Why Owning Bitcoin Reduces Risk
Do you make the mistake of thinking bitcoin is risky?
Working with family offices I learned that risk reduction is the key to wealth preservation.
How do you reduce risk? Step number one is to ensure your assets don’t move up and down at the same time.
Said in another way — risk is largely driven by correlation.
When we look at risk from the perspective of our entire portfolio we find that correlation plays a bigger role in portfolio risk than the volatility of individual assets.
Interestingly enough — adding assets like bitcoin that have HIGH volatility but are not correlated to the other assets in your portfolio actually REDUCES your total portfolio risk.
This might seem like an oxymoron and it reminds me a bit of low fat diets.
It took me years to get people to believe that adding fat to their diet would actually help them lose weight.
‘So you are telling me adding fat makes me lose fat?’
But it’s still important to be wise with your fat choice.
It’s similar with volatility.
‘Yes, you need to add volatility to lose volatility. But avoid correlated volatility. Here’s what needs to be on your plate: non-correlated volatility.’
ELI5: This strange effect is because even though some assets are bouncing around more, they aren’t bouncing around at the same time and in the same direction as your other assets. That makes your whole portfolio bounce around less.
Wall Street’s Budding Love Affair with Bitcoin
Like family offices, there are many people and businesses that pay large sums of money to financial institutions to help them reduce their risk and preserve their wealth.
As mentioned above, reducing correlation is a great way to reduce risk.
When talking about bitcoin note that the CNBC reporter below leads with ‘non-correlated’:
a non-correlated, new asset class with very high returns… there’s an absolute wall of money ready to come towards this market.
Brian Kelly speaks about how to invest in Bitcoin as the cryptocurrency hits a new high. The "Fast Money" traders weigh…t.co
A wall of money is coming indeed.
But it’s not here just yet because the legally permitted instruments (Bitcoin ETFs, Futures, Derivatives, etc) don’t yet exist.
But they are coming:
Once these instruments arrive bankers will make their client’s ears bleed talking up bitcoin’s benefits as a new non-correlated asset class that reduces their risk (while at the same time providing the potential for high returns).
The marketing about the coming Wall Street invasion of bitcoin is ramping up. Here’s another:
I think bitcoin is an under0wned asset with potential for huge institutional sponsorship coming,” Fundstrat co-founder Tom Lee. (source)
Buying bitcoin as an individual today does two good things:
1) It reduces your risk for the same reason the professionals are going to sell it to you.
2) It lets you front run all the folks that have to wait to go through institutions (you still have time to be a member of the pragmatic early majority!)
Another tried and true way of reducing risk is called ‘averaging in’.
Bitcoin can rise or fall dramatically at any moment.
It’s 8/15/17 and the price of bitcoin has risen aggressively recently. While I think there is plenty of more room to rise in the mid-term anything is possible in the short term. It is very common for bitcoin to pull back significantly after big gains. As a result I’d think twice before putting in a significant one-time bet unless you can stand large swings.
An easier, less stressful, and less risky way to get exposure is to buy in slowly.
This is easy to do — just set an automatic monthly buy on Coinbase for X$s or X% of your salary.
It’ll go up (a lot), it’ll go down (a lot) but just forget about it for 2-5 years and watch your risk waistline fade away.
You might even need to buy a new pair of pants.
Disclaimer: This is just my opinion; not advice or ‘investment’ advice of any kind (assuming this is even legally considered an ‘investment’). Do your own research, listen to varied opinions from informed people, then form your own opinions and don’t put any more into crypto than you can afford to lose.
PS > One more step the ‘intermediate’ bitcoin investor should consider if looking to further reduce risk is holding some amount of BitcoinCash. My thoughts on that are here.