8 Rules for Cryptocurrency Investing: Rule 1 – Know Your Risk Profile


Hi, welcome to this tutorial on
cryptocurrency and blockchain. We’re going to be talking about the eight
rules of cryptocurrency investing, and this tutorial it’s about knowing your
risk profile; rule number one. Okay, so this is gonna be a playlist, or series,
that will cover eight rules of cryptocurrency investing. As I just said,
this one’s about knowing your risk profile. Then we’re gonna have later
tutorials about, ‘There is no easy way to make millions, quickly’, that you need to
‘Understand the market or space, and what you’re investing in’. Number four: ‘You need
to secure your assets, use security precautions and skill up, tech-wise. Rule
number five is, ‘Things will break, and things will change quickly’, in the
cryptocurrency space. Rule number six, ‘Be prepared for extreme volatility’. Rule
number seven, ‘Don’t outsource your own research, and be wary of experts and
gurus in the cryptocurrency space – including myself! And it will finish with
the capstone tutorial, rule number eight, ‘The principles of investments still hold’.
Okay since this is about financial services let’s just go through a
disclaimer. The business AccoFina, and myself the individual, are not giving
personal advice in this video. It is meant to provide factual information for
educational purposes. We do not know your personal circumstances and financial
goals. This general information only and should not be taken as constituting
professional advice. You should seek independent legal, financial, taxation or
other advice to check out this information relates to your unique
circumstances, before taking (or not taking) any actions. AccoFina, and myself,
are not liable for any loss caused, whether due to negligence or otherwise
arising from the use of, or reliance on, the information provided directly, or
indirectly, by this video. Okay let’s get on with this tutorial! Rule number one of
cryptocurrency investing: Know your risk profile. So what is a risk profile, in the
first place? It is your unique investor personality. It helps you manage risk,
while targeting your return, and it does this through
diversification. What we’re saying here is that your unique risk profile will
determine your portfolio asset allocation. Now what’s a portfolio asset
allocation? It’s how you allocate your total assets between the various asset
classes. Now the standard asset classes are cash, fixed interest (or bonds), property,
stocks, and alternatives. And your asset allocation is the percentage, or
proportions, between these asset classes. So how does risk profiling and
cryptocurrency fit together? Well, what we would say is that cryptocurrency would fall
in the ‘alternative investment’ asset class. Now the alternative investment
asset class is characterized by: a specialization of managers, experts and
community. That is, that the people working within this particular asset
class, are normally only in this asset class. Their knowledge is based in this
particular asset class, and doesn’t transfer, or overlap, with the other asset
classes. This is quite unique in regards to alternative investments. So for
instance, if you’re an art dealer (and artwork is an alternative investment) then
you’re probably only a specialist in the artwork space. You don’t normally say,
“Well I’m an expert in artwork, but I’m also an expert in equities”. Secondly,
returns are not correlated with traditional investments. And this is why
alternative investments are often added to portfolios. It’s that many of the other
asset classes are either negatively correlated, or positively correlated.
Alternative investments are normally all over the place! So they can kind of
add some good diversification benefits when they’re not correlated, at all, with
the other traditional investment classes. Thirdly, there’s less regulation, and less
transparency, in alternative investments. You’ll see that there hasn’t been the
long history of government regulation, and community behind it, to create the
more standardized rules, and open transparency, and governance principles,
that we have with some of the traditional assets.
Similar to this, there may be limited (or spotty) historical data. Because these
assets are less popular and less well-known, as some of the other asset
classes, there aren’t the same level of firms and services providing, or
collating, historical data. So, if you can get access to data (it’s often harder) it
may just be a little bit spotty, and not as in-depth and dense, as some of the
other asset classes historical data. And again, because of their specialization
there are unique legal and tax implications. So I’ve given some examples
of the characteristics, where do these kind of apply in the real world? So some
of the other alternative assets, aside from cryptocurrency, would be
commodities. If you invest in commodities like agriculture, or precious metals, and
so forth. Or if you invest in venture capital, or LBOs (which is, ah, ‘leveraged
buyouts’). And these are both types of private equity investments. Also hedge
funds are considered an alternative investments. If you’re investing
infrastructure, such as investing in railroads, or electricity assets, or even
highways, and so forth, they’re considered alternative investments.
And finally, as mentioned earlier, artworks, antiques and rare coins, can all
be valid investments and are considered part of the alternative investment asset
class. All right so let’s get back to risk profiles. Now it’s generally
considered that there are five standard risk profiles. Now these can vary a bit; how
they’re termed, they can often be six, or four, standard risk profiles. But I’m going
with five, with some of the most common names. Now you can be conservative
investor (or a defensive investor). Secondly, if you want a little bit more
risk, then you could be a moderate investor. If you’re kind of in the middle,
in regards to your risk profile, you may be a balanced investor. And also you
could be looking for growth, or a growth investor, if you’re quite risk tolerant.
And finally, you can be an aggressive investor, or have a high growth risk
profile. And that’s where you have more of your assets in the aggressive asset
classes. So does this make sense? Depending on
your unique risk profile, whether it’s one of those five, or a little bit overlapping, or one of your own, you will spread (or allocate) your portfolio across
asset classes, at particular percentages per class. So let’s have an example, here.
A conservative investor may have 50% of their holdings in cash, 25% in fixed
interest or bonds, 20% in property and 5% (if I’ve done my sums correctly) in stocks.
And that would be a very conservative asset allocation, and risk profile. Now, a
high-growth or aggressive risk profile, might lead you (to) holding perhaps
60% in stocks, 20% in property, no cash, 10% in bonds, and 10% in alternative
investments. And that’s just an example of how different risk profiles have
different portfolio allocations. So your risk profile is based on your: ‘risk
tolerance’ and ‘risk capacity’. They’re the two key components. Now risk tolerance is
your mental attitude to volatility, and losses, of your investments. And here’s a
colloquial example, like, are you gonna ‘lose it’ and start acting irrationally
if markets swing wildly? So if the markets dropped by 10% or 15%, over a day
or a week or so, are you gonna find that very, very difficult to handle?
Are you going to be panicky? Irrational? Start selling things crazily? And basically have a
pretty, um, difficult time to keep yourself calm? In that case your risk
tolerance would be ‘low’. Now if you’re more comfortable with wild swings, and
perhaps, less concerned about short term outcomes, and have a long term plan in
place that you confident in? Then you might be able to handle more wild swings
in the short term, and in that case your risk tolerance
would be ‘high’. And it’s important to note: that risk tolerance does change over time,
and with experience. So in regards to cryptocurrency, and my personal
experience: when I first invested in cryptocurrency I was, ah, my risk
tolerance was quite low. I wasn’t sure about this space. I wasn’t
sure whether it was a good investment, or how risky it was. But as I’ve become more
comfortable over time, and had more experience during the investments, and
holding them, and watching the market move, and so forth. That my risk tolerance
has increased as I become more comfortable over time, and with
experience. So it’s not fixed. It does change over time, and with the experience.
Now secondly, is your ‘risk capacity’. Now this is your financial ability to absorb
losses. So for example, if this investment blows up, are you gonna lose your house,
your shirt, and ability to feed yourself and your family? And again here I’ll use an
example, I’ll introduce myself. My risk capacity to lose ten thousand dollars on
an Ethereum investment is very different to Jeff Bezos’ or Bill Gates’ risk
capacity to lose $10,000 on Ethereum. So we have different risk capacities,
because we have different abilities about absorbing particular losses. So
that can determine your risk capacity. And once again, risk capacity can change
over time. In this situation, it’s with life stages and particular circumstances.
So while at one point in time you may have ‘high’ risk capacity because you have
no upcoming expenses, and you see your life stage is pretty stable, with no real
changes in the horizon. Suddenly, you find out that you’re going to have a baby, or
your partner is going to have a baby. And suddenly, your risk capacity lowers. Now
you need that extra cash to plan for the different circumstances with your new
family. So different life stages, particular circumstances, even if you’re
go for a holiday, if you’re planning to go for a holiday or buy a house, then
your risk capacity can change in that case. Suddenly you can’t wait for 20 years for your investments to pay off.
You realize you’ll have to liquidate some assets in the near term, so your risk
capacity will lower. All right! So how does risk tolerance, and risk capacity,
apply to cryptocurrency markets? So let’s look at the risk spectrum of the
different assets we can invest in. Now cash is considered the safest, and least
risky. Then we move up to fixed interest, or bonds, they’re the same thing they’re
just different terminology. They’re considered more risky than cash, but
still quite safe. Following that, we move up the scale further along, we have
property investments. And finally at the top of the scale we have stocks. Now only
after these, ‘one’, ‘two’, ‘three’, ‘four’, then we have ‘five’ and some of the other alternative
investments. Now crypto assets may not even be ‘five’, they may be ‘fifteen’ of the spectrum!
Because what you’ll find is that cryptocurrency investing is highly
speculative, it’s very aggressive. After all, cryptocurrency is an emerging asset
class with a short history. The regulation is little, to non-existent.
The short history means there aren’t very many experts in the field. There’s
not a lot of data, to do quantitive analysis, to work out what’s going on. The
financial infrastructure and intermediaries, are non-existent, or still
just startup firms! It’s a highly volatile market. So even in
just the past week, over a couple of days the market fell about 8-10%. But that would be EXTREME, if it was applied to equities. Losses of that
size, (was) something we last saw in the GFC, ten years ago. Now with cryptocurrency,
those sorts of falls occur maybe three, four, five times a year.
It’s a highly volatile market, both up and down. And generally cryptocurrency
assets pay no income. So while some investors can handle wild swings, handle
volatility, if they have a long term plan, AND are collecting dividends
or interest, or income along the way. Cryptocurrency assets,
generally, don’t pay income. Some do, but the large majority
don’t. Alright, so in conclusion, before deciding if, how much, and what percentage
of your portfolio, to allocate to cryptocurrency:
It’s important that you go in with your eyes wide open, about the market and the
unique skills needed. These types of investments will be different to any; any stock investments, or any FX investments, or any bond investments
you’ve previously made. There are particular skills you will need. There is
terminology that doesn’t cross into other asset classes. It is very unique, and you
have to go in there with your eyes wide open. You’ll have to know how you’ll be
able to sleep at night, considering the volatility. In just the example I gave in
the last couple of minutes: Can you handle, perhaps going a week or
two, and having a large portion of your crypto assets jump up and down …or fall
off a cliff! If you’re not going to have a very enjoyable time living like this,
then it might not be ideal getting involved in this space. You have to know
whether you can handle the volatility. And very, very importantly: Don’t risk
more than you can afford to lose. Lots of people say this when it comes
to the crypto space, but in more technical terms: it’s about using a
reasonable portfolio allocation, for an emerging alternative asset class. The
idea is here, is that if you look at it as an emerging alternative asset class,
what would that normally represent as part of your portfolio? It shouldn’t be 100%, but should it be zero? It’s important to consider your entire
portfolio. And then you’ll be able to better assess what you can afford to
lose, within the whole portfolio, and not just this particular class. And here’s
the final conclusion. Ha, okay, I love those fireworks! Alright,
investing in cryptocurrency is not a binary yes-or-no decision, nor a
one-size-fits-all decision. You don’t simply listen to people saying, “No!
Don’t get involved in that asset class”. And, at the same time, don’t believe
people saying, “Yes, come on! This is great, you should get in on it”. It’s not simply
yes or no. Nor is it one size fits all. So what may work for one person, might not
necessarily work for you. Which again might not necessarily work for someone else, or
your brother, or your sister, or someone in your family.
The idea is: It involves assessing your unique, and individual, risk profile.
And that’s what this tutorial is about! How does cryptocurrency investing fit
into your risk profile? And from there you determine what percentage of your
portfolio, if any (and again, this type of investing isn’t for everyone), to allocate
to this class. And that’s the conclusion. It’s not a binary yes or no. And what’s
good for one person, isn’t necessarily good for all other people. All right, so
let’s wrap up. What did we cover: What is a risk profile? This is your unique
investor personality that helps determine your asset allocation. How does
risk profiling and cryptocurrency fit together? Cryptocurrency is within the
‘alternative investment’ asset class. So we talked about standard risk profiles,
from conservative (and defensive), all the way through to high growth (and
aggressive). We talked what made up your risk profile. Now that was your ‘risk
tolerance’ and ‘risk capacity’. Your tolerance is your mental attitude to
risk, and capacity is your financial strength to absorb risks. We talked about
how risk tolerance and capacity applied to cryptocurrency markets. And that
cryptocurrency markets are at the extreme end of the risk spectrum, and are considered
highly aggressive investments. And then we had our conclusion: That cryptocurrency
investing isn’t a binary yes or no decision, nor a one-size-fits-all
decision. In that it should only form part of a well-managed portfolio, and
whatever you decide is individual to your own unique investor profile. Okay
that’s it! I hope this helped. Best of success! If you enjoyed the video, please
subscribe to the channel. Click on the button that will soon appear. Ah, or you
can watch another one of my tutorials, now. Or if you don’t want to do either of
those, I’d really just appreciate if you gave this video a ‘Like’. Ah, finally, feel free
to comment below if anythings needs clarification, or if you want to just say
‘hello’. Thank you very much for your time, and that is it.

2 thoughts on “8 Rules for Cryptocurrency Investing: Rule 1 – Know Your Risk Profile”

  1. Learn my 1st Rule of Cryptocurrency Investing: 'Know Your Risk Profile'. This is the first of an upcoming series of YouTube Tutorials. Feel free to comment if anything needs clarification, or you want to say 'hello'. And also please visit this Channel youtube.com/accofina. Or you could visit accofina.com, direct.
    Cheers and best wishes,
    Axel.

  2. Hi Axel, have really been learning alot from your channel – thank you, its been a great way to catch up on all these concepts and get a bit of literacy in this area! Appreciate you taking the time to make these, theyre clear and easy to understand. Btw Im glad you like our song. We actually just released a new album with new music video, you can check that out too if you're interested https://www.youtube.com/watch?v=Z6LJLtrBY6w
    Cheers! Matt

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