The author, Dr. Nicholas Adams Judge, is a cofounder of RootProject. The other cofounder is Chris Place, a Y Combinator alum. Risk management is an important field. Companies do not spend billions and academics don’t spend liftetimes working on it because the answers are all obvious. It’s an important field, too — the more volatile the asset space the more important it is.
Many crypto traders have taken large losses from the recent fall in ether. While ICOs are risky by their (current) nature, high quality ICOs that base their currency value on a temporarily high-volatility currency offer outsized relative risk-adjusted returns. While ICOs are risky, that risk does not correlate with ether or bitcoin fluctuations meaningfully, and therefore raises portfolio risk-adjusted returns.
An easy explanation, using our pre-ICO as an example: the price for our token, ROOTS, is .0001 ether. It’s the same price whether that ether is worth $400 or $150. So, the attractiveness of investing in ROOTS — or any ICO where the price is determined by another cryptocurrency, instead of a fiat currency — correlates negatively with the value of the underlying cryptocurrency.
What that means in terms of an investment portfolio that already has a large ether position is:
(1) the investor can exit an ether position now as if ether was still at $275;
(2) the new position reduces exposure to volatility, like that from the looming BIP 148 implementation.
It’s not as safe as holding fiat currency, but it offers the potential of high returns while greatly reducing exposure to BIP 148-related risk.
Of course, I am choosing our pre-ICO as a selfish example. But if you think this point is controversial, you have to make a case that BIP-148 poses an existential threat to ether — a weird position to make. Otherwise, you are disagreeing with “diversifying your risk is a good idea.”
If the goal of the investor is purely to avoid all risk, buy fiat currency. If the goal is to make the highest risk-adjusted returns that can be made, while sheltering a portfolio from BIP-148 risk, find high-quality ICOs priced in a cryptocurrency, particularly one that will hold its operating budget mostly in fiat currency.
Article originally published on Dr. Judge's Medium
