What Now?! Part III – Risk Management in your Crypto Portfolio

02/07/2018

Welcome back to my series for folks who have been burned in the cryptopocalypse or for those who see an opportunity and want to build a smarter portfolio for the future. Up until now we’ve been talking about setting your expectations, and picking a reasonable target.

Now you have your target, it’s time to think about a risk profile (low risk vs. high risk category coins). As with any other market, the crypto / blockchain space has a lot of options from staid old institutions like BTC or the latest flavour of coin (pick your favourite). There are mining companies, trading companies, contract futures a whole rainbow of folks looking for investment dollars.

For the purposes of this series, I’ll stick to the coins themselves as our example, but the principles can and should be extended to any investment.

Once you have a big bag of picks, (PICKS, I said PICKS) you can start divvying them up according to relative risks.

Bucket 1: Core Holdings

In this category are the coins which will likely continue to survive, based on history, performance, valuation, etc. This is a pretty obvious one. Coins like Bitcoin, Ethereum, Litecoin, Bitcoin Cash might qualify.

A good bet is to try and zero in on something that is going to be here in five years. The golden snitch in this situation would be correctly guessing who will win the contest to be the fundamental standard ‘reserve currency’ crypto coin (I talk about this in a piece I wrote last year).

This category is the most solid, and likely most expensive crypto bets.

Bucket 2: Medium risks

Coins with actual working products and markets to back them up. I’m talking about smaller niche coins who actually have that ‘intrinsic’ value of some kind. Coins in this category should have an established history.

What separates them from the first category is their long term viability. This can be due to the limited value of their niche, issues with the management etc. Knowing the details of the teams and products will help you separate these moderately risky products from the wild west of Bucket 3.

Bucket 3: High Risk

Finally here’s where you put all the fun stuff you think will make you rich but will likely flame out. It’s where I would have put Bitconnect before their ponzi-palooza blew up in their faces. ICOs, low cap coins, the stuff flogged on twitter, reddit and youtube.

Basically 80% of the cryptocoins out there.

There should be a place for a few high-risk bets in your portfolio. How much depends on how comfortable you are with risk overall.

Mix it up – what’s the ratio Kenneth?

So the obvious question is what’s the right mix? That will depend on what you and your financial team decide you are willing to lose and still be able to look at yourself in the mirror. Go, figure that out and come back.

Ready? So, that amount is a good guidepost to how much you are comfortable with high risk stuff.

For the sake of argument  lets assume you are hell-bent for leather to get into this market and want some kind of a good starting place. As with anything else, you can start conservatively.

50-65% in Bucket 1 – low risk stuff that will form a solid core and financial backstop to offset potential losses in the other two areas.

The rest is where your research and risk tolerance will set the ratios. My starting point is usually 15/10% split between bucket 2 and 3, but if you’re twitchy, expand the bucket 2 and pick one or two long-shots.

Once you’ve had some time to see how the trends are moving, and learned as much as you can about your investments, its up to you to decide if you want to stay conservative, or rebalance to try and double down on the bets that are paying off.

As the market evolves, it’s a really good idea to rebalance your portfolio, Fire and forget is a good way to go broke. Keep an eye on your assets and use common sense when you need to take some profits and rejigger your assets.

Sidebar: Dollar Cost

Another way to decide which investments to pick is Dollar Cost. When you invest X amount of dollars over several periods, instead of all at the same time. This can also help counterbalance your risk.

If (as currently) the market is dropping, and you are bargain shopping, instead of spending $1000 at today’s market price,  you can buy $500 today then set a series of slightly smaller levels. (e.g. $250 at 5% lower than current pricing, $250 at 10% lower, etc.)

This will help lessen your short term pain as you buy through a drop.

Finally, here’s a list of coins and their market niches to help you start exploring (cribbed from the Internet) – None of these are buying suggestions, but a starting point to research the various options in this space.

  • Platform segment – Ethereum, NEO, Ark…etc
  • Privacy segment – Monero, Zcash, PivX..etc
  • Finance/Bank settlement segment – Ripple, Stellar…etc
  • Enterprise Blockchain solutions segment – VeChain, Walton, Factom…etc
  • Promising Tech segment – NANO/Raiblock, Cardano…etc

In my next piece we’ll look at how you can end up being your own worst enemy, and why trusting your gut can cause severe financial indigestion.

Note: This is an informational sort of thingie, and not me telling you to go and actually buy anything.

What Now?! How to survive the Cryptopocalypse – Part I
What Now?! Part II – Your Crypto investment Strategy

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