In this article, I want to give you a short overview of things I learned in terms of risk management and diversification of crypto portfolios. I’ll try to keep the ideas as brief as possible. If someone is interested in learning more about this, I would be glad to continue this conversation, personally or through more in-depth written content.
Let’s get right into it by looking at a simple rule I’m applying to all my investments. This idea is very popular in the venture capital space, and as I think that what we are doing here is just a decentralized form of venture capital or angel investing, this framework also applies to the crypto space.
If you have 10 or 15 uncorrelated bets, all with roughly the same return you can cut your risk by 75–85%. Let’s say you have 10 Investments and all of them have the potential to 10x their current price, which is not that uncommon in the current state of the crypto market. Statistically 1 out of 10 startups fail, so even if only one of your 10 investments performs as planned, while the others go to zero, you still break even on your whole portfolio. Let’s assume you did your homework on your investments, and more than 10% of your portfolio will perform as planned or even exceed your expectations.
So the potential return of these bets is not the problem. However, this approach to risk management has its flaws, at least in this early stage of the market. One problem here is that all cryptocurrencies are correlated to some degree. However, even if this rule isn’t as effective as if they were uncorrelated assets it will still minimize your overall risk and exposure. Having some risk management is better than no risk management at all.
Portfolio and Position size
You probably won’t have 10 Investments of precisely the same size in your portfolio. You have more prominent positions in large-cap coins like Bitcoin, and you will also have some smaller positions in high risk, high reward small cap coins. Try to apply the 10×10 rule to those investment categories, not your whole portfolio.
Next, we need to talk about diversification and the size of your portfolio. The first rule is to never go all in on one coin, even if your greedy mind tells you to do exactly that. Money is made by not losing money. This should always be on your mind when you are about to make impulsive decisions.
A strong portfolio should be spread across at least 5 coins. Depending on how actively you are managing and tracking the performance. I personally have 10-15 Coins in my mid to long-term portfolio. Moreover, I’m rebalancing and adding new coins constantly as I receive new information. I also have about 10%-15% of my portfolio reserved for short-term trades and super low market cap coins (<$10 Mio. market cap), I’m never holding more than 5 of those at a time. The main rule to follow isn’t a complex formula like “never have X % more than X number of coin X.” The limit is simply; the amount of coins you can control by yourself while properly tracking them.
I hope I could give you an idea of some basic concepts and ideas for risk management. Let me know what you think 🙂
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