.webp)
Building a diversified crypto portfolio: Best practices for institutions in 2025 | Image by Georg Eiermann
Building a diversified crypto portfolio: Best practices for institutions in 2025 | Image by Georg Eiermann
Europe’s MiCA framework is setting standardized rules for crypto markets. In the U.S., developments like Bitcoin ETF approvals and evolving SEC guidance are giving institutions the confidence to build long-term strategies. Across Asia and the Middle East, pro-crypto initiatives are fueling further innovation and adoption
Institutions are responding. A Coinbase survey of 350+ professional investors found that more than 75% plan to increase their crypto allocations this year, with 59% targeting more than 5% of AUM.
They’re not just looking at Bitcoin. They’re exploring stablecoins, tokenized assets, and new ways to generate yield. Case in point: U.S.-based investors held over $27 billion in Bitcoin ETFs by the end of 2024, more than doubling the previous quarter’s figure (Coinshares).
This shift brings both opportunity and complexity. So how are institutions navigating this space?
2025: The new institutional crypto landscape
Regulation has caught up with innovation. Markets have matured. And most importantly, institutions are no longer just experimenting; they're allocating. From Bitcoin ETFs to tokenized T-bills, the digital asset ecosystem has expanded into an investable universe.
In 2025, global regulation is driving broader participation. MiCA in Europe, clearer guidance from U.S. regulators, and pro-crypto stances across Asia and the Middle East are giving institutions the confidence to commit. Coinbase's recent survey found that over 75% of institutional investors plan to increase crypto allocations, with 59% allocating over 5% of AUM
Institutional appetite for digital assets is accelerating into 2025, with 67% of firms planning to increase crypto holdings - driven primarily by return potential, innovation, and inflation hedging. Notably, 24% of respondents expect to “significantly increase” exposure, up from just 16% in 2024. Family offices and hedge funds are leading this shift, reflecting growing conviction in crypto’s performance advantage and structural role in diversified portfolios. 2025 Institutional Investor Digital Assets Survey - Coinbase
Stablecoins and tokenized real-world assets are also surging, bringing familiar financial tools onto blockchain rails. Meanwhile, professional investors now hold $27.4 billion in U.S. Bitcoin ETFs - a sign that crypto is entering the core of modern portfolio strategy.
Tokenized real-world assets (RWAs) have surged past $22.5 billion onchain, up nearly 6% in the past month alone. Growth is being driven by institutional demand for private credit, U.S. Treasury debt, and alternative funds - highlighting how blockchain is rapidly becoming infrastructure for mainstream finance. With over 100,000 asset holders and 190+ issuers, RWAs are transitioning from experimental to essential in digital asset portfolios. Source: rwa.xyz
Diversification strategies for crypto portfolios
Building a diversified crypto portfolio means balancing core holdings with exposure to various high-growth sectors, while managing risk through careful position sizing and hedging. Below we outline key strategies and allocations suitable for institutional portfolios:
A well-structured portfolio includes:
- Core assets (60 - 70%): Bitcoin and Ethereum. Bitcoin (BTC) and Ethereum (ETH) are generally viewed as the “core” holdings of an institutional crypto portfolio. They are the largest, most liquid, and most widely adopted digital assets - and thus often serve as the foundation.
- Altcoins (20 - 30%). Beyond BTC and ETH, institutions should allocate a portion of the portfolio to altcoins - a broad category that includes other Layer-1 protocols, Layer-2 scaling solutions, DeFi tokens, infrastructure tokens, and more.
- Stablecoins (5 - 10%): Within the altcoin allocation, stablecoins deserve a strategic role. Stablecoins (like USDC, USDT, etc., typically pegged to USD) might comprise ~5–10% of a crypto portfolio as a cash-equivalent allocation. Held for yield, rebalancing flexibility, and risk-off periods.
In sum, a prudent allocation between BTC, ETH, a basket of altcoins, and some stablecoins can provide both growth and a buffer. A hypothetical split might be 60% core (BTC/ETH), 30% diversified alts, 10% stablecoins for liquidity and yield - although the exact ratios should be tailored to the institution’s risk tolerance and outlook.
Crypto markets are volatile, but volatility, if well managed, becomes an opportunity.
In an asset class defined by 24/7 volatility, managing downside risk is essential. Increasingly, institutions are turning to active managers not just for returns, but for risk control. Active crypto managers play a central role in protecting capital through tactical positioning, real-time rebalancing, and the disciplined use of tools like futures and options.
Skilled active managers can capitalize on volatility through tactical trading and by identifying short & medium-term trends.
For instance, they may engage in arbitrage opportunities, where they buy an asset at a lower price on one exchange and sell it at a higher price on another, locking in risk-free profits. Additionally, active managers can capitalize on short-term price dislocations, taking advantage of temporary mispricings in the market.
Sector rotation strategies are another tool active managers deploy to take advantage of cyclical trends within the digital asset market. By shifting investments between different sectors based on market cycles, they can optimize returns. For instance, they might invest more heavily in DeFi projects during a period of high sentiment, and then rotate to NFT-related assets as market interest shifts.
Moreover, active managers might employ momentum trading to benefit from prevailing market trends. By following the direction of the market's momentum, they can ride the upward or downward trends to maximize returns. On the other hand, they might use contrarian approaches to invest in undervalued assets during market downturns, buying when others are selling to capitalize on future recoveries.
Portfolios must evolve with the market. Institutions set schedules or use volatility-based triggers to rebalance, trimming outperformers, adding to laggards, or rotating between sectors.
Some also use volatility targeting to maintain consistent risk exposure. For example, scaling down altcoin exposure when realized volatility exceeds target bands, or increasing stablecoin weights during market stress.
Institutions employ tools like:
- Value-at-Risk (VaR): To estimate maximum loss probabilities
- Volatility analysis: For allocation sizing
- Correlation matrices: To avoid redundant exposures and improve true diversification
- Stress testing: Simulating events like a 50% BTC drop or major DeFi exploit
Institutional portfolio models for 2025
There is no universal allocation strategy in crypto, but there are proven models that help institutions navigate different objectives, risk profiles, and market conditions. Below are three institutional frameworks gaining traction in 2025, each built around a blend of core exposure, diversification, and risk discipline.
This structure mirrors the logic of traditional 60/40 investing, adapted for crypto. It offers a balance of long-term conviction, growth optionality, and liquidity management:
- 60% core blue-chips: Allocated to Bitcoin (~40%) and Ethereum (~20%). These assets serve as foundational exposure, with high liquidity and deep market acceptance. They anchor portfolio performance and reduce headline risk.
- 30% satellite diversifiers: Spread across large-cap altcoins, DeFi tokens, Layer-2 protocols, and early-stage narratives like RWAs or interoperability plays. This sleeve is rebalanced frequently and serves as the primary alpha driver.
- 10% stablecoins & tokenized yield: Held in USD-backed stablecoins or tokenized short-duration treasuries, offering yield and dry powder. This segment buffers downside and supports tactical entries during market pullbacks.
This approach gives institutions a clear structure and rebalancing logic, while allowing for opportunistic tilt. Some variations adjust weightings to 50/40/10 or 70/20/10, depending on conviction and market phase.
Comparative metrics of various Bitcoin-Ether portfolio allocations (9/1/2015 – 4/30/2024)
Source: VanEck Research as of 5/28/2024. Past performance is no guarantee of future results. Volatility refers to the fluctuation in the returns of an asset or portfolio as measured by the standard deviation of returns. Higher volatility indicates greater risk and potentially higher returns, affecting the risk-adjusted returns measured by the Sharpe Ratio. Compound Annual Growth Rate (CAGR) represents the rate at which the value of ether (ETH) has grown annually over a specified time period. This metric is used to provide a smoothed annual growth rate, eliminating fluctuations and giving a clearer picture of long-term investment performance. Sharpe ratio is a measure used in finance to evaluate the performance of an investment compared to a risk-free asset after adjusting for its risk. It is calculated by subtracting the risk-free rate of return (such as the return on U.S. Treasury Bonds) from the rate of return for a portfolio and then dividing the result by the standard deviation of the portfolio returns. This ratio helps investors understand how much excess return they are receiving for the extra volatility that they endure for holding a riskier asset. A higher Sharpe ratio indicates a more attractive risk-adjusted return. The information, valuation scenarios, and price targets in this chart are not intended as financial advice or any call to action, a recommendation to buy or sell, or as a projection of how ETH and BTC will perform in the future. Actual future performance of ETH and BTC is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.
This model allows institutions to over-index on a high-conviction thesis. For example, a DeFi-tilted portfolio might hold 40% in BTC/ETH, 30% in DeFi tokens and liquidity pools, 15% in general alts, and 15% in stablecoins. If the thesis proves correct, outperformance can be significant.
Other common themes include:
- Layer-2 Scaling: Rollups, bridges, and Ethereum infrastructure
- RWAs: Tokenized government bonds, treasuries, and yield-bearing products
- Web3/NFT Infra: Betting on consumer applications and cultural assets
Thematic portfolios demand more oversight, active risk caps, and strong conviction - but they allow institutions to express differentiated strategies in a fast-moving ecosystem.
For more quant-driven institutions, a risk-parity approach allocates capital based on volatility contribution, not dollar amount. This results in:
- Balanced risk exposure across BTC, ETH, altcoins, and stablecoins
- Reduced concentration in high-volatility names
- Rebalancing rules based on changing market correlations and volatility trends
Risk parity works best for institutions with the tools to model portfolio VaR, simulate stress scenarios, and rebalance frequently. As intra-crypto correlations weaken, this model has gained relevance.
Portfolio models don’t exist in a vacuum - they evolve with market structure, performance data, and risk tolerance. Institutions are also layering tactical flexibility and operational filters on top of their core allocations:
- Dynamic allocation vs. fixed weights: Some institutions adopt trend-based or momentum-driven overlays. For example, when indicators suggest a bullish macro setup, a 60/30/10 portfolio might shift to 70/25/5. During downturns, they may increase stablecoin holdings and reduce alt exposure. These decisions are often guided by technical signals like moving averages, volatility triggers, or on-chain data.
- Benchmarking: Portfolios often target outperformance relative to a benchmark, such as a 50/50 BTC/ETH index. Whether using custom indexes or off-the-shelf crypto benchmarks, this helps define return targets and measure success in a disciplined, comparative way.
- Liquidity constraints: Even a well-optimized model can fall apart if assets are illiquid. Institutions screen for tokens with sufficient market depth, enforce minimum volume thresholds, and avoid over-allocating to assets that might cause slippage or be hard to exit during stress events. Practical execution is as important as theoretical diversification.
Crypto asset management is the institutional edge
By 2025, digital assets have secured their place in institutional portfolios, not as speculative side bets, but as strategic allocations. Yet capturing crypto’s upside requires more than exposure. It requires structure, risk discipline, and a professional approach to portfolio construction.
A diversified crypto portfolio - anchored in Bitcoin and Ethereum, complemented by altcoins, stablecoins, and tokenized real-world assets - can deliver strong, risk-adjusted returns while helping hedge macro volatility. But allocation is just the starting point. The true edge lies in how portfolios are managed: through thoughtful rebalancing, proactive risk tools like derivatives and VaR, and tactical overlays aligned with market cycles.
Institutions are already responding. Over three-quarters of professional investors plan to increase crypto exposure in 2025, fueled by regulatory clarity and an expanding ecosystem of investment products. The data speaks for itself: even modest allocations, managed correctly, have improved portfolio performance.
Crypto asset management is how forward-looking institutions are unlocking that potential. It's not about chasing trends - it’s about building resilient, future-ready strategies that reflect the evolving role of digital assets in modern finance. With the right governance, partners, and processes, crypto becomes not just investable, but essential.
Collapse
The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
