Preparing for a Crypto Bear Market?
What is a stock that drops by 90%? A stock that drops by 80%, then gets divided by two. This pun emerged in the internet bubble, and might well hold true for crypto in any bear market. Not reading in the tea leaves, just planning that’s all!
For most traditional investors, a crypto bear market does not matter. At best, crypto allocation represents 5% of traditional portfolios. If anything, a crypto bear market would be a boon for trad-investors, allowing them to build up a position at discounted price.
However, considering that some crypto went 100x and more in FY21, for some lucky web3 dabblers, the bulk of their bags is now placed in a few single coins. While they got significantly wealthier in the process, they have an urging incentive to diversify away in order to strengthen the basis of their wealth. Any bear market would be a devastating psychological blow, not to be down-played. Where do you start?
Well, the perspective of switching from an investment with several Xs potential for 1x + yield is probably not the most enticing, but a rather sensible one for part of your bag. You can surely diversify across protocols and tokens within crypto, or buy NFTs as a degen diversifying play, or switch to yield farming. Chances are that you may want to do a bit of all that and more. What game plan did we use ourselves for that?
First, we ranked assets in terms of risk-return potential. Tokens HODling, and degen yield farming appear at the extreme end of the risk spectrum, considering higher volatility, recent nature of the protocols involved, and higher regulatory risk. We introduced an asset class under the name of stabilized dollar yield, which is any yield farming strategy with a stablecoin asset base, and leveraged returns. The latter is probably the best of both DeFi and Tradfi world, considering mid-teens return expectations, combined with the downside protection of a stablecoin asset base. In our mind, this is an ideal substitute for part of bond exposure, albeit at a higher risk.
For stabilized dollar yields, the return expectations are between 9%, for straight-out stablecoin staking, and 30% if you add selected leverage through better established protocols. A medium-term proxy of 15% is probably a decent ambition. This is a winning asset class, not only within DeFi, but also as an alternative asset class for hedge funds.
For someone who would have been exposed entirely to crypto HODling, here is a suggestion of a portfolio with better risk diversification across a wider spectrum of assets. This should provide de-correlated returns, and stronger resistance under various scenario.
Such portfolio should deliver a blended return of 15% per annum, with far less concentration on a single asset class.
The silver-lining in portfolio management is to look at it regularly, at least on a quarterly basis, and rebalance positions if necessary. Those who are not ready to spend nights and days thinking about and tweaking their exposure, might want to delegate part or all of it. A resulting piece of mind that is, combined with a sparring partner able to look across and advise on your overall net worth.
About 360 advisory LLC
360 is a registered investment adviser based in Boston, MA. It advises and manages assets across a wide spectrum, including crypto. https://twitter.com/930AM2
