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Author Topic: Bitcoin can reduce the risk of your portfolio  (Read 270 times)
bitmover
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May 23, 2018, 02:32:04 PM
Merited by darklus123 (2), LoyceV (1), sabotag3x (1)
 #1

I was thinking about Modern Portfolio Theory and Bitcoin. I did a little research about it and will share my thoughts with you guys.


As stated here (https://www.turtletrader.com/modern-portfolio-theory/)
Modern portfolio theory is standard practice in the smart investor’s portfolio. MPT places a non-correlated investment, a predefined percentage managed futures component, into a typical bond and equity portfolio. Risk is diversified away from the bond and equity positions into non-correlated managed futures positions. Higher portfolio returns with a reduction in risk is the end result.

As you can see in this chart, from the same website, 100% bonds is riskier than 80% bonds and 20% stocks.


A greate challenge to investors is to find non-correlated assets.

This is where bitcoin comes in.

Bitcoin is a new asset class with high returns, non-correlated to any other assets.

Pension funds, hedge funds, and many other funds are probably willing to buy bitcoin, as it is non-correlated to any other assets. But they can't for legal reasons.
But they can buy a Bitcoin ETF, or maybe a Bitcoin Future. Soon money will come, when those legal instruments are available for them.

When you add volatile assets, that have low correlation with the other assets in your portfolio, your overall portfolio volatility and risk get lower.

Remember, to lower the risk of your portfolio bitcoin should be something like 3% of your overall portfolio, maybe even less.

This articles covers a little about the subject too.
https://medium.com/@dustin_byington/why-owning-bitcoin-reduces-risk-8163309ec2f1

Edit:
Vitalik Buterin saying the same thing, that cryptocurrencies reduces risk.
http://Https://www.youtube.com/watch?v=VosfxChTxVg


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May 23, 2018, 02:45:10 PM
 #2

I was thinking about Modern Portfolio Theory and Bitcoin. I did a little research about it and will share my thoughts with you guys.


As stated here (https://www.turtletrader.com/modern-portfolio-theory/)
Modern portfolio theory is standard practice in the smart investor’s portfolio. MPT places a non-correlated investment, a predefined percentage managed futures component, into a typical bond and equity portfolio. Risk is diversified away from the bond and equity positions into non-correlated managed futures positions. Higher portfolio returns with a reduction in risk is the end result.

As you can see in this chart, from the same website, 100% bonds is riskier than 80% bonds and 20% stocks.


A greate challenge to investors is to find non-correlated assets.

This is where bitcoin comes in.

Bitcoin is a new asset class with high returns, non-correlated to any other assets.

Pension funds, hedge funds, and many other funds are probably willing to buy bitcoin, as it is non-correlated to any other assets. But they can't for legal reasons.
But they can buy a Bitcoin ETF, or maybe a Bitcoin Future. Soon money will come, when those legal instruments are available for them.

Remember, to lower the risk of your portfolio bitcoin should be something like 3% of your overall portfolio, maybe even less.

This articles covers a little about the subject too.
https://medium.com/@dustin_byington/why-owning-bitcoin-reduces-risk-8163309ec2f1

Generally, it's always very good idea ''Don't put all the eggs in the same basket'' Smiley
So, in my opinion, we should invest in different markets and financial instruments, not only crypto market.
Thank you for your financial analysis.
Bitcoin was a new asset class with high returns but bitcoin is not ''new'' any more and returns are not high as before.
The market has stagnated for half a year.
It's very difficult to predict future with crypto market.
bitmover
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May 24, 2018, 10:38:40 AM
 #3


Generally, it's always very good idea ''Don't put all the eggs in the same basket'' Smiley
So, in my opinion, we should invest in different markets and financial instruments, not only crypto market.
Thank you for your financial analysis.
Bitcoin was a new asset class with high returns but bitcoin is not ''new'' any more and returns are not high as before.
The market has stagnated for half a year.
It's very difficult to predict future with crypto market.


Hello,

This Modern Portfolio Theory is not about predicting future.
It's a statistical and mathematical model that builds an optimal portfolio, which offers the maximum possible expected return for a given level of risk.
And you can lower the risk by adding non-correlated assets.

If all your assets go up and down at the same time, that's bad for you. Imagine the whole Stock Market goes down 10% (which is huge for that kind of market), but bitcoin goes up 30% (which is not that much for bitcoin). Your portfolio will not suffer so much.

The opposite can happen too, when stock market goes up 10%, and bitcoin goes down 30%.

The idea is to be exposed to many different assets with non-correlated risks. The objective is not receiving high returns from bitcoin, but that it's not going up or down at the same time as the rest of your portfolio.


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May 24, 2018, 10:44:53 AM
 #4

I was thinking about Modern Portfolio Theory and Bitcoin. I did a little research about it and will share my thoughts with you guys.


As stated here (https://www.turtletrader.com/modern-portfolio-theory/)
Modern portfolio theory is standard practice in the smart investor’s portfolio. MPT places a non-correlated investment, a predefined percentage managed futures component, into a typical bond and equity portfolio. Risk is diversified away from the bond and equity positions into non-correlated managed futures positions. Higher portfolio returns with a reduction in risk is the end result.

As you can see in this chart, from the same website, 100% bonds is riskier than 80% bonds and 20% stocks.


A greate challenge to investors is to find non-correlated assets.

This is where bitcoin comes in.

Bitcoin is a new asset class with high returns, non-correlated to any other assets.

Pension funds, hedge funds, and many other funds are probably willing to buy bitcoin, as it is non-correlated to any other assets. But they can't for legal reasons.
But they can buy a Bitcoin ETF, or maybe a Bitcoin Future. Soon money will come, when those legal instruments are available for them.

Remember, to lower the risk of your portfolio bitcoin should be something like 3% of your overall portfolio, maybe even less.

This articles covers a little about the subject too.
https://medium.com/@dustin_byington/why-owning-bitcoin-reduces-risk-8163309ec2f1

Generally, it's always very good idea ''Don't put all the eggs in the same basket'' Smiley
So, in my opinion, we should invest in different markets and financial instruments, not only crypto market.
Thank you for your financial analysis.
Bitcoin was a new asset class with high returns but bitcoin is not ''new'' any more and returns are not high as before.
The market has stagnated for half a year.
It's very difficult to predict future with crypto market.


true, diversity in one's holdings makes for a smarter investor in the end. a diverse portfolio makes up for the slack an investment is short of. over time if both investments prove to be profitable then all well and good. but if one fails, you can still make up for your losses by your other holdings. it still holds true for all crypto currencies today. i myself don't just keep one coin in my holdings.

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May 24, 2018, 10:55:26 AM
 #5


This is where bitcoin comes in.

Bitcoin is a new asset class with high returns, non-correlated to any other assets.
In all you talked about I agreed. But not with the bitcoin. I do not believe that bitcoin gives high returns always. What about the high risk involved. Did you also calculate that risk that not so many people like bitcoin because of that and the case of volatility?

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May 24, 2018, 11:02:30 AM
 #6

as per my tradiing strategy i always try to keep %40 btc in my portfolio for bad scenerios, it would be always good to feel btc power in your pocket.
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May 25, 2018, 06:57:19 PM
 #7


This is where bitcoin comes in.

Bitcoin is a new asset class with high returns, non-correlated to any other assets.
In all you talked about I agreed. But not with the bitcoin. I do not believe that bitcoin gives high returns always. What about the high risk involved. Did you also calculate that risk that not so many people like bitcoin because of that and the case of volatility?

Bitcoin is the asset with the biggest returns in the last 8years.

I am satisfied with that valuation Smiley


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May 25, 2018, 07:13:41 PM
 #8

Yes, I am a diversified investor. I have seen your analysis more firmly on the idea of investing in bitcoin. This is a new investment opportunity, and many people have not yet entered the market.
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May 25, 2018, 07:30:08 PM
 #9


Generally, it's always very good idea ''Don't put all the eggs in the same basket'' Smiley
So, in my opinion, we should invest in different markets and financial instruments, not only crypto market.
Thank you for your financial analysis.
Bitcoin was a new asset class with high returns but bitcoin is not ''new'' any more and returns are not high as before.
The market has stagnated for half a year.
It's very difficult to predict future with crypto market.


Hello,

This Modern Portfolio Theory is not about predicting future.
It's a statistical and mathematical model that builds an optimal portfolio, which offers the maximum possible expected return for a given level of risk.
And you can lower the risk by adding non-correlated assets.

If all your assets go up and down at the same time, that's bad for you. Imagine the whole Stock Market goes down 10% (which is huge for that kind of market), but bitcoin goes up 30% (which is not that much for bitcoin). Your portfolio will not suffer so much.

The opposite can happen too, when stock market goes up 10%, and bitcoin goes down 30%.

The idea is to be exposed to many different assets with non-correlated risks. The objective is not receiving high returns from bitcoin, but that it's not going up or down at the same time as the rest of your portfolio.

That makes sense, but there's something I don't get about this mathematical model... Sure, it can reduce the risk of your portfolio, but isn't it also true that it could just as well lose value and actually increase the risk of your portfolio? If it falls 50% and 3% of your portfolio is in the Bitcoin stuff, you just lost 1.5%. Maybe not a lot for small hobbyist investors, but it definitely is a lot for larger ones.

So... Basically I don't get the point of this... Everything can reduce the risk of your portfolio, just as everything can increase the risk of your portfolio. I don't see how Bitcoin can only "reduce the risk" or if it does not only reduce the risk, I don't get what is the point of this..

Correlation is cool and all, but it doesn't change the fact that the volatility of this thing neglects that correlation part.

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May 25, 2018, 07:36:24 PM
 #10

as per my tradiing strategy i always try to keep %40 btc in my portfolio for bad scenerios, it would be always good to feel btc power in your pocket.

I agree that bitcoins can really make your portfolio grow because investing on bitcoins can really guarantee you to earn a huge amount of profit and if some of your coins fail then still you can earn some extra cash to back it up.

bitmover
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May 25, 2018, 09:55:08 PM
 #11


That makes sense, but there's something I don't get about this mathematical model... Sure, it can reduce the risk of your portfolio, but isn't it also true that it could just as well lose value and actually increase the risk of your portfolio? If it falls 50% and 3% of your portfolio is in the Bitcoin stuff, you just lost 1.5%. Maybe not a lot for small hobbyist investors, but it definitely is a lot for larger ones.

So... Basically I don't get the point of this... Everything can reduce the risk of your portfolio, just as everything can increase the risk of your portfolio. I don't see how Bitcoin can only "reduce the risk" or if it does not only reduce the risk, I don't get what is the point of this..

Correlation is cool and all, but it doesn't change the fact that the volatility of this thing neglects that correlation part.

When you put all your eggs on the same basket, you may lose all your eggs at once.

Lets suppose you invest all your money in the US Stock Market, SP500.
If there is some kind of crisis like 2008, you may lose 50% of your whole money overnight.
But Bitcoin may not suffer 50%, it may even go up 10 %, or 30%.

Or let's suppose you are a South Korean and you have 50% Korean Stocks and 50% bonds. If a north korean dictator throw a nuclear bomb on Seul, well, you lost all your money probably. Is South Korean riskier than BTC? Ofc not, but you are extremely exposed to one kind of risk.

When you make a mix of different assets and get exposed to different risks, your overall portfolio becomes less riskier.

Modern Portfolio Theory suggests that you make a geographical mix (stocks from many continents), diversify in bonds, real states, stocks, etf, physical assets (like a house), foreign currencies, even cryptocurrency.

The idea is to reduce risk and reduce volatility of your overall portfolio. If you add High volatility assets to your portfolio, they may reduce your portfolio volatility.


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May 25, 2018, 10:43:50 PM
 #12

Well this is an interesting thing since i am looking for new style handling my folios,let me study this first before i give my final argument but as i take a first look this seems to be more liberated way on how to lessen the risk.

And i think you made a long way research regarding this before posting here,and thanks about this one you give some option to generate good income

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May 25, 2018, 11:26:58 PM
 #13

Wouldn't have thought you need a mathematical formula to prove that you should diversify investments. Diversifying within a certain category is slightly better than holding everything in one investment, but the risk is still concentrated. As mentioned in some comments above, spreading the risk across several investment channels, and spreading it even further within those channels to reduce your exposure to sudden moves in certain industries/countries, is a solid strategy. Also maintaining a mix of liquid and non liquid, high risk and low risk, and long term and short term. Related to cryptocurrency, it really should be (considerably) less than 10% of your overall investments, depends on your personal risk/reward outlook whether you want to stretch that a bit further. Also can depend on your current situation. Certain times in life, kids heading off to college for example, require increased liquidity, so your portfolio should reflect that.

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May 26, 2018, 06:14:30 AM
 #14

You are wrong about bitcoin being non-correlated to any other asset.
Bitcoin is correlated to the US dollar.That`s why the the current BTC price is down.The US dollar is increasing it`s value to resist the higher oil prices.Anyway,you are right about the modern protfolio theory.
If you have only 100% bonds,the inflation will eat all the interest gains.Having 20% stocks lowers that risk.

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May 26, 2018, 07:01:04 AM
 #15

I believe in your theory but I cant ignore my own experience of holding portfolio. Many times it happens that bitcoin goes down but at the same time it does happen that many other altcoins goes up and gives more profits. Today also you check it live on CMC that though BTC is down the road then also some of the altcoins are up. They are giving me nice % of profit today. The meaning of this is having the nice portfolio can be profitable at same time! Holding BTC is always perfect no question about it but possibility of getting more profits from the different alts cant be ignored.


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MAJICOIN
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May 26, 2018, 08:48:08 AM
 #16

Yes if we select top five coins for making a portfolio and bitcoin is the first one then it is good because with this the risk factor can be reduced and it is good for every one to keep bitcoin coin in your portfolio.

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bitmover
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May 26, 2018, 10:40:38 AM
 #17

I believe in your theory

This is not my theory but a Nobel prize winner's theory:)

Bitcoin and all other cryptocurrencies have a Very strong correlation.


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marginal
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May 26, 2018, 03:15:38 PM
 #18

Bitcoin is highly volative and it drives me crazy, but I believe it will stabilize somehow sooner or later on market.
timerland
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May 27, 2018, 08:55:05 PM
 #19

Well, diversifying anything will reduce the risk of it. That's just facts.

But I like the statement that bitcoin is independent from any other asset class. And I agree - this is why bitcoin is so attractive as an investment to prospective investors, because it offers a hedge against fiat, stocks, housing, anything, because it's completely independent.

Even though it's independent, it's still a long term store of value because it's decentralized. That's the true beauty of bitcoin as an investment. So yeah, bitcoin can honestly not only reduce the risk of your portfolio, but also make it grow a lot faster in the future as adoption grows.

hualangktsld841
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May 28, 2018, 05:37:16 AM
 #20

I believe that diversification in the field of investment is a basic common sense. The high volatility of bitcoin is accompanied by high returns and high risks, and both real estate and bank bonds are low risk and stable investment. I believe it will bring more possibilities to your investment. If real estate is in crisis, maybe you can make up for losses in bitcoin, which can make your investment more flexible.
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