Risk & Return Expectations For Crypto

This week we announced the release of a new crypto index strategy that was created to give our wealth management clients exposure to this burgeoning asset class.

There was a lot of work behind the scenes from a lot of different people and organizations to make this happen (read Michael and Josh for more on this).

But now that we have a diversified vehicle to invest in crypto comes the hard part — investing in crypto is not for the faint of heart.

A number of people have been dabbling or hardcore investing in crypto for some time now but there will be plenty of individuals that will be getting their first exposure in the months and years ahead.

This is especially true for those coming from the more traditional wealth management space.

Advisors and clients alike will be dealing with an entirely new asset class that is evolving at a rapid pace. Setting expectations for both risk and reward will be of the utmost importance.

Consider the fact that Bitcoin is up well over 9,000% over the past 10 years. Assuming a starting price of $50k or so right now, that would mean Bitcoin would need to rocket all the way to $4.6 million to repeat that feat over the next decade.

Never say never I guess but it seems like a stretch for the current $1 trillion valuation in Bitcoin to shoot up to more than $90 trillion.

I don’t know what the future returns in the crypto space will be but it’s safe to assume the growth won’t be nearly as high as it’s been over the past decade.

The returns in this space will come from some combination of user adoption, inflows from investors and innovation from the developers.

Your guess is just as good as mine about what those returns will be.

Here’s something I am more certain about when investing in crypto — it’s going to be easier to predict the risk than the returns.

There are going to be crashes and bone-crushing volatility in this space.

Since 2017 alone there have been corrections of 33%, 39%, 41%, 30%, 84% and 62%. And then there’s the current downturn that saw prices nearly 40% from all-time highs in the early hours on Saturday morning this weekend.

This includes a two-day 50% crash at the height of the pandemic-induced market panic along with numerous 20% crashes in a single day.

That’s seven crashes of 30% or worse in the past 5 years alone. In that time the U.S. stock market has fallen 30% or worse just once.

You also have to remember crypto markets never sleep. It’s 24/7/365. You could go to bed with a calm market and wake up in a bear market.

In fact, this very thing happened just this weekend. Friday morning Bitcoin was trading at roughly $57k. Coinbase shows a print as low as $42k by Saturday morning in a waterfall overnight crash:

That’s a 25% loss in the blink of an eye.

Alternatively, you could see 15-20% gains in a single day or a matter or hours.

Think about it this way — Bitcoin has fallen more than 60%, went all the way back to new highs and is now in the midst of a 30%+ correction this year alone. And it’s still up almost 70% on the year!

The moves in most other crypto assets are even more violent.

The thing is you don’t get to see insane returns if you don’t see insane losses and volatility.

Because of their 24/7 nature and inherent supply constraints, this is a feature, not a bug of crypto.

This is why it’s so important to size your allocation correctly and go into this new asset class with your eyes wide open. Setting the right expectations for the potential risk in crypto is far more important than setting the right expectations for returns.

We’re pleased with the way our index strategy was constructed. Yet I’m sure people can and will poke holes in it if they really want to nitpick.

However, the allocation itself, while important, is not going to determine success or failure when investing in crypto.

The perfect strategy you can’t stick with is vastly inferior to the good strategy you can stick with.

This is true for stocks, bonds, crypto or anything else you’re investing in.

Further Reading:
Wealth Management Money is Coming For Crypto

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