the asset class. The 60-40 portfolio approach helps manage the risks of crypto while still allowing investors exposure to high-growth assets.