Focus Within Diversification?

The Golden Rule

Diversification has always been an extremely critical aspect of effective risk management. I think 2022 has been a prime example of how imperative good risk management truly is, especially within the Crypto world. Legacy investments are not as likely to incur complete collapses, unlike the Crypto sector, which can be a minefield. As you know, landmines are not visible, at least until they blow up.

Having multiple investments “blow up” on you is something you really want to avoid. Apart from doing a significant amount of research, diversification is a key aspect of reducing risk. However, if you really want your portfolio to perform well you have to be exposed to projects capable of significant returns. This is however a two-edged sword, as a high reward generally implies high risk.

This dynamic poses the following question: Can focus and diversification co-exist? For many, it is simply a case of one or the other. However, it is possible to design a relatively strong portfolio in terms of diversification, while still maintaining a relatively strong focus on one or more altcoins.

This all comes down to relativity ratios and understanding the potential upside. I have mentioned that when I am considering an altcoin for significant gains I like to look at projects that are still small, yet stable. This generally tends to be projects that fit into the $80 million to $200 million market cap range. A “successful candidate” also needs to have some decent daily trading volume.

Marrying Risk & Reward

A portfolio that has 1% allocated to a potential moonshot stands to lose that entire 1%. However, if it were to 100X that 1% would cause the entire portfolio to double. Essentially, generating 100% portfolio growth with a fractional allocation. There are many who are somehow blown away by the idea of 100X.

Are you aware of how many coins/tokens managed this return and higher in the previous bull market? Even Cardano, a top-tier coin, generated well over 100X from the bear market bottom to the 2021 peak. The problem is poor portfolio construction when it comes to relativity ratios. Instead of allocating a few percent, investors deploy heavy allocations where risk is inherently present.

Understanding the potential of a project by considering numerous dynamics helps to create a reasonable interpretation of future prices. Taking this into consideration, along with the risk factor will help to formulate a fairly accurate relativity ratio. Getting this ratio right can make a significant difference to your portfolio over time.

Final Thoughts

Putting a lot of thought and planning into the construction of your portfolio can make all the difference. In many ways, many miss out on enormous gains because they have never studied or applied much thought to portfolio construction. An investor can risk 5% of their portfolio by allocating 1% to high-risk/high-reward projects.

Rather, what often takes place is heavy allocation to projects that don’t offer much potential in terms of “real gains”. Imagine if just one of these 1% risk allocations did a 100X, or even 200X. Planning is imperative, and now is the perfect time to be doing it. See you next time!

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