What’s the best way to invest in crypto in 2018?

It’s been an absolute hellish first half of 2018 for crypto-investors. The highs of January quickly disappeared, with the cold hard reality of Bitcoin minus euphoria hitting like a post-Christmas flu. But we shouldn’t be too depressed, suggests our CEO, Paul Cliffe, as he explains that diversification can help to subtract from the painful volatility that crypto-assets can bring.

And so the wait continues…….

A lot of our clients are wondering what happened. As much as 50% of their gains have disappeared. This does not lead to happy conversations where I’m heralded as a genius. Quite the opposite in fact. But I’m more than capable of treating those two impostors just the same.

I help our clients to contextualize. They’re still up over 400% on average in the last 12 months, which is around 40 years of stock market performance (compounding) condensed into one orbit around the sun. Not a bad return. Not December 2017, but still not bad.

The majority of our clients are family offices and UHNW individuals, which means that portfolio diversification is easy to achieve. Their portfolios stretch far beyond just crypto-assets. They’re exposed to all traditional asset classes too. The biggest overall portfolio exposure to crypto-assets that we have helped to construct was 5% — a lot more than we would suggest for our clients, but this specific family office were adamant that their under-performing hedge fund assets needed to be reallocated.

So this is all fine for multi-million dollar portfolios, but how about the average crypto-investor? What can they do to diversify?

This falls into 2 separate considerations — how do we diversify crypto-holdings and how do you construct an investment portfolio so that crypto exposure is no longer a major worry?

Crypto-diversification

Diversifying in crypto is not easy — the correlation between most coins is close to 1, meaning they all move in the same direction at the same time. but not all crypto-assets have the same risk profile. For instance, a centralised asset holds a greater risk of falling to zero overnight than a decentralised asset (see e-gold, a Bitcoin forerunner, which was shut down with relative ease by the US government — had bitcoin had the same cetralised authority, it would probably no longer be here). An ICO holds greater risk of failure than an established crypto-asset. Furthermore, an assets position in the market also comes into consideration — Bitcoin and Ethereum are often used as trading pairs on most major exchange, making them more important to the eco-system and hold an implied ‘safe-haven’ status due to this. There are many factors which need to be taken into account when assessing the potential risks of a crypto-asset, with regulatory risk probably the most prevalent at the moment. Below is a non exhaustive consideration of differing risk profiles of some crypto-assets:

So, when creating a crypto-portfolio, such considerations of risk can help to reduce risk (in a very limited fashion — this is crypto, don’t forget) if not volatility.

So far as total portfolio construction goes, you should seek financial advice here so that the portfolio is constructed with the correct mix of assets to match your overall attitude to risk. Many advisers use specially constructed risk questionnaires to establish the correct level of risk you’d be comfortable with.

When we advise family office clients, we usually suggest a limit of around 2% for crypto-exposure. However, it should be noted that 2% of investable assets for a family office can be in excess of $100m.

As an individual with $250,000, we would suggest a top-out exposure of 5% in quality crypto-assets, or if you’re aiming for the ‘Hail Mary’ of ICO exposure too as a way to retire early, we would usually limit this to 2% of total assets.

Please do not misconstrue this as advice (unless you’re a client of ours, then get in touch and we can discuss reshaping your exposure if necessary). Be sure to do your own research when investing in crypto-assets. It can be a scary place sometimes.

Visit us at blockventureproject.com and follow us on twitter to stay updated with how we can help you to manage your exposure to crypto-assets without ruining your life.