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Don't make this bitcoin investing mistake, warns fund manager who's nearly all-in on cryptocurrencies

  • "Bitcoin is just the biggest of literally thousands of cryptocurrencies," says Brian Kelly, who runs the BKCM Digital Asset Fund.
  • "It's not just the size of the coin, but how you use it," he says.
  • Kelly offers advice to investors on how to build a cryptocurrency portfolio modeled after a diverse model of stocks and bonds.
A cryptocurrency mining computer equipped with four cooling fans is seen on display at a computer mall in Hong Kong, January 29, 2018.
Bobby Yip | Reuters
A cryptocurrency mining computer equipped with four cooling fans is seen on display at a computer mall in Hong Kong, January 29, 2018.

Bitcoin bull and hedge fund manager Brian Kelly says the key to building a portfolio of digital currencies is first understanding the crypto universe.

"Bitcoin is just the biggest of literally thousands of cryptocurrencies," the founder of BK Capital Management told CNBC's "Fast Money" on Wednesday. "[Cryptocurrency] is a world onto itself. It's its own market. And just like the stock market it has its own organizational structure."

It's a mistake to invest only in bitcoin, thinking that's a sufficient way to play the digital currency market, Kelly said.

That organizational structure includes large-cap, mid-cap and small-cap coins. Larger coins typically have market values above $10 billion, mid-size coins are between $1 billion and $10 billion and smaller coins fall below $1 billion.

"It's not just the size of the coin, but how you use it," said Kelly, who earlier this month said he has invested "like 90 percent" of his money in the cryptomarket.

Different digital coins have different uses, such as payment systems and storage, said Kelly.

Here are Kelly's recommendations for starting a cryptoportfolio, and how much to invest in each area of the diverse market:

Currencies: 30 percent

Names include large-cap coins such as bitcoin, bitcoin cash and litecoin.

Platforms: 30 percent

Names include ethereum, ethereum classic, EOS, and NEO.

"That's where the new apps are coming," Kelly said. "On all of these platforms, new things are being developed. Thousands of people are building on top of it."

Privacy: 20 percent

Names include Zcash, Monero and Dash.

"Not just things you don't want people to see. But, maybe, if you're a big company and you don't want to show that things are moving around the world."

Apps: 10 percent

Names include Storm, Metal, a computer app, and Salt.

"When I look at apps I want to look at things that are solving real-world problems," Kelly said.

Exchanges: 5 percent

Names include Binance, Zerox and Polymath.

"That's where all the money is being made right now," Kelly said.

Hybrids: 5 percent

Names include ripple and stellar.

"What's interesting about these, not only can they be used as a pure currency, but you can build on top of them," Kelly said of their dual currency and platform function.