Broad Indexing Under Uncertainty
Diversify across contenders when the category matters more than the winner
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 95%
This framework separates two decisions that investors often conflate: whether a category will become more important and which individual asset will win. When the category thesis is strong but winner selection is unreliable, construct a diversified index of the largest liquid contenders. Market-cap weighting lets the portfolio adapt as adoption shifts, while a liquidity screen prevents theoretical diversification from becoming operationally fragile. The resulting position is not a claim that every constituent will succeed. It is a structured bet that gains among eventual winners can outweigh failures elsewhere. The method is especially useful in early markets where protocols compete for different use cases and reliable forecasting is difficult.
Origin
Extracted from Masters in Business during Matt Hogan's explanation of Bitwise's cryptocurrency index methodology.
Core principles
- 01Admit when the eventual winner is unknowable
- 02Express conviction in the category rather than one contender
- 03Use market weight as an adaptive selection mechanism
- 04Exclude assets whose liquidity cannot support implementation
How to run it
- 1
State the category thesis
Specify why the overall category should become more important and what evidence would invalidate that belief.
Pro tip Phrase the thesis without naming an individual winner.
Watch out A vague belief that prices will rise is not a category thesis.
- 2
Map viable contenders
Identify the largest credible assets or companies competing within the category and document their distinct use cases.
Pro tip Use transparent inclusion criteria rather than personal favorites.
Watch out Do not treat every available asset as viable.
- 3
Apply a liquidity floor
Remove constituents that cannot be bought, sold, priced, or custodied reliably at the intended portfolio size.
Pro tip Test liquidity under stressed conditions as well as normal trading.
Watch out Nominal market capitalization can overstate investability.
- 4
Choose systematic weights
Apply a repeatable weighting rule, such as market capitalization, that can evolve with the market.
Pro tip Cap oversized positions if concentration defeats the purpose of diversification.
Watch out Frequent discretionary overrides turn the index back into active speculation.
- 5
Rebalance and review
Update constituents and weights on a fixed schedule while separately reviewing whether the category thesis still holds.
Pro tip Separate routine rebalancing from thesis-level decisions.
Watch out Do not abandon the method solely because leadership changes among constituents.
In the wild
An investor believes public crypto networks will gain adoption but cannot determine whether Bitcoin, Ethereum, or another liquid protocol will dominate. The investor holds a rules-based basket of the largest liquid assets rather than concentrating in one forecast.
→ The portfolio participates in category growth while reducing dependence on a single protocol prediction.
A fund manager expects a young technology sector to expand but sees several firms pursuing incompatible approaches. The manager builds a liquid, market-weighted basket and periodically removes firms that no longer meet the rules.
→ Exposure adapts as the market identifies stronger competitors.
Common mistakes
Pretending to know the winner
Concentrating in one contender converts a category thesis into a much narrower forecasting bet.
Ignoring implementation liquidity
Including thinly traded assets can make a diversified portfolio impossible to price or exit reliably.
Indexing without a thesis
Diversification controls selection risk but cannot rescue a category that lacks enduring value.
Is it for you?
Best for
Investors who believe a developing asset class will grow but cannot reliably select its dominant protocol or company.
Not ideal for
Investors with no conviction in the category or those unable to tolerate broad emerging-market volatility.
From the transcript
“I'm not smart enough to know five years from now whether Bitcoin or ethereum, or light coin or man narrow or these other assets will…”
“And so the index gives you a simple way to make a simple bet, which is, I think crypto will be more important in the…”
“If you think back to the equity market, in the early days of emerging markets, you would only buy large caps and then large mid…”
From the episode
Matt Hougan Discusses Cryptocurrency and ETF Indexes (Podcast)