Crypto vs. TradFi
And my views on asset allocation
If you have a few minutes, I recommend you to watch this sequence of videos by Numerai founder Richard Craib. To summarize, his arguments are:
Crypto is not a true uncorrelated bet as it used to be, it’s basically behaving as Nasdaq with a higher beta
Bitcoin’s Sharpe Ratio (measure of risk-adjusted return) of ~1.3 since 2013 is good but not phenomenal — and probably will go lower given that most of the alpha is off the table ( i.e. “every idiot on Wall Street has some exposure to bitcoin already”)
I hold two conflicting positions at the same time.
I think Richard is right on the correlation, but I also think there’s a decent argument to imagine that eventually crypto will decouple from the traditional markets.
I think Richard is equally right on the Sharpe ratio argument, but I don’t necessarily think of Sharpe ratio when allocating to bitcoin/crypto (I think of absolute returns and volatility is less worrying because of my allocation strategy).
Barbell
The recent drawdown in every market made me go back to the drawing board on how much I want to be allocate to crypto and risky assets.
My personal view on that is very simple: I use a Barbell strategy.
I’m exposed to risky assets (crypto, illiquid equity) on one end and ultra-safe cash-like alternatives on the other end. Everything in between is a distraction — some risk but with low upside.
The point of the Barbell strategy is to ignore the middle of the spectrum of risk and make very thoughtful decisions about how much you want allocated on each end.
An unintended consequence of it was to bring me more clarity of mind in regards to allocation and risk. Of course, every big drawdown makes you rethink if your Barbell was actually well distributed, and dynamically how do you want to move your assets from risky to safe.
But the main point is that it makes you very mindful of the risks you’re taking. When doing this assessment, I continue to find crypto better than everything else.
See you tomorrow.
