Ask 10 people with some crypto exposure for advice on how to set up a cryptocurrency portfolio and you'll get at least 12 answers.
When I talked to my financial advisor (which I'm not and this is not advice blah blah) like all the ads tell me to do when trying to be an adult all I got were lots of sitting-on-the-fence words that amounted to a fat "I don't know. I don't get commissions selling you crypto."
So where to start if I want to build a portfolio that gives me exposure to upside in cryptocurrencies?
I believe that some diversification is worth doing in any investment process even if you have really high conviction on a particular token. I'm sure everyone's been told by their Grandma at some point in time; "Don't put all your eggs in one basket!"
Why diversify you might ask when your friends are screaming to go all in on Bitcoin and HODL?
- Diversification spreads risk in case of unforeseen events and volatility
- smooths and minimises the risk of loss over the longer portfolio cycle of holding.
- increases opportunity for returns with same level of risk as described in Modern Portfolio Theory (MPT)
OK, before you doze off, Modern Portfolio Theory states that the benefits of diversification come from investments with low correlation so it's important to remember having a larger number of investments alone isn't necessarily diversified if they're all similar.
So diversification will be important in the trade-off between returns and managing risk.
In the next article let's see how we can apply this and MPT's idea of an Efficient Frontier to build our portfolio. We'll also discover MPT is not without it's critics as an approach.
For those looking for more detail;
- here's an old 2018 Coin Telegraph article that goes into correlation and variance in crypto.
- Ayushi Chhetri goes deep in her 2019 article on Application of Modern Portfolio Theory on Cryptocurrencies
