It is fair to say that every trader around the world is in consensus with respect to recognizing the instability and risk-laden aspect of the cryptocurrency market. The recent Tether-Bitfinex drama caused a lot of chaos in the community, with investors left outraged as Tether dropped in valuation in the market.
Ari Paul, CIO of BlockTower Capital, recently commented on the situation and laid out an explanation about investment risk and how it can be controlled, rather than losing substantial capital.
He stated that the fundamentals of risk and return went hand in hand and they have to be considered as a combined parameter. There was no such term as “too risky,” since the risk can be directly controlled by sizing up the investment, he added.
Ari Paul listed out a situation based on volatility as the annualized metric and designated stocks to have 20 percent volatility, with Bitcoin [BTC] clubbed with 80 percent volatility.
In a calculated trend, if the stocks are likely to produce 8 percent returns in 12 months, Bitcoin can be expected to produce around 40 percent, which implied the investment in Bitcoin was exposed to much “less risk.”
He emphasized on the point that traders had to avoid “uncompensated risk” in the market, where they are not passively holding on to crypto and not generating active trading profits. For example, passively holding Tether would be considered as taking a risk without space for compensation.
Ari Paul stated,
“If you have $50k in savings, putting half of it in Bitcoin would indeed be “too risky” for you. But putting 1% of that into BTC isn’t. Putting 1% of that into BTC probably *reduces* the risk of your total portfolio because it’s diversifying.”