Flipside Crypto News

Don Quixote and the Benefits of Basket Investing

Investing in baskets is a convenient way to access the crypto markets and most importantly — diversify holdings.

“Don’t put all your eggs in one basket” is one of the most common, if not overused, phrases in the English language. Its origins, however, have been attributed to a sentence in the Spanish classic Don Quixote. The translated line from the novel: “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

It’s unknown if this was indeed the first use of the phrase, but regardless the statement is sage advice. The quote is particularly relevant for investors — maybe few more so than those entering the alluring world of cryptocurrencies. Fortunately for these folks, there are emerging ways to diversify hundreds of crypto “eggs” into multiple baskets.

Weaving Baskets Through the Crypto Maze

Basket investing isn’t a new concept, and really is pretty simple. By grouping together similar types of assets, investors can bet on a broad index of related assets or one cluster of investable assets from a specific industry, part of the world, or market capitalization (e.g., mutual funds or ETFs focused on specific sectors or geographic regions).

According to Coinmarketcap.com there are currently 1,628 crypto coins and tokens in circulation, and if the current growth trend persists there will soon be more cryptocurrencies than stocks traded on the NYSE. There are cryptocurrencies focused on user privacy, stable coins pegged to the value of traditional assets, and tokens focused on smart contracts. There are China-focused coins, cybersecurity coins, and healthcare-related tokens. It’s a lot to process.

In the world of crypto assets, basket investing follows many of the same principles applied to traditional funds. By bucketing cryptocurrencies into groups based upon the purpose of individual coins and tokens (see this postfor more on the differences between crypto assets), investors can bet on the use cases for crypto/blockchain technology they think have the most promise. If an investor wants broader exposure to crypto assets, there are also baskets with selected coins and tokens covering a diverse variety of use cases and functions.

Given that over 100 million individuals invest in mutual funds, significant regulatory oversight is a good thing. But we’re not there yet with crypto, and while regulators continue to monitor the use of cryptocurrencies, it will take time to determine what differences–and similarities–exist between this space and traditional investing.

Tisket Tasket, Careful With That Crypto Basket

It might seem as if anyone could just throw together a bunch of cryptocurrencies and say they are basket investing.

Good friggin’ luck.

Trying to learn about each and every available crypto asset is damn near impossible, and because no one is an expert in every field, it’s difficult for an individual to uncover where exactly opportunities exist.

The reality is that because there are so many coins and tokens, picking ones with a future is very complex. The key to basket investing is combing robust data analysis and modeling with effective diversification. Arbitrarily buying a bunch of coins focused on decentralized storage or fintech simply won’t work.

That’s not basket investing. That’s guess work. That’s spray and pray.

That’s a sure way to weave a bunch of losses.

Diversifying into Crypto Baskets

We believe in basket investing because we know how difficult it is to understand each and every coin and token out there and, as with any investing strategy, it will only become more complex to pick individual winners from losers.

But more importantly, we believe diversification is a fundamentally sound investing strategy — and as important with crypto investing as with other types of investing, and having experts do extensive research will lead to better outcomes.

At Flipside, we develop baskets by evaluating cryptocurrencies using proprietary algorithms that measure maturity, developer behavior and utility. Frankly, we rarely read whitepapers or even study the team. We let the data be our guiding light.

We also spend countless hours backtesting our strategies and providing results to our investors. Our Horse Race Backtest leverages the abundance of available data to help us determine what assets will perform over time, comparing results to top 10 market cap weightings, the Coinbase Index, S&P 500 and other options.

So how do we provide basket investing for retail investors? Two options:

  1. First, for the crypto-curious person looking for long-term exposure to these assets, we offer a basket of the Flipside Index: a diversified, minimally-correlated basket of crypto coins and tokens. This is a particularly good option for an investor new to this space, who probably doesn’t have the time, patience, and resources to research these assets, and certainly doesn’t want to take a scattershot approach to buying into cryptocurrencies.
  2. Second, for someone who has specific interest in a particular sector, industry, or realm of crypto technology, we utilize basket weaving technology to offer countless basket themes and variants. Think the best use case for crypto is decentralized storage? There’s a basket for that. Think the future is fintech, proof of stake, privacy coins? There are baskets for those as well. The key is that Flipside baskets are all based on technical analysis — so you can diversify into baskets knowing that the underpinning metrics are sound.

An Ongoing Crypto Journey

In Don Quixote, the protagonist sets out on expeditions through Spain, completing various deeds along his adventurous quest. Most of his acts are motivated by an altruistic desire to make the world a better place.

At Flipside, we share some of this starry-eyed optimism for the future and believe crypto is changing the world for the better. But we also recognize that different motivations, as well as evolving iterations of the technology, have led to a growing list of use cases all over the map.

Some of these are proving worthwhile, some are showing future promise, and some are just outright terrible. It will no doubt take time for the good, bad and ugly to shake out, and uncertainty will be the norm as regulators wrap their heads around what they should (and shouldn’t!) be doing in this space.

As the crypto markets develop over time, it’s very likely crypto baskets will become available via traditional brokerage houses, in the same way these brokers currently offer fund and ETF products.

Regardless of the current uncertainties, a future of investors having access to baskets via their brokerage accounts will be truly transformative.

How ‘bout them eggs?