Crypto markets in the last year showed returns of 100% to 1000%. But after the recent market melt-down of 64% and a market struggling to find its reversal, we have been left with a few questions – will we see such returns again?
And, if yes, can we limit our risk to some reasonable level like 25%?
Before we proceed with what, why and how, I would like to make a statement. I’m optimistic regarding crypto markets. This is the first assumption one needs to make when investing into a young and volatile market. That the market will grow and it is not simply smoke and mirrors. I hope I’m right, for several reasons. I love that this is a next innovative phase of high-tech after a fairly long period of tech depression. I love blockchain’s technology attempt to provide solutions that protect parties – both B2B and B2C. Of course, I see a full range of good, bad and ugly, but overall I love the energy, the excitement of teams that are now enabled to dream bold and big.
I want this market to succeed. For the investor’s sake, I wish this market to grow and mature. Together with Dr. Chiara Longo, Chief Economist of Pareto Network, I’ve co-written this article on crypto-investing. While the version that appears in Dr. Longo’s blog is more suitable for beginners, here we want to present a more detailed look at the subject. If you are not familiar with Alpha/Beta terminology, or find these concepts unclear – I would suggest that you read Dr. Longo’s blog first.
How to build a Crypto portfolio
During the process of building Crypto portfolios we’ve found that the dynamics in this game are quite new. The traditional methodologies and techniques that are thoroughly explained in the common handbooks of finance do not necessarily work:
- Crypto assets’ prices are extremely volatile; if we look, for example, at the recent past of Bitcoin, its volatility has reached levels rarely seen in any market. In December 2017, in fact, Bloomberg reported that Bitcoin 10-days volatility rose up to 125%, surpassing the 102% peak that S&P 500 has seen only in October 2008, at the inception of the financial crisis.
- At this time, the correlations between assets are almost all very close to 1 and positive; this makes it very difficult to diversify a portfolio to minimize risk. The current high correlation may be attributable to several reasons like the use of a small set of currencies in most purchasing, common technologies behind the coins, and the likelihood that most “altcoin” buyers have rotated out of some of their gains in BTC and ETH. This correlative behavior, however, might change in the future, loosening the links between assets and/or inverting the relationships.
- The crypto markets today are still quite rigid; there are still too many limits: in term of assets that are not traded on all markets; in terms of constraints on money transfer, that often require several business days and make it necessary for the potential investor to immobilize her funds, so they are “ready for when the times come”.
All this, together with other inefficient qualities of the crypto environment, makes the game challenging – it’s still attractive but the rewards are not that easily accessible; not quite yet.
At EndoTech we are addressing the challenge of portfolio management by following the approach explained below:
- Active rebalancing is our key. Buy and Hold is not a valid approach in such a young market when the “power struggle” is still very high, technologies are still immature, any crypto-currency can quickly lose its value to another player. Monitoring and keeping currencies in a manner that allows you to properly rebalance your portfolio and minimize risk/maximize return (this means keeping them on a reputable exchange, or in a wallet that allows you to quickly transact currencies – more on security in a future post).
- Decide on what suits you best – Alpha or Beta portfolios. Will you be upset if you make just half of what’s market is making, or will you be more discontented if you see that 2/3 of your investment disappears.
- Rely on trading strategies to add assets to portfolio, to increase or decrease the share of an individual holding. These strategies are carefully chosen by our EndoTech genetic analysis factory to provide adaptive technology for quickly changing market.
And now for the fun part – results! Below are results from an initial set of portfolio allocation systems developed by EndoTech. Yes, they are backtested results. We are not financial advisors, and we are not recommending you follow this system. We are sharing with our clients what we found to work in such markets, but we cannot guarantee that it will work in the future.
These results are based on backtesting. They are not indicative of future results.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
Past performance, real or hypothetical, is not indicative of future results.
There is a risk of loss in virtual currency trading.