Bitcoin is the most crowded trade in the world right now according to large fund managers.
That means should sentiment change or risks/headwinds increase there could be a lack of liquidity as people head for the exits and a precipitous price drop.
Matters are made worse by the lack of an options market and the ability to hedge.
For what it’s worth, I think the way many people in my network are thinking about investing in cryptocurrency is flawed and dangerous.
Investing in cryptocurrency is part alternative asset class, part angel investing in emerging early stage technology.
I’m particularly concerned for people who don’t understand the concepts and principles of Asset Allocation and Diversification.
And I’m concerned for people who are invested in cryptocurrency but have no investable assets in the stock market.
I think cryptocurrencies should make anywhere from 1-10% of a portfolio. Potentially 25% if you’re hyper bullish and an active trader.
And if you have FOMO that you missed out on huge returns like Ethereum’s 2178% YTD return according to coinbase, know that:
a) past performance is not predictive of future performance
b) spike ups in price are often followed by long consolidation periods before the next leg up
c) It’s possible to get 20x returns with other investment vehicles as options in the stock market. A long term option (LEAP) far out of the money, on NVDIA purchased in early 2016 has over a 21,000% return, 10x Ethereum this year.
Transparency on my personal approach:
Personally, I am very long blockchain technology but not sure about which technology will ultimately win, thus active trading and agility matters.
‘Buy and hold’ is increasingly deadbeat advice in a world of accelerating change.
I currently have about 7.5% of investable assets in Bitcoin, Ethereum and a small basket of speculative cryptos on Poloneix.
I’ve studied tech trends and macro economics for a decade. About 2 years ago I committed to understanding how to translate this knowledge to financial markets by understanding fundamental and technical analysis across various cycle times and in April I started trading a dynamic long/short options portfolio and I have outperformed the nasdaq by nearly 3x over that time, admittedly by taking a lot of risk with very high beta.
Also published on Medium.