In 2017, as crypto mania escalated, we witnessed extreme cases where individuals decided to make huge bets on bitcoin. Some liquidated all their assets and invested their life savings. Most of these investors were subsequently gored by the same bull that had led them and then rekt during the ensuing bear market of 2018. Knowing your risk appetite and understanding trading psychology are essential before investing in cryptocurrency.
Also Read: Back to Basics: What Is Money?
Irrational Exuberance Is All Part of the Cycle
The crypto market is still young, and so volatility is part of the game. Before entering for the first time, it is important to be aware that the market is prone to the phenomena of irrational exuberance.
Diversification is a key part of risk management. As the saying goes, don’t put all your eggs in one basket, which raises the question: how important is it to have exposure to a range of assets and cryptocurrencies?
It is worth diversifying your investment holdings in order to mitigate risk. The modern portfolio theory (MPT), a hypothesis put forward by Harry Markowitz, a Nobel prize-winning economist and author of the classic 1952 article “Portfolio Selection,” states that by diversifying assets you will minimize risk and get the mean. Markowitz’s research has also shown that investors can assemble the perfect portfolio.
MPT is a mathematical framework for building a portfolio of assets so that the expected return is maximized for a given amount of risk. The mathematical framework MPT has been applied by a number of groups. Recent research by the Bocconi Students Investment Club at Bocconi University in Milan showed that applying the MPT framework to crypto beat all other portfolios, at
