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The risk of not taking enough risk

The risk of not taking enough risk

Any coverage of investing in cryptoassets (usually Bitcoin) will inevitably lead to one thing; the high risk nature of the asset. 

It is too risky, too volatile, too unpredictable for investors. It is too dangerous. Grannies will lose all their money to it. 

Yet we live in an era of easy capital, where most asset classes have been inflated and engorged by over a decade of quantitative easing. The young, in particular, are frozen out of a basic good such as housing. Retirement ages continue to climb. Social care provisions are being eroded, not enhanced. 

So what is really risky? Continuing to live according to outdated guidelines in the hope that the state will hold up their side of the bargain come retirement? Or allocate a small portion of your capital to an unproven and volatile asset class that may potentially offer outsized returns and diversification?

Risk management is crucial. But good risk management must also encompass knowing when to take acceptable risk. Allocating a portion of your total funds to crypto could prove a good decision, depending on your attitude to risk. If the likelihood was 50% that crypto increases by 1000% then any sane person would be willing to take that chance. I believe that those are the sort of odds we are currently looking at, even after the explosive growth of 2017.

A more important question relates to the timeframe for investment. Most research shows that the longer you invest for, the less likely you are to not lose money.

 
 Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1970-31 July 2017

Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1970-31 July 2017

 

This poses a bit of an issue. Crypto moves extremely fast; if a traditional long term investment is considered 10 years + and a short term one under three years, then a long term investment in crypto is likely over just a year (at absolute most), such is the rapid pace of the space. 

The solution, I believe, will be to invest in crpytoasset funds which invest in a basket of the top 20-50 assets. A number of these already exist such as Crypto20 and CombiCoin. Managing individual cryptoassets is time consuming and requires dedication to remain atop of. Investing in an index fund would be more palatable for a regular investor to invest in over a longer period of time. 

The King is dead?

The King is dead?

'Pump and Dumps' and Relex: Spotting the warning signs

'Pump and Dumps' and Relex: Spotting the warning signs

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