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04 Mar, 2019, 09:21 PM 4 Print out
Kenneth Hearn

Fund Manager

Warren Buffet and many of the great investors are synonymous for their long-term approach to investment. Investing in the blockchain and crypto currencies requires a similar approach. In our previous post found here, we have shown that historically investing in bubbles 85-90% from its highs is good place to start especially when the entire asset class is experiencing increased momentum in terms of regulation, development and institutional investment.

We conclude that this asset class will be around for the foreseeable future and therefore building exposure to crypto currencies will provide significant long term returns to your portfolio. Furthermore, these returns are unlikely to be correlated to any other asset classes.

Here is a question we often receive:

“I see the BTC price is coming down should I wait a bit longer before I get in?” OR “The BTC price has gone up a lot recently should I wait for it to come back before I get in?”

There should be no illusions here — this is a volatile and uncertain market. This is often the case for burgeoning industries with high potential growth trajectories, and it is for this reason you want exposure to it in the years to come.

Our analysis shows the most pragmatic strategy is to “average in” to your position over a few months or even years. This is a long-term game and it is much more palatable to ease into the market. We think establishing a meaningful position over a few months and then continuing to build on this position is a good strategy in the current environment. This way you have some skin in the game if the market starts to run and if it pulls back or corrects you have some fresh powder to continue to gain exposure at lower levels.

The result is that both price movements, up or down, keep you in the right head space for long term investing.

What does “averaging in” look like? Rather than investing everything at once, at one price, look to enter the asset class gradually. Instead, break up the investment into smaller chunks.

It is extremely difficult to time the bottom of the market perfectly however this process makes the entry more digestible and less stressful.

Once your portfolio exposure to cryptos and the blockchain has reached your defined risk appetite, it’s time to enjoy the ride. This is 5-to-10-year investment you are making at least, therefore, it is important to be actively patient. This means make rules to only check in a sane amount of times during the day/week/month/year whatever it is that keeps you in the best emotional head space to maintain your investment approach.

Next question: How much should I invest?

Allocation depends on the fund mandate or the individuals risk appetite. A small allocation in cryptos can have a significant effect on the performance of a diversified portfolio, with very little effect on the downside if risks materialise. However, given where the crypto market has come from (down c.85% from its highs) we suspect the downside limited. This contributes to further limiting the downside risks and points to potentially higher allocations compared to a market that has already shown significant amounts of growth.

The potential for growth is still enormous with crypto assets representing less than 0.2% of the global asset base. The potential returns present a significant asymmetric risk return payoff profile.

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The high potential growth combined with cryptos’ uncorrelated price behaviour with global indices makes it an attractive asset class in one’s portfolio given its potential alpha generating capacity. Even a small weighting in crypto assets will create material upside, with negligible portfolio downside risks.

Here are our suggested allocation categories:

  • Low growth / capital preservation: 2-3%

  • Moderate risk / Balanced: 4-6%

  • High risk / Aggressive: 8-10%

Final question:

What is a good strategy to average in?

As mentioned above, a good strategy is one that keeps you in a good mental state. However, here are a few good tips we can suggest:

1) Buy the dips – in any growing market volatility comes naturally. The market may move upwards for consecutive days and then retract very quickly back to previous levels (like we witnessed this past Sunday). These dips present good buying opportunities during your incremental averaging in periods.

2) Define your average in period and stick to it. We suggest an average in period of between 12-18 months. The recent Bitcoin bear market experience since January 2018 is now the longest in its history – this should be noted when defining your average in period.

3) Defining your price entry points can also assist if “buying the dips” does not suit your investment style. Bitcoin has had some significant technical levels both on the way up and the way down that one can use as entry points. These are: BTCUSD 3500, 4000, 5500, 6000 and 6800. Generally, one would want to see these levels broken through followed by the market settling at these prices on the way up.

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