Iliya Zaki

@iliyazaki

Reduce your Crypto portfolio’s risk exposure with one simple trick — Fiat as an asset

Photo by Alice Pasqual on Unsplash

Things to Note: You should know the limitations of my expertise. Firstly, everyone has a different investment strategy and philosophy. Secondly, I have no prior experience in Finance or Investing before July 2017.

Here I speak as a fellow Crypto Enthusiast who has experienced the highs and lows of the crypto market since July 2017. I believe that it is easy earning money during a bull market, but a good trader/investor makes money in both bull AND bear markets.

The strategy listed below is geared towards first, reducing losses during a bear market. Next, realising returns during a bull market and lastly, ensuring long term survival in the market.

This article is directed towards the many retail investors whose only investments are in Cryptocurrencies.

DIFFERENT ASSET CLASS IN CRYPTOCURRENCIES

Let us first establish the different asset class when we invest in Cryptocurrencies. Each of them has a different purpose in a portfolio.

  1. FIAT
  2. BITCOIN
  3. ALTCOINS
  4. DIVIDEND-BASED COINS

I will discuss on how to create an All-Weather crypto-asset allocation in subsequent articles. In this article, we will focus on the most important asset class in a crypto-asset portfolio: FIAT

Photo by Christine Roy on Unsplash

Why is Fiat so important? It is the only Crypto asset class that does not depreciate in value. Obviously when we take into account inflation/deflation, it is not exactly loss-proof. But in the crypto market, it definitely is as the ultimate goal is to gain more fiat.

A stable crash-resistant asset allocation would look like this:

Having 40% in fiat or stablecoins will ensure your portfolio is equipped to withstand any unpredictable or random crashes which Bitcoin is so well-known for.

The first thought that would enter anyone’s mind is “We will stand to gain much lower if we have such an allocation.” Therefore, we may need to deploy a different rebalancing strategy.

Rule #1: Never lose money
Rule #2: Never forget rule #1
~Warren Buffet

GROWTH & RETRACEMENT-BASED REBALANCING

“I think that the first thing is you should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.” ~ Ray Dalio

Crypto-based rebalancing is to realign the weight of assets in a portfolio based on the asset’s growth and retracement level. Cryptocurrency market differs from traditional markets in the sense that most crypto-assets are pegged with Bitcoin’s USD value and investors’ underlying nature of HODLing. Thus, a different approach to rebalancing is required.

Traditionally, a deadline is placed for when a portfolio should undergo rebalancing. For example, every 6 months or annually. Instead of a set amount of time, this rebalancing technique looks to sell an asset when it reaches a set amount of growth or loss.

Volatility can be either a good or bad thing. Great for those gutsy yet skilled, bad for the uneducated and fearful. We can learn much from the words of John Train — For the investor who knows what he is doing, volatility creates opportunity.

STRATEGIC REBALANCING

It will ultimately depend the individual investor’s intuition, expertise and skills.

https://howmuch.net/articles/bitcoin-all-major-crashes

The image above shows us how often and low Bitcoin crashes are. Strategically rebalancing the portfolio close to the bottom would be ideal.

Currently, both Bitcoin and Altcoin are moving together. The strategy could (or should) change when there is a clear separation between Bitcoin and Altcoin. But for now, let us focus on the main goal.

REBALANCE WHEN RETRACE
Rebalance between the big two: FIAT & Bitcoin. Keeping FIAT always at 40%.

For crashes, my suggestion would be to perform a retracement rebalance when Bitcoin drops -30% and -70% from the previous swing highs.

During a bull run, perform a rebalance when Bitcoin increases 50% FROM previous rebalance price. And subsequently, after 80% or depending on how crazy Bitcoin increases.

For the altcoin section, it requires more explanation and therefore, I will discuss this in another article.

To illustrate how this portfolio will do, I came up with a story:

Disclaimer: This story does not take altcoins into account.

EXAMPLE

Jack and Tom only have $10,000 to invest.
Jack bought 1 Bitcoin at $10,000 with $10,000
With $0 capital left to invest.
Tom wants to keept a 60/40 Crypto to Fiat ratio so:
He bought 0.6 Bitcoin at $10,000 with $6,000
With $4,000 capital left.
What happens if Bitcoin INCREASES by 50% from $10,000 to $15,000?
Jack has 1 BTC now worth $15,000 (+50%)
His total portfolio is UP by 50% or $5,000 and is now worth $15,000
Tom has 0.6 BTC now worth $9,000 (+50%)
With $4,000 capital left, his total portfolio is UP by only 30% or $3,000 and is now worth $13,000

In this example, Jack would have profited $2,000 more than Tom. But ultimately, BOTH APPROACHES have seen gains.

Now let’s look at what happens when the market is BAD

Same scenario: Jack and Tom only have $10,000 to invest.
Jack bought 1 BTC at $10,000 with $10,000
With $0 capital to invest.
Tom bought 0.6 BTC at $10,000 with $6,000
With $4,000 capital left.
What happens if Bitcoin drops by 50% from $10,000 to $5,000?
Jack has 1 BTC now worth $5,000
With $0 to buy the crash, his total portfolio is down by 50% or $5,000 and is now worth $5,000
Tom has 0.6 BTC now worth $3,000
But with $4,000 in the sidelines, his total portfolio is down by only 30% or $3,000 and is now worth $7,000

In this example, Tom would have saved a whopping $2,000 more than Jack.

Here’s something extra-

In a bad market: Bitcoin drops by 50% from $10,000 to $5,000?
Tom has 0.6 BTC now worth $3,000
With $4,000 capital left, his total portfolio is down by only 30% or $3,000 and is now worth $7,000
Keep in mind, Jack has no capital left to buy or do anything. But Tom decides to rebalance his portfolio to keep up with the 60/40 Crypto to Fiat ratio with Bitcoin priced at $5,000.
Tom will then have 0.84 BTC now worth $4,200
With $2,800 capital left.
If Jack wants to break even, Bitcoin has to double (2x) OR increase by 100% from $5,000 to $10,000 just to break even on his $10,000 investment.
For Tom, Bitcoin only has to increase by 40% to $7,000 to break even on his $10,000 investment.

In other words, The market will take less effort for Tom to breakeven as opposed to Jack. This is how we can use defensive tactics to ultimately win in the long run.

By the time Jack breaks even when Bitcoin returns to $10,000, Tom would have seen his portfolio grow to $11,200 or increase by 12% ($1,200).

Of course the market isn’t so easy to predict which is precisely why sometimes we just need to remove the emotional aspect and rebalance when its due.

If the market is good, you will still profit! If the market is bad, you will survive it!

ENTER PORTFOLIO.IO

https://portfolio.io/

A great tool that is being built right now is Portfolio.io. An exclusive sneak peek provided by its COO, Bob Bogaert has shown incredible promise of a platform that is capable of rebalancing with a click of a button.

This function can truly change the way we see our Crypto Portfolios. Rebalancing is a well-known method used by Wall Street and big hedge funds and it should not be underestimated.

The platform is still in beta mode but is showing great promise so far. It is a project that I am personally excited to try.

Head to their website and sign up now! 
https://portfolio.io/

I hope this article will help spark ideas on forming more strategies. Please feel free to share your thoughts and strategies below! :)

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Disclaimer — 
This strategy WILL reduce your expected returns in the long run, and should only be used with the intention of tempering any emotional responses towards market volatility. I would highly recommend researching other techniques or strategies that can provide a better result based on your own risk appetite.

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Please feel free to check out my Bitcoin analysis and predictions for the month of July.

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Iliya Zaki is the Marketing and Community Manager for Moonwhale Ventures.

Moonwhale Ventures is a Consultancy for Blockchain Applications in Corporations, SMEs or Listed Companies to improve the efficiency of the value chain, and new innovative ways to funding business expansion through STO, ICCO (tokenization).

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