Insights
Short, general pieces on holding digital assets in proportion. Educational only: no product, no advice, no forecast.
What is different about digital assets
Four things set digital assets apart from the asset classes most holders know, and each one argues for proportion rather than against it.
The market never closes. Prices move at three in the morning and on public holidays, so a limit that is only checked in office hours is checked too late. The record is short. The oldest of these assets has more than fifteen years of prices, and most have far fewer; the worst day seen so far is unlikely to be the worst day there will be.
Prices depend on the venue. The same asset can trade at different prices in different places at the same moment, and a thin venue can show no usable price at all. A valuation therefore needs a named, dated source, and a rule for the days when the source fails.
The rules differ by country and change often. An activity that is permitted in one place is prohibited in another, and a change of law can end an activity overnight. Where an asset is held, and under which law, is part of what the asset is.
None of this is an argument for holding more or less. It is an argument for deciding the share first, in writing, and for measuring the risk of that share rather than the capital it took.
Position size is set by the loss, not by the hope
Two numbers describe how an asset moves: volatility, which is how much the price swings in a normal period, and drawdown, which is how far it has fallen from a peak and how long it stayed down. Neither is a forecast. Both are read from the record.
Suppose a portfolio holds many kinds of assets and adds a small weight of one that swings four times as much as the rest. If the new asset moved on its own, a five percent weight would carry about a fifth of the portfolio's risk. If it tends to move with the rest, it carries more. That is the arithmetic behind counting risk rather than capital.
The loss that can be borne is the fall that would not force a sale, break a plan or change a life. It is set before the position exists, in calm conditions, and it is written down. The size of the position then follows from it: a holder who can bear a ten percent fall in the whole cannot hold much of something that can halve.
The gain that is hoped for sets nothing. It is not a number anyone can measure, and it is not there to help when the price is down and the limit is being tested. A position sized to the loss can be held through a bad year; a position sized to the hope is sold at the bottom.
The practical rule is short. Decide the fall you can bear. Measure how much the asset moves. Size the position so that the one fits inside the other, with room to spare, because the record is short and the next worst day is not in it.
Checking the exit before the entry
A position is easy to open and hard to close. Before the first unit is bought, the question is how long it would take to sell the whole position in a stressed market, and at what cost.
Liquidity is not one number. It is the depth of the market on a normal day, the depth on the worst day seen, and the depth when the venue itself is in trouble. A position that can be sold in an hour in calm conditions may take a week in a crisis, at a price far from the last one printed.
The cost of an exit has three parts: the gap between the price seen and the price received, the fees of the venue, and the time during which the price keeps moving while the sale is under way. In a fall all three grow at once.
The useful habit is to write the exit plan with the entry: the size that can be sold within a set time, the venues that would be used, and what happens if none of them is open. A limit written in calm is worth more than one improvised in a fall, because the fall is exactly when no one thinks clearly.
Glossary
- Allocation
- The division of a portfolio among kinds of assets, expressed as weights that add to the whole.
- Asset class
- A group of assets that behave in broadly the same way and are held for the same reason. Digital assets are treated here as one class.
- Concentration
- The share of a portfolio in one holding, one kind of asset or one counterparty. Limits are set on it.
- Correlation
- How closely two assets move together. It is not fixed: in a crisis correlations tend to rise.
- Counterparty
- Any party on whose performance a holding depends: a venue, a broker, a service provider. A counterparty can fail.
- Digital asset
- An asset that exists as a record on a network and is transferred by that network, including digital payment tokens such as bitcoin and ether.
- Drawdown
- How far a price has fallen from its highest point, and how long it stayed below it.
- Drift
- The change in a portfolio's weights caused by prices moving, without any decision being made.
- Exit
- The sale of a whole position: how long it takes, what it costs, and whether it is possible at all in a stressed market.
- Limit
- The largest weight a holding, a kind of asset or a counterparty may reach. Written down before a position exists.
- Liquidity
- How much of an asset can be sold, how quickly, and how far the price moves while it is sold.
- Position
- A holding of one asset, measured by its weight in the portfolio and by the risk it adds.
- Rebalancing
- Returning a portfolio to its chosen weights after prices have moved them.
- Review
- A scheduled or event-driven re-examination of limits and weights, recorded with its reasons.
- Risk
- The range of things that can go wrong with a holding, including those that have nothing to do with its price.
- Source
- The named, dated origin of a price or a fact. A valuation without a source is an opinion.
- Stress test
- Asking what a portfolio would do in a crisis already seen, and in one not yet seen.
- Venue
- A place where an asset trades. Prices differ between venues, and a venue can close, freeze or fail.
- Volatility
- How much a price moves in a normal period. A measure of swing, not of direction.
- Weight
- The share of a portfolio held in one asset or one class, by value.
About these pieces
These pieces are general information written for education. They are not advice, not an offer and not a forecast, and they do not describe any product. The company may hold assets of the kinds discussed. Read the Important information page before acting on anything.
‘The Monetary Authority of Singapore (“MAS”) has consistently warned the public that the trading of digital payment tokens (“DPTs” or commonly referred to as cryptocurrencies) is highly risky and not suitable for the general public.’ (MAS Guidelines PS-G02, paragraph 1.1, 17 January 2022)