There’s are different types of risks to consider which is catastrophic risk, system risk, and a position risk. The regulation space is evolving rapidly and what you can trade in one country from one month to the next can change. The future of particular tokens or parts of the market can also change over time. You need to be cognizant and be nimble with your strategy and portfolio and get out if the market turns down. It’s an immature market so there’s a lot of market shock and potential. We’ve seen some sudden declines so think carefully about your risk profile and catastrophic risk tolerance.
If I think about my whole portfolio, I want to be able to trade the next day and still support my family no matter what happens or any conceivable event happens. That’s my threshold of what catastrophic risk I’m willing to tolerate. When we talk about crypto, I’m not putting all of my assets in that. However tempting it is or how great the returns are on the systems I’m developing, they’re just a part of the portfolio. That’s important because people see the dollar signs and go all in, and particularly a new trader with little experience, that’s dangerous. Then you combine that with a 10 or 50 leverage that the exchanges seem to want to give you, and instantly people are just blowing up.
You need to also think about the exchange risk. I’ll never put all my money on one exchange since I am trading actively, so I can’t use cold storage because I’m in and out of the positions reasonably quickly, and that’s a bit cumbersome. But to protect me a little bit there, I’m using multiple exchanges on the exchanges that offer leverage. I’m putting some of my assets on there, using leverage, and keeping some cash separate from the market. That’s a way of catastrophic risk protection.
The second part of risk management is the systematic risk of your systems failing. This is important because the market is evolving rapidly, and we are seeing new participants entering. ETFs are coming, and there’s broader acceptance, so the nature of this market will change over time. You need to have a broad portfolio of systems so that if one of them fails, you can close it and keep trading with the others. You need to monitor those closely so backtesting weekly and evaluating. Ask yourself “are the stats doing what they’re supposed to be? Is this behaving as I think it should, given the market conditions? I’m not trading one system. This morning I ran six, and I’m constantly developing new systems. So my goal is to keep building that portfolio of trading strategies so that when one fails because the market dynamic shifted a little bit, it doesn’t matter that much.”
The last one is the individual position risk. You can’t afford to get married or fall in love with one position in this market. Some people would say, “Oh, this is going to change the world. And this token is going to revolutionize everything.” And maybe it will, but trying to call it now is like going back to when the automobile was first invented and saying that it would be Ford and General Motors that survived. Who knew, right? No one knew, but there were hundreds and hundreds of car companies. Same situation again with aircraft. When the aerospace industry took off, the same thing, the massive proliferation of people trying to crack it and change the world. And then same again with the dot-com. Most of those aren’t here now either.
Its probably the same with crypto, we just don’t know which ones will succeed. If you buy one and heavily concentrate your portfolio with a couple of tokens. They happen to be the ones that change the world. Congratulations, you’re probably going to be a billionaire. But you’ve got to think “what if I don’t?
What if I don’t pick the right ones? What if the five I pick are the duds, and I end up with nothing?” My approach to trading is I want the maximum probability of a particular outcome, not maximum profit potential with a small probability. I’m much more interested in a degree of certainty about what results I get. Therefore, a portfolio of systems and trading a portfolio of instruments with a very low reliance on any one ticker is what gets you there