Have you diversified your Crypto portfolio?
You’ve heard the same story before, “new college grad goes all in on DOGE and makes millions”. Or the one where someone buys a lambo because he was in Ethereum early. A lot of times, these flashy stories make you think crypto is a get rich quick asset (although it’s still the highest returns asset class). In some sense for these folks, it was true, they went all in on a bet, and made massive returns.
In principle, it sounds great. However, probability wise, the odds are slim…
For example, right now the same opportunity exists, you can go all in on one coin and it will be 10x and make your dreams come true, the problem though? You’re not hearing the stories of people who lost their savings or lost their kids’ college fund. These stories far outnumber the ones where people have retired at the age of 25. So how do you still hit the winners without accidentally going big on a bad bet?
So how do you still hit the winners without accidentally going big on a bad bet?
There is a very widely known rule to diversify your investments. If there’s a black swan event, then you’re okay, if a coin gets hacked, that is okay too, since you have other assets/coins. However, some may argue that strategy is hard to win big, or that it’s better to maximize winnings on a huge bet. Probability wise, that’s not going to work out for the vast majority of people.
So that’s the main lesson today, spread your bets. If you have $5,000 to deploy, $1k on ETH might make sense, $1k on BTC sure, but $1k on a high risk asset? If it goes to $0 you would have to have another allocation go up 100% just to make up for it. That’s why it is important that when you are spreading your bets you should also allocate risk accordingly as well. If there is a low market cap coin of $5M and it has the potential to go to $100M (20x), it also has the potential to go to $1M (-80%), that is just the reality of crypto.
Here’s an example to illustrate the point
Let’s say you had $300 to play with:
Coin A is $100
Coin B is $100
Coin C is $100
A few months later:
Coin A is $1000
Coin B is $200
Coin C is $10
Now what would have happened if you went all in on Coin C? You’d have $30 left, and you’d be kicking yourself hard for missing out the runs in Coin A and B.
Let’s say you go all in on Coin A, you would have $3,000, you’re in the best case scenario, likely, only a few people were as bold as you.
If you spread your bets on all 3, you end up with $1210, not too shabby. You lost a lot on Coin C but more than made up for it on Coin A. The problem with the above situation is that, the difference between All in on Coin A and All in on Coin C is a coin flip, one outcome is great, the other could ruin savings. The probability of spreading bets is always risk weighted evenly, so you don’t have to worry about coin flips. Mentally, it’s also advantageous, if you went all in on Coin C, you’d probably end up selling near the bottom because of maximum pain and not being able to stomach the loss. However if you were spread evenly, mentally you are fine because whatever happens you have a piece of all 3. Your stress levels will be lower as one coin is flying high and one coin is down a lot.
Now, this might have been a roundabout way of saying when there is a high risk asset, don’t put an amount that you are not comfortable losing. The above example was spread evenly, but don’t go heavy on super risky low caps or when YouTubers are pumping a coin. You can say crypto as a whole is a risky asset class, but that is what you sign up for when you have something like Ethereum which is still up >600% over the last year even after several corrections.
In summary: Diversify your investments, allocate your money by risk, and higher risk investments should not be higher allocations. Not financial advice of course, but best practices in my opinion, and good for managing stress.