I wanted to share this information for multiple reasons. The main reason being I do not see this being discussed enough in the crypto space. I would argue this is the most important concept for investors to understand before investing in the crypto market.
The Risk Profile of Crypto Assets
Summary of risk categories (in sequential order)
Unsystematic risk is exclusive to a specific asset or industry.
Systematic risk is market wide risk.
Unsystematic risk is also called diversifiable risk. Unlike systematic risk it can be mitigated using different tactics such as diversification. It is important to be aware of systematic risk as market wide events will have an affect on your portfolio. The cryptocurrency market is correlated to the stock market. It is not some investment safe haven that does not react to other markets declining or crashing. Systematic risk cannot be avoided. Most investors simply react to major market events and some will try and predict them.
Every time you decide to purchase a cryptocurrency you are essentially taking on three different layers of risk. Unsystematic risk will always be the largest. The other two categories of systematic risk will compound the risk of your crypto asset. For example; let’s say tomorrow the stock market crashes along with the crypto market. This will immediately have a compounding affect on coins or tokens. The lower risk cryptos have become slightly more risky and the higher risk cryptos have become much more risky. You can see that buy adjusting the unsystematic risk of the crypto assets in your portfolio you can mitigate the risk exposure you have to large market events or systematic risk.
Coin/Token Specific Risk (Unsystematic)
This is a useful checklist that I use when selecting each crypto that I invest in.
Correlation
How correlated is the coin to Bitcoin?
If the historical correlation is close to 1 diversification into this asset will do nothing to decrease your portfolio risk.
Market Capitalization
The lower in market cap a coin is the more volatile (risky) it will be (most likely)
This does not mean you should avoid low market cap coins. However, too much exposure to them is very risky
Tokenomics and Security
What is the monthly or yearly inflation rate (increase in circulating supply)?
Does the supply have a fair allocation to holders? Or is the team and early investors holding a large majority?
Are there any large token unlocks in the vesting schedule?
Is an appropriate percent of the supply being allocated for development and marketing?
Has the token or protocol been audited? Or is there any serious security risk?
Value added
Does the token have utility or is it just for governance?
Is the token a fork or clone of another crypto?
Is the value added marketable?
Is there a long term vision?
Is the token creating value or FOMO?
Competition
The team behind your coin of choice is extremely important.
Is the team trustworthy and capable?
How do they compare to other teams?
Is the token competing in a specific crypto sector (NFTs, DeFi, Oracles, etc.)? Or is it creating something entirely new?
Will this coin still be around in 10 years?
Developing a long term outlook is very powerful.
This list do not cover everything. However, if you use it you will be better off than a lot of other investors I see in this space. In other words, it is a good starting point. If a coin you are interested in does not meet all of the criteria that is okay! I often invest small amounts in coins that do not make the list because I believe they have short term potential. However, if I am investing a large amount I follow this list pretty closely.
In this post I wanted to cover the idea of risk. I can go more in depth on the tactics I use specifically in a later post.
What defines a successful investor?
Success is the realized progression of a worthy ideal.
This is subjective. However, as an investor your must have a plan or ideal to work towards.
Whatever your goals may be, make sure they are realistic or achievable
What are my Cryptocurrency investment goals?
To achieve above market annual rates of return while minimizing risk
To create value for other investors or people in the market
To build and maintain an awesome crypto community!