Numerous articles and suggestions can be found on the composition of the cryptocurrency portfolio.
You can see a method of organizing major cryptocurrencies composed mostly of Bitcoin and Ethereum as a majority of the portfolio, and organizing some of the other altcoins evenly. In fact, the Upbit Index, Hedge Fund Portfolio Proposal, and Coinbase Index all propose to take bitcoins by 30-40%, Ethereum 10-30%, and other altcoins between 2-5%.
However, this is only an answer to the question of what to do to invest in’cryptocurrency’ without worrying about the entire portfolio. Let’s think about what to think about before actually constructing a cryptocurrency portfolio.
How much cryptocurrency should be included in the entire portfolio? Consider volatility first
Before investing in cryptocurrency, let’s examine how my portfolio is structured as a whole.
Assets generally include cash equivalents, real estate with relatively low liquidity, long-term bonds and pension insurance, and high-liquidity stocks or index ETFs, and unlisted stocks with low liquidity and difficult asset evaluation, and safe assets such as gold. There will be.
First, you need to check if the volatility of the asset relative to the current portfolio is too great. In portfolio theory, efficiency falls when the daily average volatility of the entire portfolio exceeds 1%. This is because if the entire portfolio itself suffers significant losses due to rapid fluctuations, there is a high probability that profits will not be generated efficiently due to a loss to the entire principal even in the future when profitable is good.
The VIX index, which refers to the volatility of the S&P 500 Stock Index ETF, a representative stock investment, is 22.5, which is about 1.7%. In other words, it is recommended not to make up more than 60% of the total portfolio even when the portfolio is composed mainly of US stocks.
Conversely, it is not recommended to include more than 25% of Bitcoin in its entire portfolio. If a portion of the portfolio is already invested in stocks or volatility assets, the ratio will be further reduced.
If 50% of the total portfolio is already invested in various stocks, it would be wise to invest in a way that the volatility of the total portfolio is already close to 0.7-8%, and the proportion of bitcoins does not exceed 10% of the total portfolio.
Even Ethereum and other altcoins outweigh the volatility of bitcoin, so it’s a good idea to do a good job of adjusting the proportion of the entire portfolio.
The correlation between assets is very important.
The reason we structure our portfolio is not simply to invest in a variety of assets, but to prepare to make good average returns in various scenarios. However, if the relationship between portfolio assets is high, in some cases, the loss of the entire portfolio is severe, but in the case of maximizing profits, this is not a portfolio, but is the same as investing in a specific asset class.
A typical mistake appears among cryptocurrency investors. Since it has distributed various assets to Bitcoin, Ethereum, and Altcoin, it is mistaken for a strong portfolio. However, since the correlation between cryptocurrencies is very high, there is a high possibility that when bitcoins or certain coins fall, they will fall simultaneously. In other words, no matter how well the volatility is allocated, it does not mean much if the correlation between assets is high.
As mentioned in the last column, in a situation where the correlation between the stock market and bitcoin is broken, it can be a good risk management method to include both bitcoin and stocks in a portfolio at the same time. More specifically, if the correlation is reversed, volatility is offset, so even if it is composed of highly volatile assets, it can be composed in various ways.
For example, the correlation between bitcoin and gold is increasing as time goes by, so there is not much reason to take both gold and bitcoin into a portfolio at the same time in terms of a fan-like safe asset. Conversely, the correlation between the stock market and Bitcoin is very unstable.
However, since the correlation between bonds and bitcoin converges to 0 and the correlation is low with foreign exchange, it would be good to form a portfolio with bonds. However, it is important to constantly monitor this correlation as it also changes rapidly according to market conditions.
Looking around, there are many people who have so much faith in cryptocurrency that they make up most of the entire portfolio with cryptocurrencies and come and go with joy and despair depending on the price of bitcoin. In addition, there are many cases of contemplating how to divide the proportion of cryptocurrencies and how to divide them for each cryptocurrency.
Of course, you can get big returns from the current target market, but keep in mind that in a long investment breath, you can make long-term successful investments if you take a portfolio that meets both return and risk management.
After studying computer science and applied mathematics at Carnegie Mellon University in the United States, he worked as a quant trader at Wall Street in the United States. He is currently working as a strategic director at Vibric, a digital asset manager. He wrote the book’Artificial Intelligence Investor Quant’.
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