[Eva]

RISK PARITY QUESTION: How do you factor in crypto into your portfolio by asset allocation or is it easier to just omit and treat it as something outside of your optimal portfolio model as you might a small cash reserve.

Similarly, how about stocks? Don’t foresee selling either bucket off ATM. Combined cypto + stocks are something like 5% of our portfolio so nominal anyway.

Thanks again, wise ones.

[Frank]

Well, there is an episode about that, albeit it that is a little out of date.

Bear in mind that bitcoin used to be about 10 times more volatile than the stock market and be relatively uncorrelated, but in recent years has performed like 3x the NASDAQ (and has had a very high correlation since covid).

So today you would consider it to behave like a 3 times leveraged version of QQQ or a large cap growth fund and proportion is accordingly — i.e., a 5% allocation to it would be like a 15% allocation to a stock index fund.

The real problem with highly volatile assets is that it often does not make sense to try to rebalance them with the other assets.

But you need to have some rules as to when you would buy or sell it.

I would use the new ETFs like IBIT if you are including this as part of a managed portfolio an not just a side interest.

[Amy]

Segregating them in their own separate “sandbox” portfolio is fine.

[Rick]

If you won’t rebalance out of it, to a lesser emotional degree into it, is it really part of your risk parity portfolio??

[Scott]

My (very very very tiny) IBIT is something that is “off the side”.
It is hard to tell if bitcoin is (a) a diversifying asset eg ‘digital gold’; (b) equity-like (ie it is correlated with tech stocks so it trades like a levered position on QQQ), (c) apocalypse insurance for the singularity/Skynet, (d) something else entirely or (e) all of a-d.

In practice it is (again very small) part of my alternative bucket but that is more to simply find a place in the spreadsheet so I guess it’s (a).

[Matt]

I’ve switched some of my retirement accounts to 100% FBTC and seen significant gains.

BTC follows a pretty typical 4 year cycle. Plan to be out of that ETF by late Summer/Fall and 100% VTI for the next 2.5-3 years.

[Patrick]

If I were to add crypto to my risk parity portfolio, I would probably replace a percentage of my gold with an equal percentage of crypto.

Probably 2-3% but no more than 5%.

[Sean]

It’s part of your gambling portion. That’s fine with 5% or so of your total investable assets.

[Danny]

I consider it an alternative asset that hopefully is uncorrelated to us equities in the long run, like gold or anything else.

[Dillon]

Some other ideas to consider… What’s the difference between risk and volatility? Does volatility matter to you when considering a store of value for your wealth over a long time horizon?

Also, do all assets in the “crypto” category behave the same over time?

[Author]

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