Utilizing portfolio selection to avoid tail risks

[Accardo]

Some issues with organizing crypto assets derives from the lists of assets various investors accumulate, this means that the selected assets in the portfolio of other investors changes our own portfolio. Today, I was playing around with this term 'Tail risks' and ended up linking it back to crypto, I found that it encourages investors to be actively available for diversification to manage asset returns, and market returns, it's called tail risk because the problem comes from the tail, take for example an investor who at the moment adds to his bitcoin and eth holdings some amounts of Near, Zec, and Storj (these 3 asset's price falls simultaneously), he/she would record more losses compared to an investor who diversifies immediately to coins like BNB, Solana, or even Xrp with less systemic risks.


This way investors could swim through the crypto market without facing big risks, the word hodl always sticks out its neck when talking about crypto investments but we know that it's not safe to hodl assets other than bitcoin or eth, following the alts market high risks, and low asset expected returns. Also Investors who actively diversify their assets tend to make more profits compared to investors who holding a falling coin hoping that it'll rise back in the future.

Unfortunately, I found multiple complex mathematical variances to these terms tail risks, systemic risks including the law of large numbers, that I couldn't write directly under this thread to help maintain discussion flow, If you're looking out for how to back this up mathematically, Portfolio Variance is a solid way to solve for the variances in a portfolio to attain maximum asset returns, and minimize variance.

[blockman]

Also Investors who actively diversify their assets tend to make more profits compared to investors who holding a falling coin hoping that it'll rise back in the future.

This is not true at all times. While there's the condition about holding those failed coins. Someone who keeps on diversifying could also get into more losses than someone who doesn't diversify a lot. And a perfect example is by simply holding the one and very own, Bitcoin. And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot. As I have said that it's not true at all times, there can be times that it's true and vice versa.

[TastyChillySauce00]

My thought is, diversification shouldn't be a hard rule, diversify if you have found enough good investments, don't diversify if you haven't found any. Forcing diversification on an investment that you're not sure of is bad.

When investing in cryptocurrencies, I never really think about diversifying. I just invested to coins that I think can give me profit because bitcoin already acts like index of the market. Every coin follow bitcoin so diversifying is rather pointless.

This is not true at all times. While there's the condition about holding those failed coins. Someone who keeps on diversifying could also get into more losses than someone who doesn't diversify a lot. And a perfect example is by simply holding the one and very own, Bitcoin. And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot. As I have said that it's not true at all times, there can be times that it's true and vice versa.

Yep, in my opinion there is no such thing as diversification when the alternative for diversification is bunch of altcoins that follow bitcoin's price. If anybody want diversification, try commodities, don't go to altcoin.

[abhiseshakana]

I agree some of your point of view but talking about crypto investment, i think mostly has same common risk factor which mean even we do diversification in our portofolio it may reduce some of the risk, but it does not automatically eliminate tail risk. Example, when global liquidity dried up. it increase correlation between crypto assets. So asset diversification different from the diversification of risk sources.

Based on my experience before choose an asset for investment, i always aligning everything with my investment goals then i will defined risk, horizon, and diversification needs. So diversification not always resulting bigger return because different purpose bring different asset composition. Beside that long term and short term investment can not use same parameter, short term volatility not alwas automatically bad for investor with very long horizon.

[atookz]

In my personal opinion, the use of "tail risk" isn't quite appropriate here. It's not so much tail risk as correlation risk. Tail risk typically refers to rare events like the LUNA or FTX crash.

I do agree with the overall idea though, which is that it's far safer to diversify into assets with less correlation relative to one another than to sink a ton of money into a group of altcoins that move pretty much in lockstep. There are many folks who believe they are “diversified” when their assets all fall at the same time in a market downturn.

As for hodl, I agree altcoins are riskier than BTC/ETH, but I believe this approach depends on each person's risk tolerance. There's no one-size-fits-all answer.

[Accardo]

And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot.

No rational investor would do this, It's much risk to hold a single asset in a risky market. Diversification keeps the eye focused on market movements.

Yep, in my opinion there is no such thing as diversification when the alternative for diversification is bunch of altcoins that follow bitcoin's price. If anybody want diversification, try commodities, don't go to altcoin.

Not all alts are bad, everyday we watch billions of dollars worth of transactions pass the altmarket, which fuels most of the total crypto market cap, alts are where some investors miss out so much in the total crypto market return because they chose to hold a single coin.

I agree some of your point of view but talking about crypto investment, i think mostly has same common risk factor which mean even we do diversification in our portofolio it may reduce some of the risk, but it does not automatically eliminate tail risk.

Diversification won't eliminate variances completely, it helps so much at getting closer to the expected returns of a portfolio. Also there're systemic issues that affects similar coins, when I looked up the 3 assets I used as instances for falling coins, they had issues with restrictions, or technological downtime or change of authority. I see no reason why an investor wouldn't move out of such a coin to another profitable asset, before the losses gets bad, it's actually what's bringing down the price too, some other rational investors are diversifying.

In my personal opinion, the use of "tail risk" isn't quite appropriate here. It's not so much tail risk as correlation risk. Tail risk typically refers to rare events like the LUNA or FTX crash.

The example of LUNA and FTX crash is more of a systemic risk than a tail risk, it got to macroeconomy, tail risks implies a lot on a project, some systemic risks affects some coins alone, the problem could come from the system but targeted to a single coin, which drops the price of specific coins simultaneously. In the absence of broad systemic risks like that of Luna or FTX where everybody gets to lose so much money, curtailing tail risks by moving out of specific bad investments to progressive assets helps investors hit their expected returns, with low variance.

[Hamza2424]

he/she would record more losses compared to an investor who diversifies immediately to coins like BNB, Solana, or even Xrp with less systemic risks.

Adding a project in your portfolio based on the biggest alts like BNB is a huge risk in the first place. Like, I would never add tokens for the long term which are built on these top 10 to top 20 coins' blockchains.

Adding them is already very risky bro. You should go for the main ones, like SOL, BNB, etc. But don't get so lost in the jargon of tail risk. Because BTC is the one that drives the whole crypto market. If it goes down, all alts go down, and if it goes up, all alts follow it.

[Accardo]

Adding a project in your portfolio based on the biggest alts like BNB is a huge risk in the first place. Like, I would never add tokens for the long term which are built on these top 10 to top 20 coins' blockchains.

Adding them is already very risky bro. You should go for the main ones, like SOL, BNB, etc. But don't get so lost in the jargon of tail risk. Because BTC is the one that drives the whole crypto market. If it goes down, all alts go down, and if it goes up, all alts follow it.

It's not for the long term but shifting from the bad performing assets to positive projects, portfolios are mainly for alts, and a single coin can't make one, trades happen from all over the market, bitcoin is not the only coin that fetches money into the crypto market. Investors who are not interested in alts and wants to hold only bitcoin, should have nothing to do with portfolios, those who diversify alts to make expected returns care so much about tail risks.

[ColdLava40]

This way investors could swim through the crypto market without facing big risks, the word hodl always sticks out its neck when talking about crypto investments but we know that it's not safe to hodl assets other than bitcoin or eth, following the alts market high risks, and low asset expected returns. Also Investors who actively diversify their assets tend to make more profits compared to investors who holding a falling coin hoping that it'll rise back in the future.

Unfortunately altcoins looks more promising to many while bitcoin seems to be giving them the headaches.

For altcoins you could become rich over time if you know what to buy and at the right time. But many mistakes this for Bitcoin and that is why they bag alot of gist coins and continue to play the word hodl thinking same strategy works for altcoins.

You have to be selective in your cryptocurrency Investment, not all coins are worthy of your money or risk. I cannot imagine spending such a long time holding a worthless coin and maybe end of the day walk home with nothing.

[alani123]

Crypto assets which purported to have any sort of utility have time and time again proved to fail.

Filecoin, internet computer protocol, Dash, you name it. Coins with supposed utilities ended up amounting to nothing.
Crypto in general has not proved itself as a long term investment.

Only BTC and XMR, maybe ETH have utility but which portfolio manager is gonna want to associate themselves with the "darknet coin"? I don't see many realistic options. Even ETH has big tail emissions for perpetuity.

[Ashawowo(OS)]

Also Investors who actively diversify their assets tend to make more profits compared to investors who holding a falling coin hoping that it'll rise back in the future.

This is not true at all times. While there's the condition about holding those failed coins. Someone who keeps on diversifying could also get into more losses than someone who doesn't diversify a lot. And a perfect example is by simply holding the one and very own, Bitcoin. And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot. As I have said that it's not true at all times, there can be times that it's true and vice versa.

It's dicey, since people who actively diversify can still be actively diversifying into a failed project ignorantly, it's best to have limited productive assets in an investment niche and take more of your diversification outside of it.

 For example, you come into crypto investment and fill your bags with Bitcoin, Eth, Monero and you take your diversification to precious metals and invest in Gold and silver, you can take it further to real estates if you still have good funds and pursue lands and event centers. That's more profitable way to diversify, than doing everything in crypto niche and accumulating more financial liabilities for yourself.

[Cryptomultiplier]

he/she would record more losses compared to an investor who diversifies immediately to coins like BNB, Solana, or even Xrp with less systemic risks.

Adding a project in your portfolio based on the biggest alts like BNB is a huge risk in the first place. Like, I would never add tokens for the long term which are built on these top 10 to top 20 coins' blockchains.

Adding them is already very risky bro. You should go for the main ones, like SOL, BNB, etc. But don't get so lost in the jargon of tail risk. Because BTC is the one that drives the whole crypto market. If it goes down, all alts go down, and if it goes up, all alts follow it.

This concludes why I only prefer to invest in the top coins like Bitcoin and Eth because investors all over the world will always buy into the dip regardless and other altcoins to me just constitute to more uncontrolled losses because it might be quite a headache to monitor all market for these coins at a time when you got real life commitments to attend to.

I would prefer to instead use different hardware wallet to hold my coins instead of diversity into alts as in different portfolios. Perhaps one or two coins like BNB, Eth can be invested in and when the profit comes, it is reinvested into BTC to increase portfolio size. This should give more control of risk under chec, but when it comes to long term holding, BTC and maybe Eth is the best option for me.

[blockman]

This is not true at all times. While there's the condition about holding those failed coins. Someone who keeps on diversifying could also get into more losses than someone who doesn't diversify a lot. And a perfect example is by simply holding the one and very own, Bitcoin. And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot. As I have said that it's not true at all times, there can be times that it's true and vice versa.

Yep, in my opinion there is no such thing as diversification when the alternative for diversification is bunch of altcoins that follow bitcoin's price. If anybody want diversification, try commodities, don't go to altcoin.

Yes, there are other good assets as well that are outside crypto and if someone wants to diversify and don't like to expand in crypto that's where they should look at. Maybe some us stocks, or any other as long as it's not altcoins.

And that's why someone who is consistent and holding Bitcoin more than they diversify earns more profits than of those who diversification so much with coins they think will pump a lot.

No rational investor would do this, It's much risk to hold a single asset in a risky market. Diversification keeps the eye focused on market movements.

I disagree, there have been a lot of investors who did it. The bitcoin maxis, and we can't deny that it was profitable rather than diversifying in different assets. But there's the catch, it's for those who got in earlier than us.

It's dicey, since people who actively diversify can still be actively diversifying into a failed project ignorantly, it's best to have limited productive assets in an investment niche and take more of your diversification outside of it.

 For example, you come into crypto investment and fill your bags with Bitcoin, Eth, Monero and you take your diversification to precious metals and invest in Gold and silver, you can take it further to real estates if you still have good funds and pursue lands and event centers. That's more profitable way to diversify, than doing everything in crypto niche and accumulating more financial liabilities for yourself.

That's the ideal type of diversification when you know where you're going to go next. Because many investors are just throwing their money on other assets without them knowing wholly what they do and as long as they are following the advise of diversifying, that's what they do which IMO is wrong.

[lombok]

It's dicey, since people who actively diversify can still be actively diversifying into a failed project ignorantly, it's best to have limited productive assets in an investment niche and take more of your diversification outside of it.

 For example, you come into crypto investment and fill your bags with Bitcoin, Eth, Monero and you take your diversification to precious metals and invest in Gold and silver, you can take it further to real estates if you still have good funds and pursue lands and event centers. That's more profitable way to diversify, than doing everything in crypto niche and accumulating more financial liabilities for yourself.

Distributing of money in one sector of the economy are equivalent to the fatal financial weaknesses being accrued. The purchase of dozens of similar projects regularly is likely to leave junk assets that drains the value of wealth since a collapse in one ecosystem is likely to blow up complete portfolio in real time.

Logical actions rest on autonomous allocation of funds in the real sectors. The asset backed securities, which entail combining chosen crypto assets and physical gold and commercial property, would enjoy considerable protective measures, protecting the value of capital in the event of market crash.

[Accardo]

I disagree, there have been a lot of investors who did it. The bitcoin maxis, and we can't deny that it was profitable rather than diversifying in different assets. But there's the catch, it's for those who got in earlier than us.

The early birds did build up profits from bitcoin alone that's true, but we're focused more on managing a portfolio than holding a single coin, I agree with Ashowowo, regarding moving into other assets like Gold, that's for investors who are not fully inclined with switching through different altcoins.

[blockman]

I disagree, there have been a lot of investors who did it. The bitcoin maxis, and we can't deny that it was profitable rather than diversifying in different assets. But there's the catch, it's for those who got in earlier than us.

The early birds did build up profits from bitcoin alone that's true, but we're focused more on managing a portfolio than holding a single coin

But you said that no rational investor would do that where in fact that there have been the early investors who did it. And that risk of holding a single coin was worth it for them but yes, that's one advantage of it because they were too early. Yet, it's never too late.

I agree with Ashowowo, regarding moving into other assets like Gold, that's for investors who are not fully inclined with switching through different altcoins.

That is the better choice if someone isn't fond and impressed with altcoins. Even I, I am trying to limit myself from investing into altcoins. Because when we say that, it could be random altcoins but it's okay to invest into some of it as long as you know that they're just fine to hold.

[adultcrypto]

Diversification in cryptocurrency can be devastating if you are not careful. Beside bitcoin, how many of these assets are worth holding for long? Check the records and see how many of these altcoins survive 10 years, then you will understand that diversification can ruin your portfolio rather instead of earning you more profits. If you are lucky to get one coin right, I mean invest in a coin that will pump so hard, you will be in profits but because of the nature if altcoins, such pumps are hardly sustainable and you may hold and the founders dump on you and move on. i still prefer holding bitcoin a lone and let diversification be into other sectors.

[Crypto Library]

I personally would say that to completely avoid tail risk, we need to focus all our investment funds on Bitcoin only, meaning there can be no driver specification here.

Even Ethereum was a very successful Layer-1 coin, but even after that, we have already seen a bad bull season, although it has not experienced a major event like tail risk.
Again, if we talk about BNB, it is difficult to say that it is not subject to trail risk because it is a CEX backed coin, so it would not be logical to rely completely on it or hold a big fund on it. 
What I really mean is that even with diversification in the top 10 coins, trail risk cannot be avoided. Here, we may have to use a signal tool to avoid trail risk, which will give us a signal when we start dumping 30%+, but it would be better to use tools like stop-loss. But I don't know if this is possible on DEX so I have created a topic to find out.

[abhiseshakana]

I agree some of your point of view but talking about crypto investment, i think mostly has same common risk factor which mean even we do diversification in our portofolio it may reduce some of the risk, but it does not automatically eliminate tail risk.

Diversification won't eliminate variances completely, it helps so much at getting closer to the expected returns of a portfolio. Also there're systemic issues that affects similar coins, when I looked up the 3 assets I used as instances for falling coins, they had issues with restrictions, or technological downtime or change of authority. I see no reason why an investor wouldn't move out of such a coin to another profitable asset, before the losses gets bad, it's actually what's bringing down the price too, some other rational investors are diversifying.

I agree that no need to HODL until it crashes for altcoins that facing fundamental issues and diversification can reduce specific risk. But change to other asset may cause we face another phase of buy high sell low repeatedly because we only know that an asset has already outperformed other asset in the past, How we know that the asset will be more profitable in the future? Thats why i ting will be wise if we determining the overall investment strategy then buy asset with match with our strategy. So do not sell asset simply because price dropped or chasing price performance, sell it when the fundamental reasons when you buy it are no longer valid.

[yhiaali3]

I do not like getting into complex technical mathematical details. However, I generally view asset diversification as beneficial, and diversifying investments is essential Because this contributes to increasing profit opportunities and reducing risks.

Even with some losing assets in the portfolio, The chances of profit will be greater with a single asset in the portfolio. Only Bitcoin can be exempted from this rule.