An innocent DM "How do you handle risk in your portfolio given you keep buying £20k slugs of #btc?" generates three to me deep questions which are not typically CT material. What is risk? What is a portfolio? What is your position size?
I learned risk at the feet of Peter L Bernstein in the 1980s. Sitting in front of a huge tank in the Monterey Aquarium, Peter suggested we had conducted a sophisticated risk analysis before joining the dinner. We had considered what would happen if the giant glass tank behind
his head exploded disgorging various sharks of varying size and presumably appetites onto our laps. Now we had evaluated inter alia the design issues of the tank, the half life time of survival of a beached shark, and the value of our clothes were they to be soaked....
Of course we hadn't. We had trusted the Aquarium and assumed they had done their risk analysis. The same with investment management. If you give your portfolio to a professional money manager you expect to be able to sleep at night! But crypto self managed is different!
We can only blame ourselves it it all goes a politically incorrect 't**s up". So how much risk do I take? Well I could afford a bit of perhaps 7 or 8% at my total investment portfolio level. Another big word 'portfolio'. We used to do "window dressing" in the day when I was a
professional investment manager. Depending on the regulatory environment, we would hold back some profit and use it to mitigate the difficult sponsor review meetings of the future. I don't mean we lied about portfolio value (!). I mean we sometimes held success stories back for
rainy days. Robin was my rep in a Middle Eastern state. He lived there. To him risk was different coated to me in London. Robin was find of reminding me that I got on a plane after the quarterly review meetings. He lived there and thel locals all practiced swordsmanship!
My sponsor today is my wife. My potential pain is a function of disappointing her and the grief that might ensue (!). So I manage her expectations just as I managed Robin's sheiks. She thinks our portfolio is worth less than it is. Thus if all my crypto evaporated over night
and the portfolio took a minus 7 or minus 8 percent hit (not bit, see above) she would still think we were doing fine. But wait. Somewhere else I have admitted I was 50+ percent exposed to crypto.... Aha, well she thinks the portfolio is worth X (her expectation of value) which
is a modest amount higher than it was at inception (24 September 2020). In reality it is about 40 percent above that. So I can ACTUALLY afford a 47 percent hit to my portfolio and still not have pain. It is not coincidence that I used to take big bets in the first months of a
6 monthly meeting cycle to my macro clients.... Back to the problem at hand. We have kind of nailed risk. I set the value of #btc and #eth to zero and value my portfolio. Will my wife be upset? Will the bank demand money - how geared am I? Well that harder. Some of my crypto is
bought on tick so I might in that scenario have to sell some precious metals to repay my loans. But they are either 6 month or one year maturity and none are borrowings against crypto. And if crypto went to zero the macro player in me says gold will rise in value...
If all else fails I have a slug of unrealised profit in the trading account which I can apply to funding loan repayments. So no LTCM or Margin Call risks (unless all assets collapse in which case I will be using my 3D printer to make guns and the problems will be different)
So you can see there is a portfolio of gold, silver, platinum, long commodity futures and a low risk non-crypto hedge fund as well as good old diversified equity index funds. So I can take 50 percent crypto risk
The last point is bet size. I don't look at my stack as a stack. I think of it as a linear combination of separate decisions taken at separate times. Thus I can look back in my note book to say December 21st last year and recall from my notes why at that time I bought bitcoin
My bet size is £20,000. Less than that is pointless on a £4m total (liquid plus illiquid) portfolio. And each bet has to be recorded. And doing two bets in a day is contraindicated. Discipline at all times.
HODL but look at the life consequences if crypto goes to zero. Remember Robin and the swords. And the shark in the lap scenario!
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