Bernstein says buy these assets to play the big crypto investment themes

Published Mon, Jul 31 20231:10 PM EDT

With bitcoin's price and trading volume still little changed, Bernstein is highlighting other crypto assets with good opportunities for investors. Bitcoin investors have been feeling deja vu as the setup for the next bull run takes shape. Ripple's recent court victory has given investors reason to look at other altcoins while bitcoin remains stuck at current levels. "We see crypto today as an asymmetric cyclical trade, entering at the bottom of the cycle (with crypto regulation a mixed bag currently but with early signs of institutional adoption) and exiting over the next 24 months into mainstream market acceptance of crypto as a regulated institutional asset class," Bernstein analyst Gautam Chhugani said in a note Monday. "It is time to dial up the crypto exposure, either through crypto equities or direct digital asset exposure for multi-asset strategies," he said. "We suggest treating crypto exposure as equivalent to a high-growth large cap tech stock (with crypto's $1.2 Tn market cap today), with a starting allocation of 1-2% of the total fund, for crypto to have material impact on the portfolio performance." Investors who are familiar with crypto have become comfortable with bitcoin and ether. However, several investing themes within the market have emerged in recent years, and Bernstein has identified opportunities in specific assets to play each segment. In addition to the Bitcoin economy, these themes include: the Ethereum enterprise scale economy, the Ethereum staking economy, the "survivors" of this crypto winter, decentralized finance and payments. Chhugani identified a seventh category, crypto games and prediction markets, but said market leaders in that space have yet to emerge. Here are six of the 12 crypto assets and their respective categories Chhugani highlighted as part of a long-only portfolio: Bitcoin and ether each account for a 25% allocation in the portfolio. The Ethereum scaling category — which consists of Layer 2 protocols built on top of the Ethereum blockchain to to improve scalability, privacy and other characteristics of the original chain — includes the ether allocation and altogether makes up 40% of the suggested portfolio. A token tied to Optimism (OP) —one of the assets in this category — has some of the strongest week-on-week growth in blockchain revenues (103%) and has gained 82.2% this year. Separately, in the Ethereum staking category, the analyst highlighted the liquidity-staking protocol Lido, which has the highest market share. The firm called for a 5% allocation to Lido. The token tied to Ethereum competitor Solana is the one asset in the "crypto winter survivors" category. It's up 145.4% this year, and Bernstein suggests a 10% allocation toward this asset. DeFi is a sector with growing adoption amid a tougher regulatory environment and increasing interest by retail investors in new assets launched only on decentralized exchanges, Chhugani said. Uniswap leads this category in the spot markets, he said. Bernstein's suggested allocation to the DeFi sector, including Uniswap, is 15%. Finally, Ripple's XRP has seen the second largest year-to-date return (101%), thanks largely to its recent rally after the landmark court ruling. Bernstein named it in its payments and digital currencies category, noting the recent regulatory relief. The firm called for a 2.5% allocation toward Ripple and a 2.5% allocation toward Link. - CNBC's Michael Bloom contributed to this report.