Most crypto investors rely on intuition when evaluating portfolio balance, assuming that holding multiple assets equals diversification. In reality, many portfolios remain structurally concentrated, exposing investors to asymmetric risk during market corrections.
The Herfindahl-Hirschman Index (HHI) is a proven tool from traditional finance used to measure concentration. When applied to crypto portfolios, it reveals how much capital is disproportionately allocated and how vulnerable the structure is to individual asset movements.
This guide is written for serious crypto investors managing six-figure portfolios or bigger, who want to move beyond surface-level diversification and adopt a data-backed approach to allocation. It explains what the HHI is, how to calculate it, and why it's an essential metric for portfolio risk diagnostics — especially in volatile and highly correlated markets like crypto.
What Is the Herfindahl-Hirschman Index (HHI)?
The Herfindahl-Hirschman Index (HHI) is a statistical measure used to quantify concentration within a system. Originally developed to evaluate market competitiveness, HHI is widely applied in antitrust regulation to assess whether an industry is dominated by a few players.
In traditional finance, HHI is used to detect overconcentration in equity portfolios, ETFs, or sector allocations. In crypto, it can be applied to measure how evenly (or unevenly) capital is distributed across assets within a portfolio.
The HHI helps answer a fundamental question:
Is your portfolio truly diversified, or do a few assets dominate your overall exposure?
Understanding this can reveal hidden structural risk, especially in volatile asset classes like crypto, where correlations are high and drawdowns can be severe.
How Is HHI Calculated?
The Herfindahl-Hirschman Index is calculated by summing the squares of each asset's share within a portfolio.
Formally:
