From Crypto Riches to Long-Term Wealth: The Case for Diversification

With Bitcoin up more than 40% year-to-date,¹ it's no surprise that the number of crypto millionaires has surged, climbing from 88,000 in 2023 to over 172,300, as reported by Henley & Partners in 2024. This strong performance has created a wave of ‛new money’, but it’s crucial to remember that cryptocurrencies remain one of the most volatile asset classes. To put this into perspective, Bitcoin’s volatility is 3.9 and 4.6 times that of gold and global equities, respectively.     

For these newly minted millionaires, the challenge now is not just about holding onto their wealth but growing it sustainably. Diversifying into traditional and alternative investments, which are largely uncorrelated with cryptocurrencies, can provide a decent hedge against the unpredictable nature of crypto markets.

The role of traditional investments

Traditional asset classes such as equities and bonds offer a reliable foundation for long-term wealth. These investments provide steady income and capital appreciation, essential for planning significant life events and meeting future cash flow needs — whether it’s purchasing a home or managing unexpected emergencies. Dividends from equities or interest from bonds can create a stable income stream, helping to mitigate the volatility inherent in crypto holdings.

Global diversification is also a crucial aspect of reducing country-specific risks. In recent years, there’s been a noticeable shift from active management to passive strategies, such as exchange-traded funds. For digitally savvy crypto investors, leveraging digital wealth platforms can be an efficient way to diversify into globally diversified portfolios, ensuring that their wealth is protected across various markets and sectors.

Exploring alternative investments

For those inclined towards alternative investments, options such as real estate, private equity, and venture capital can be appealing. Real estate, for example, is known for providing relatively stable returns and serving as a hedge against inflation. Crypto investors can easily gain exposure through Real Estate Investment Trusts, which are relatively liquid funds that invest in income-producing properties without the need to manage physical assets.

Investors with a higher risk tolerance who are looking for growth might find private equity and venture capital particularly attractive. Among alternative investments, private equity has historically been a strong performer, delivering median net internal rates of return of 20.1% for funds raised between 2009 and 2019, as of 30 September 2023 — well above the S&P 500.²     

However, direct access to private equity funds has traditionally been limited to the ultra-wealthy, requiring minimum investments of USD 1 million to USD 10 million. To build a diversified private equity portfolio, an investor might need close to USD 20 million. This barrier is beginning to lower with platforms such as Arta Finance, which make private market investments more accessible by reducing minimum investment amounts to as low as USD 25,000, democratizing access to these high-growth opportunities.

Rebalancing and monitoring

After determining an appropriate asset allocation, it’s essential to regularly rebalance the portfolio to maintain the desired target allocation — especially given the volatility of cryptocurrencies. In practice, this means setting thresholds around the target allocation and adjusting holdings when those thresholds are exceeded, either buying or selling assets to realign the portfolio.

Ongoing monitoring is also critical to ensure that the portfolio continues to meet your financial goals. For those who prefer to take a hands-off approach, digital wealth platforms or financial advisors can manage these tasks, providing peace of mind that their wealth is being managed effectively.

Building a future beyond crypto

While the rise of cryptocurrencies has created massive opportunities, it also brings significant challenges in terms of volatility and risk. For those who have achieved substantial wealth through crypto, the next crucial step is to ensure that this wealth endures for yourself and future generations. Diversification is not just a strategy; it’s a safeguard against the unpredictable nature of markets.

By thoughtfully allocating assets across traditional and alternative investments, and by leveraging digital platforms that make these options more accessible, you can create a balanced portfolio that withstands market fluctuations and supports your long-term financial goals.

Notes

¹ As of 14 August 2024

² See full report, page 11