Position Sizing and How to Construct a Crypto Portfolio
So you’ve got an idea for a trade that seems like the best thing since sliced bread.
You are so confident in the trade that you are ready to take out a second mortgage because you are convinced there is no way in the world you can lose on it.
If you feel like this is the case, the first thing you should do is stop whatever you are about to do and read–or reread–this article.
By the end of this article you will understand some basic strategies to help you maximize your returns and minimize your risk.
One of the most important first steps of being a successful crypto investor is to come up with your own set of rules for position sizing.
Position sizing is fancy investment jargon for establishing some sort of system that will help you remove emotions when determining how much to invest in any given project.
As crypto investors, we must be very careful to NEVER, EVER bet the house on any one prospect.
Crypto is a highly speculative investment class and even if we get everything spot on…
… that is, we’ve done all our research and we’ve identified the perfect investment opportunity, and we get the timing perfectly right…
… there is still a chance that the trade could go against us.
The reason we can still not get it right is because crypto is still such a new industry and the majority of the coins being traded today are still largely startups.
Investing in startups is highly risky because so many things can go wrong in a life-cycle of a business from inception until maturity.
For example, founders could have a sudden, unexpected fallout, there could be bugs in the code, or the market could simply not be ready for the project’s proposed solution.
A crypto project could fail for any number of reasons — just the same way startups do.
So in this sense, investing in crypto projects is a lot like venture capital investing.
When venture capitalists invest in promising startups they are investing in the team, their proposed vision, and the hope that they are able to execute on their vision successfully.
Most of all, they are betting that everything along the way goes smoothly and the company wins – that it is, it goes public, or gets acquired.
In crypto we’re betting on the same things. We’re swinging for home runs!
We’re hoping for something to go 10x or more.
However, not every time at bat will result in a home run. We will get some base hits, some doubles, and (of course) we will strike out a few times.
In baseball, we can maximize our chances of getting a home run by maximizing the number of times we go to bat.
In crypto, we do the same.
We maximize our chances of getting massive returns by spreading out our bets in a systematic way.
First, we need to decide how much money we want to invest in crypto for any given time period.
In this example we can use one year as the time period.
It’s not recommended to invest more than 5% of your overall yearly investment budget in crypto.
So, if I plan to invest a total of $100,000 this year across different asset classes (stocks, bonds, mutual funds, real estate, etc.) then $5,000 is the MAXIMUM amount I would consider putting into crypto.
Next, I decide how much time I have to spend researching projects and executing trades.
I personally only have time for about 1-2 trades a month. Crypto takes a lot more time and focus to execute a trade than it does for public stocks, so you need to account for the extra time and energy required.
But keep in mind for every investment position I enter, I will have to spend time to exit that position in order to realize profits.
For me, my target is to spread my entire yearly budget into roughly 10 investments over a one-year period.
So in this example, I would take the total budget, $5,000, and divide it by 10.
That gives me 10 investments at an average investment size of $500 each for any one year period.
The exact number is up to each person’s individual preferences, risk appetite, how much time they have to trade, and how often they are able to come across investable projects.
But that’s the general idea. Whatever system you decide on, write it down and stick to it.
So why do we do all this work and what can we expect to be the outcome?
We expect that some of our bets will lose a bit or gain a bit and not amount to much change.
We also assume that some will go to $0, or near $0.
But all we need is 1 or 2 of them to go 1000% and we’ll have already made enough to cover all our losses and book serious profits.
This is the same investment strategy successful venture capitalists use to make outsized gains for THEIR investors.
And every now and then, you will hit a rare home run that goes 2000% or more — and those are the ones that will actually make you rich.
But you’ve got to be in it to win it!
Once you have figured out how many investments you want to make, and once you’ve figured out what your average position size will be, then you can get a bit more fancy.
You can start resizing your investment positions based on how confident, or how excited you are for a particular investment.
So for example, one simple way to do this is to break up your investments into three sizes: small, medium and large.
But the key is to make sure your average investment size is still $500, based on the current scenario.
So if I find a really interesting coin, but I have one or two reservations or concerns about it, then I would classify it as a small bet, and risk half my average bet, say $250.
If there’s a coin that I really like and I’m super confident it will increase in price in the near future but the timing isn’t amazing..
And maybe the market just started moving down and there has been a string of bad news, then maybe I would classify it as a medium bet and invest $500.
But lets say I found the perfect investment opportunity and I discovered a piece of information that doesn’t seem to be priced in already, and the market is in full-on bull, I would go big and invest $750.
Notice here the average of $250, $500, and $750 is still $500. So my average bet has not changed.
Now of course there will be small variations and deviations to this.
There may be low periods where you can’t justify making anything more than a small bet for several investments in a row.
There may also be periods where you simply can’t find ANYTHING worthwhile to invest in.
And finally, there may be periods where EVERYTHING starts looking like an amazing investment.
And that is perfectly normal, since crypto is very much momentum driven — when things are good, they are really good; when things are bad, they’re really bad.
But as long as you come up with a set of rules for position sizing – even if it only remotely resembles the example above – and you consciously stick to it…
You will be able to maximize your returns and minimize your downside risk.
In the next piece I will explain how to exit a position once it starts moving up in price.
In the meantime, I hope this helps make you a smarter and more successful crypto investor.
All the best,
CEO / Founder
Crypto Briefing / SIMETRI Research