Despite receiving little attention, the market portfolio is a crucial element of the asset pricing theory. This theoretical portfolio contemplates every asset in the world weighted in accordance to its market cap. In other words, the greater the total value of an asset, the larger its representation in the market portfolio. Theoretically, this highly diversified portfolio is exempt from all forms of idiosyncratic risk, only being exposed to the systemic risk that affects investments as a whole. The market portfolio also represents an aggregation of all investors holdings worldwide and, therefore,depicts a mean portfolio averaged over all investors.
The market portfolio can also be used as a neutral portfolio in the asset allocation process. Preferences or beliefs of individual investors justify straying from this neutrality point. Investors with higher risk tolerance are likely to implement a more aggressive allocation, increasing their exposure to high volatility assets, such as stocks. Another common source of preferential deviation is what is known as homebias, which is a disproportionate exposure to one’s country. Lastly, regarding beliefs, we can cite investors with a more pessimistic view of a particular sector, which would naturally result in smaller portfolio representation of such sector.
Crypto is a relatively new asset class with a market cap of roughly one trillion dollars (excluding stablecoins). Considering all assets under management globally as the investable universe, estimates suggest a total market cap around 120 trillion dollars. Hence, crypto assets represent slightly over 0,8% of the total investment market, which would be crypto's representative allocation in the market portfolio. Despite this fact, many investors have allocations smaller than this neutral point, while many of them have no crypto exposure at all.
A smaller than average risk tolerance or investment horizon could justify being underallocated in crypto, but is unlikely to warrant no crypto exposure at all. Similarly, in regards to belief, an investor would need a particularly pessimistic view on crypto assets and blockchain technology to justify the complete absence of this asset class in their investments. Therefore, aversion to risk, short investment horizons and pessimism don’t seem to account for the large number of investors with no exposure to crypto. The answer must lie somewhere outside the bounds of finance theory.
One plausible explanation is that some investors avoid crypto markets as a result of their lack of knowledge regarding this asset class and the financial products backed by it. Another possible explanation is inertia: they don't invest in crypto because they never bothered to consider how much and through what vehicle this should be done. In both scenarios their indecisiveness is, in fact, a deliberate choice that distances their portfolio from neutral allocation. This can be a costly decision. Despite 0,8% seeming like a miniscule representation, simulations have shown that this level of exposure can have a significant positive impact on the risk adjusted return of a portfolio, especially in the long term.
Theodore Roosvelt once said “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Even when lacking the knowledge or the conviction necessary for a more substantial allocation, and unless an investor is significantly more conservative, short term oriented or pessimistic about crypto, they should aspire to be allocation neutral, which is around 0,8%. The potential for loss is small and the upside, considering average annual returns, could be substantial.
Choosing not to invest in crypto is choosing to be underallocated in the most dynamic asset class ever created. In the future, this could become the source of great regret. As the crypto market saying goes “If you hate bitcoin, buy a 1% position in bitcoin. You can keep hating bitcoin, but at least you won’t hate yourself.” Perhaps an 0,8% allocation in a diversified portfolio may be enough to safeguard you from that regret.