In our previous article, The big crypto rush – a few words about risk, we discussed the concept of volatility and risk for all securities, including for cryptocurrencies, and we looked at how to assess the overall portfolio risk.
What many crypto investors want to know is, what percentage of their investment portfolio should be invested in crypto?
The equivalent question to that is: How much can you tolerate to lose?
Advisors from around the globe suggest different percentages of investments in cryptocurrency to investors.
We argue that there is no percentage that works for everyone, because each investor is different and so is their portfolio.
If we look at this question from an investor’s perspective, we need first to consider: what are the goals of the investor, to accumulate wealth, buy a house, pay off a debt, retire safely etc.? All investments carry risks, so it’s imperative for any investor to first understand and map out their goals when it comes to investing and understand what their individual risk tolerance level is.
At the end of the day, what everyone wants is to get a good return while taking low or no risks. Almost impossible, one would say. But technology shows us that it is possible to at least consider thousands of scenarios at once and choose the one that gives you the best possible return for the lowest possible level of risk.
Let’s look at an example:
We consider the same example we had in the previous article, that is, a portfolio of 6 investments (5 ASX stocks making up 90% of the portfolio and 1 cryptocurrency for the remaining 10%) as follows: CBA 20%, MAQ 20%, COL 20%, BHP 20%, WES 10% and BTC 10%.
If we run this portfolio in Diversiview, we get a 32% portfolio return and 100% risk, which places the portfolio somewhere in the middle of over 5000 other possibilities of combining the same securities (see Fig 1).
Fig1 Weight allocation for a random allocation in the example portfolio
As it can be seen, for a risk (volatility) of 100%, there are other, better positions that would give an expected return of 50% or so. Also, there are positions on the curve at the left that can achieve a return higher than 32% for a risk less than 100% – even better!
So, one question to answer is, how can we find the percentage of Bitcoin in this example that can give us the lowest risk?
To do this we can employ Diversiview Balancer and obtain the following allocation: CBA 10.81%, MAQ 1%, COL 3.88%, BHP 77.05%, WES 6.26% and BTC 1%. By reducing Bitcoin allocation to 1% and adjusting the other securities as well, we can obtain an expected return of 23% and a volatility of approx. 14%. While the return is reduced by 9%, the risk is also reduced dramatically by 86%.
The new portfolio position is the one at the most left position in the universe of possibilities, i.e. the one with the lowest risk (see Fig2).