This is an article about a logical strategy to get involved in crypto without exposing a portfolio to massive risk. On our site it is easy to forget that there are other investments out there, crypto is one asset class among many.
Everyone in Crypto is a Pro Trader
Crypto is still years behind in regulation when compared to traditional asset classes. Yes, we are a crypto based website and community, but we do invite regulation for clarification, as long as it is not overregulation. A prime example of regulation I personally would love to see is that on leverage and margin trading in the crypto market. Non experienced traders can bring on massive risk, mostly gambling with borrowed money, and magnify their trades using leverage. A massive reason why we see such volatility in the crypto market has to do with this leverage.
When a leverage trader loses their bet, they either need to add more funds to bring the trade to equilibrium, or risk losing their initial collateral. While on paper, this doesn’t seem like a big deal, it essentially forces the crypto exchange to sell, or buy to cover that trader’s loss. This is a very big deal. Depending on the direction the trader places their bets (upward or downward price) the exchange will sell or buy assets to cover the collateral. In our case now, we saw a massive liquidation of traders who bet on price going up. Since price went down, they lost their bet, and their Bitcoin (and other tokens), and the exchange sells this on the open market to cover their losses.
So, the hypothetical trader, took their Bitcoin, collateralized it for more trading power, then leveraged this collateral. They not only lose their initial Bitcoin, but they lost all of their trading power AND still owe that exchange money, it is like owing money to a bank. Leverage is a tool for professional traders and should be left for only the advanced and knowledgeable ones. Young teens or adults with no experience should not be allowed to borrow money with collateral, or leverage trade to begin with. Here in lies the problem, with the lack of regulation, we will continue to see washouts, market pumps, market dumps and extreme volatility.
The Role of Crypto for the risk Averse
There I said it, crypto today is extremely volatile, but we already knew this. What role does crypto have for the everyday investor. What role does it have for those who want to reduce risk but expose their portfolio to some of the gains it can provide in the long term. Crypto doesn’t have to be all or nothing. I will be the first to admit that I am overexposed to crypto, I hold too much, I do not hold enough stocks or other assets. I own some real estate, but I have a very high-risk tolerance. A strategy we have not spoken about enough involves your normal stock portfolio, which could simply be compose of mutual funds or lower risk asset baskets. You then sprinkle some crypto exposure into that portfolio, instead of splitting your risk only between different crypto assets.
For example, one might have 70% of their investment net worth in their favorite mutual fund with a few select single stocks. They could have the other 30% of this portfolio in Bitcoin or Ethereum, or a basket of crypto assets. While the crypto is likely to outperform the rest of their portfolio longer term, the stocks and mutual funds assist in smoothing out the volatility of the total portfolio. The same way crypto investors use Bitcoin as a volatility hedge in relation to the total crypto market, investors can use stocks and mutual funds or real estate as a volatility hedge to their crypto exposure. This hypothesis is what can bring crypto to its next level.
Over time more and more old school investors will be adding small exposures of Bitcoin and the like to their portfolios. The more people that do this, the more the mass adoption takes over, and the more valuable these networks become. This is the grand scheme; the long-term fundamental investor does not worry about volatility. For those who bought Bitcoin or Tesla, or Apple 4 years ago would certainly be happy if they hadn’t looked at the value for a few years. I believe it is this principal that will bring crypto to the masses. Blockchain games and NFTs will bring about the usability, the pop culture, and excitement. Crypto exposure will increase as crypto becomes a normal part of the world we live in. When blockchain is in the background of the app on your phone, and you have no idea you are using the technology, but you find the frontend application user friendly and enjoyable, you will have been late to the party. Stay safe out there, remember none of this is financial advice, do your own research, and come to your own conclusions!