Crypto Asset Allocation
Coindesk did me a disservice with this blog post:
USV’s Fred Wilson Predicts ‘Big’ Cryptocurrency Crash https://t.co/P8085HlhW1 pic.twitter.com/8rVaudYnlA
— CoinDesk (@coindesk) September 26, 2017
It made it seem like I was predicting an imminent crash which I was not.
But just as bad, it has led to a lot of tweets like this one suggesting that I also said that people should have 10-20% of their net worth in crypto:
Interesting viewpoint: @fredwilson believes #cryptocurrencies could represent 10-20% of the allocation strategy for an informed investor https://t.co/0tphYEQ5sG
— Jean-Michel Pailhon (@jmpailhon) October 14, 2017
What I did say is that “true believers” in crypto might want to have 10-20% of their net worth in crypto assets. For many of these true believers that would be down from 80-100%.
So, what do I think is a reasonable asset allocation to crypto for the average investor?
Well to start, as I mentioned in that blog post, The Gotham Gal and I have about 5% of our net worth in crypto assets, across a number of vehicles; direct holdings, USV funds, token funds, etc. We have a fairly diversified crypto portfolio, likely much more diversified than most folks could do on their own.
I think that’s likely at the high end of what the average person should have, but I also think its not a ridiculous number for the average person to have.
Many endowments, pension funds, etc allocate 3-5% of their portfolio to venture capital. They know its a risky asset but it has the potential for outsized returns. The largest allocation I have seen to venture capital from a big endowment or pension fund is 10%. So that gives you a sense of what sophisticated investors do with risky asset classes.
If you had to pin me down on a number, here is where I would end up:
- young, aggressive risk taker – 10% of net worth in crypto
- sophisticated investor seeking a high performing portfolio – 5% of net worth in crypto
- average investor, slightly conservative, but with some appetite for risk – 3% of net worth in crypto
- retiree seeking to preserve portfolio value and generate income – 0% of net worth in crypto
Hopefully this will set the record straight. It makes me very nervous when I see folks tweeting out “advice” that I did not give.
FRED:We honestly misread that blog post also. We even commented directly when originally posted. Then reread it in context. It was all bunched together.But those promoting crypto-currency with a selling point will misuse or take out of context anything they feel will provide credibility to their position.Welcome to the Billion Dollar VC world with credibility.You should post right after them saying they (the person) are misrepresenting what you posted. Which usually rarely happens. Challenge them on the false narrative. Which you should. Stop having people misquote or misuse your name you have taken years to build into a credible voice.Take action, reclaim your good voice.Is Coindesk a USV portfolio company? Hope not.
I think Coindesk would be wise to publish Fred’s response. It would probably get as many clicks as the original story and (I hope) more people would be more interested in that, if they were interested in the first ‘story’ than what they believe the price of ripple is going to be in the next 72 hours based on a few charts they pull up.It’s easy content for them so it’s a win-win-win for Coindesk, Fred, and readers.
Fred, there are always people trying to misquote and make news out of it. Why fall for it?Next, 10% of net worth is quite conservative. I think the right amount should be in proportion to how much one understands the technology as well as the risks a.k.a doomsday scenarios. For me I’m looking forward to see how Government around the world work together to ban the entire cryptocurrency ecosystem. I believe they have better chance of agreeing climate change and denuke programs. So no, crypto asset is not going away. Its value may fluctuate but definitely will not be gone in this lifetime.
I would disagree. It depends on the alpha you are trying to generate. It also depends on the risk free rate, and expected rate of returns you impute for other assets in your portfolio. Tom Labus is correct, crypto has a higher probability of going to 0 than a lot of other assets-so you better assign the correct risk factors to it. 10% of a $100k portfolio might be assuming too much risk depending on other factors. If you have a wealth advisor that uses Riskalyze.com, you might be able to find out what your personal risk tolerance is. Fred’s is significantly higher than the average investors.
This is to you and the poster above. % of assets invested in crypto is probably not the best metric. % of future / needed retirement assets etc. is probably a slightly better metric (still not perfect obviously). Point being if you have $250k and are 35 putting 10% is different than if you are 65. Lets say you are 35 and intend to retire with $2 million. It very well could make sense to put $100k out of your 250k in there, if you believe in crypto ( I personally think crypto coins are relatively worthless, maybe blockchain catches on as its value for decentralization, but you don’t need crypto coins to monetize necessarily). If you think there is a chance crypto does a 10 x in the next decade (definitely a possibility, while going to zero is a possibility too), then it makes sense to pick up a $1 million in gains, half of your retirement needs. If it goes to zero, then your lost is still easier to make up if you are say putting $25-50k a year away into retirement (which you probably are if you already have $250k at age 30 or 35 socked away). Not fully fleshed out thoughts obviously, but better metric includes what percent of future net worth or future retirement contributions is invested in crypto if you are a believer.
I hear you. But, with crypto there is no indexing which magnifies the risk further. It’s all or nothing on one cryptocurrency. I get some diversification effects from being invested in several crypto’s, but the real effect is each new investment simply magnifies risk, not diversifies it. This means I have to be “right”. I could be totally wrong on a particular stock but if I buy a SPDR, I could still be right.
Good point. But top 5 are like 90% of total value, so relatively easy to split between those 5, and /or can have a rule once one becomes worth $5 billion or more you allocate. So possible to allocate to it. In general I think crypto is way way overhyped, but interesting discussion nonetheless
A large part of my underlying premise is if you believe in crypto as assets going way up (I don’t to be clear), there is a believe that there is asymettrical upside risk. At some point if crypto goes up another 10x, there will no longer be a 10x potential, so doesn’t make sense to just say I will put 10% of my retirement / savings per year for the next decade into it. If you believe in crytpo as an asset I think you have to believe its still way undervalued, which necessitates pulling forward your next decade of investments in it. You will be able to buy stocks / bonds / real estate at relatively similar valuations, but not crypto if its truly going up.
Fred. Thanks for post. Two questions if I may 1) For someone trying to get their head around crypto where would you suggest would be a good starting point. As far as I can tell there looks to be around 17 cryptocurrencies being somewhat actively traded. How to distinguish noise from reality.2) if you could ask for one thing (other than regulatory) around crypto products you see, what would that be? Aka thoughts on how the product could be improved.Thanks in advance.
with great power comes great responsibility, and twitter provides so many people with the power to disregard that responsibility.http://www.newsweek.com/bit…
With exploding values what’s the play when crypto net worth exceeds your desired allocation, rebalance out to fiat?That’s what I think people are finding hard. Getting off a bullet train, albeit one which can make you sick, to get on a slow one, is not easy.
I rotate into new crypto assets if I can find ones I like at “entry level” valuations
Sure but that doesn’t change the overall crypto allocation, that’s just a crypto diversificationUnless money is withdrawn to fiat it’s still on the crypto train. So crypto net worth target remains out of whack.
go and reside in a zero tax haven and play the crypto to fiat and back again game.
True. But I’m loath to go back to fiat with my crypto right now
Exactly my point. Sensible asset allocation goes out the window when you’re on a rocket ship
I think if we got to 10% we would convert some to fiatAlso we are doing this at USV. Taking money off the table is something we’ve always done. Zynga Twitter Lending Club Mongo. Etc
That’s if you’re looking at all of this from a traditional “bubble” perspective. What I think many people don’t realize is that this isn’t a traditional “bubble” like the dotcom, realestate, etc. Those were all investments that were valued in, and “bubbling” in, an existing currency. This is completely different from all of those, because this bubble IS *THE* new currency. Try as hard as the governments will (and whoever else wants to exert their control over the general public), there is no stopping the transition at this point because the cat is out of the bag… The same as there was no stopping DVD, CD, and movie copying, despite the MPAA’s best efforts. Once it was public knowledge and open-sourced, there was no turning back the clock and stuffing the cat back into the bag. The Pirate Bay is still online, the dark net cannot be shut down. This world has been stuck with the same currencies that are susceptible to corruption by governments and the elite (whoever is in control) for a very long time. By creating the internet, DARPA started a domino effect that will change this planet more than it has changed in a very long time. If you think that we’ve seen unbelievable change so far, you better hold onto your hat. The rise of triple-entry accounting (ie cryptocurrency) was essentially inevitable, given the unchecked proliferation of the internet. Oppressive regimes will all eventually fall, unless they isolate themselves like N. Korea, but even that can’t hold out for long unless they completely cut off all communication with the outside world, and that’s pretty much impossible. If we make it through this without gifting this planet to radioactive cockroaches, and we do become an interplanetary species, the only way that oppressive regimes will be able to hold out longer is by occupying their own planet to isolate their people and keep them from learning the knowledge that Professor Yuji Ijiri birthed, and then Senor Satoshi Nakamoto unleashed. Most people to this day haven’t even come close to realizing the significance of the show that we have front seats to. Act 1 is just about over, the story and stage is just about set. After a brief intermission, we will be witness to a story the likes of which only a few people have even glimpsed in their dreams.
deleted, sorry was hacked
You’re in it for the long haul as is evident from your many blog posts. You’re being consistent there.
Interesting psychology wise. It’s similar to ‘can only replace an addiction with another addiction’. I don’t mean to say that buying crypto is an addiction. However if you believe in something and you feel as if you are potentially missing out  by not keeping your hat in the ring (meaning you sell and take profits) then one strategy is to keep in the game by buying something else that is similar. That way you can sleep thinking you are not on the losing end of history and have less of a reason to kick yourself. And in your case buying ‘entry level’ valuations means you can relieve re-live the high of being right. And obviously more chance of a similar great upside.One thing though at your asset level being wrong makes much less difference than someone at a more typical asset level. This is the reason people that are wealthy can take all sorts of risks that others of lesser means can’t even dream of. That is also why they can have outsize gains. Their basic and even after basic needs are met. They are then playing with house money that they can afford to loose. That risk definitely allows for outsized gains no question about it. As an example my entire life I stayed away from stock investing simply because it wasn’t something that I couldn’t control (given the time I had to spend on thinking about it and beating others who knew more). Finally less than two years ago I decided I would be 10% of my money into stocks. I would do this by paying an investment adviser to make all of the decisions (and pay a fee). Well so far with the exception of Under Armour just about everything they bought has gone up. The total gain on the portfolio is about 41% which beats by a little bit what the index would be for the same time period.
+1 wanted to ask that! Especially with crypto since converting profits to fiat is often annoying (all platforms make it easy to buy / hard to withdraw). Basically is there a sell-side version of dollar-cost averaging? From @fredwilson:disqus’s reply, I understand if your initial investment is less than 5% of your net worth, you can continue riding the train rotating into new assets. Thoughts?
a lot of the crypto investors I have spoken with on slack and telegram are like https://uploads.disquscdn.c…
That was funny. I sometimes find these online comics less than funny, as in, meh, but this one was good.
There is a certain degree of risk associated with thinly traded speculative markets. If you are using anything other than cash you can afford to lose, it’s time to reassess your position.Being on the sideline is also a market position.
>Being on the sideline is also a market position.Great point. Like, zero is also a number 🙂 – which people sometimes forget.Talking about zero also reminded me of this fun post (IMO) and comment I wrote about it, on my blog and HN respectively, some time ago:Post:Bhaskaracharya and the man who found zero:http://jugad2.blogspot.in/2…HN comment about the post, in the context of a related thread on Ancient Indian texts:https://news.ycombinator.co…
Thanks for a great post. Are you including investments in blockchain/crypto startups or just tokens themselves? Would love to hear your thoughts on diversification within the crypto sector as well. How does an average investor (non-player in the industry) get informed enough?
Great post. Very interesting. Thanks.
as I mentioned in that blog post, The Gotham Gal and I have about 5% of our net worth in crypto assets, across a number of vehicles; direct holdings, USV funds, token funds, etc.Interesting to note that if your holdings were entirely in BTC your holdings would now be closer to roughly 7% of your net worth based on the gains since you wrote the blog post…. https://uploads.disquscdn.c…
Ok, I think I got it. It’s … “Silicon Valley based angel investor Fred Wilson, best known perhaps for being the first investor in Facebook, recommends that all retirees on a fixed income have at least 75% of their portfolio in Litecoin.” Sound right?
> tweeting out “advice” that I did not give.Welcome to the world of fake news! The flip side of this rot is confirmation that you “have arrived”! So, you are now of interest to the newsies! That is, the newsies, the people who take relatively new stuff and distort, exaggerate, insert lies, omit crucial points, and generally create some “fake” nonsense, all in their effort to get eyeballs and ad revenue, all via their usual, grabbing people by the heart, the gut, below the belt, always below the shoulders, never between the ears.It helps if the newsies are like the “convenient idiots” of the old Communist efforts, that is, people who don’t really know what they are talking about and are dumb enough not to see or smell the rot in their fake output! The reason for this is, if they have any formal education that might have given them some understanding of knowledge, likely they squandered that education on beer, bed, and fictional literature, that is, vicarious escapist fantasy emotional experience entertainment where nothing is objectionable or even wrong! In particular, any of fake news is not at all wrong or even objectionable!Of course I got newsies from a contemptuous, insulting remark from the Bogart character in The Maltese Falcon.Of course, NYC is a world leader in many topics and in particular in fake news due to the formerly revered, highly self-esteemed NYT, the unchallenged, unique, world-class master of fake news and their running dogs, lackeys, and fellow travelers WaPo, Time, ABC, CBS, CNN, MSNBC, NBC, Politico, etc., i.e., the “mainstream media”.Of course, that nonsense is well on the way out of business: On paper it can’t compete with Charmin, and on the Internet can’t be used to wrap dead fish heads.Yes, anonymity is nice and thankfully “All fame is fleeting.”! In particular, the fake news of today will be forgotten in two weeks or less!
It made it seem like I was predicting an imminent crash which I was not.They didn’t say anything about imminent. It’s no different than someone saying ‘scientist predicts earthquake will hit the Bay Area’. That statement has no qualifier as far as time. If it did there would be ‘on Friday’ or ‘in the next year’.What they said:USV’s Fred Wilson Predicts ‘Big’ Cryptocurrency CrashWas based on what you said:I am certain the big crash will happen.And no it doesn’t matter what you said after that sentence. I cringed when you wrote that. I knew that someone would make hay out of it. It’s no surprise and in all honesty you gave them exactly what they needed to write that.So “Fred Wilson predicts” = “I am certain”.You probably could have avoided this by simply saying something like “I don’t know if there will ever be a big crash but of course there could be (as with any investing). Therefore you should….”You can avoid problems by simply peppering writing with appropriate qualifiers. Similar to how I said ‘probably could’ rather than ‘could’. By the way I did cringe when you wrote that.What do I think of the current bitcoin price? I think that there are enough buyers flooding into the market as a result of all of the main stream publicity to sustain it for quite some time. I am basing this on what I see the main stream press is saying and comparing it to the net in the early years. The newspapers and legacy media essentially is what gave the net legs and legitimacy (to their detriment). The fact that Jamie Dimon is even talking about it in the end is doing more good than harm.
I really think it’s important for people to consider the bigger picture here. When a discussion is about asset allocation, it seems to me that the most obvious point which is the least interesting is that the most important thing one can do to mitigate the impact of a ‘big crash’ is to save as much as possible. A crash is going to be a whole lot less painful if you’ve been saving as much as possible (and ideally have an emergency fund) leading up to it.The second question that I wish more people would ask when they discuss asset allocation or portfolio construction is ‘what makes sense for me’ given your goals, current financial situation, employment situation, tax situation, age, risk tolerance (which almost everyone overestimates), cost of living, time horizon, family obligations and values etc. There are some general guidelines to follow which are fine but what makes sense for two people with ostensibly similar situations is likely very different. There is a saying on one of my favorite forums online (www.bogleheads.org) about “there are many roads to Dublin….”Third, one of the things I find really scary about the current interest in investing in crypto-assets is that very few of the people I know who are investing in crypto have spent any time constructing the other 80% or 90% of their portfolio. Or even really investing at all. Regardless of the allocation you make to crypto-assets, it doesn’t seem logical to, even at the high-end, invest so much time and energy into figuring out the granular details of what makes up 20% of your portfolio when you haven’t spent the time figuring out the other 80% which should be some mix of traditional assets (cash, equities, bonds, gold etc) placed in accounts with different tax and liquidity characteristics. Like saving, it may be boring but that’s going to have a much more significant impact on how your life is impacted by any ‘crash’ regardless of how long it lasts and how severe it is. I guess this is an example of the old 80/20 rule at work.Finally, whatever you decide to do, make a commitment that you will stick with it through the inevitable good times and bad and remove the decision making. There’s a lot of discussion about re-balancing, for example, but as Richard Thaler would point out, humans are imperfect. If you casually plan to do something today with a level head, it will easily be forgotten in the best of times or the worst of times. If you don’t have a plan and are just reacting, regardless of what that plan is, it seems to me you are doing yourself a major disservice. Either write down a detailed plan for investing and print it out / save it like you would any other important document, including a saving, re-balancing and investment schedule or have it automatically done for you as much as possible.I guess this makes me a wet-blanket, but remember that for most of us this is real-life stuff. It has real-life consequences and real-life people that you care about can and will be impacted by the decisions you make. So invest, speculate or do whatever you decide on doing with that in mind :)**One note on re-balancing: those who decide on a re-balancing strategy in their portfolio (or even their crypto-portfolio) should keep in mind that there are different ways to re-balance (i.e with new cash or selling winners and buying losers) and there are tax and transaction costs associated. It’s a relatively important ‘detail’ as far as details are concerned.
This is very much real life stuff. But when you have your first windfall in life you may not see it that way. I felt like it was Monopoly money until it wasn’t
We are all too human. I don’t know anyone who had achieved any amount of financial success quickly that hasn’t felt that way, And looking back most of the people can’t believe how dumb they (we) were. With money and in life. Even in situations where someone avoided a wipeout or a near-wipeout, as they gain perspective I think almost 100% of the successful people I know quickly realize on a very deep level it was luck not ingenuity that spared them. As a result, they almost compulsively first consider what could go wrong and how wrong it could go way before thinking about the upside. And that, ironically (or the more painful path of going through it) is what makes many of them successful in the long-run.
How about the scenario of someone who had originally made crypto 5% – 10% of their portfolio, but it rose to be 30%-40% over the past year? Rebalancing is an option, but the long-term tax consequences aren’t very clear and what if one is still bullish on the industry longterm?
this is a very good question and is most pronounced for those at the highest end of the tax bracket where the difference is paying something like 40% on ordinary income v. 20% on long term capital gains.It is further complicated by the state you live in if you’re just talking about the simplest math answer.I would be curious as to what other issues are involved here that determine your real tax rate difference on gains from anyone who has thoughts.I’m also curious how the IRS (and other gov’t agencies that are relevant) treats / will treat crypto-assets that are not stores of value, currencies etc. but which people place a value on (e.g not Bitcoin). I presume it’s the same as gold or a collectible and a sale is a taxable event etc. but there are a lot of weird tax issues that accountants who decide to carve out a niche with crypto and tax lawyers are going to make a lot of money arguing about and consulting on.
I completely agree.One of the things that’s not clear is whether the IRS will require retroactive cap gain taxes if one sells before the final rules are in place, or whether we’re living int he “golden age” where selling might actually be beneficial because the IRS won’t track your cap gains before some date.
First of all I do not think paying taxes should stop people from making the right financial decisions. I’ve seen people hold off on getting liquid to avoid taxes and then have the position blow up on them. Not goodSecond, if you are “playing with the house’s money” I think you can get a bit more aggressive. When I have a windfall like that I like to take 1/3 to cash immediately, keep 1/3 fully invested for the long term, and tightly manage the middle third
What do you mean “tightly manage the middle third”? If you have 1/3 to cash, 1/3 in the asset, what would the 1/3 be used for?
Trading it based on events
Thanks for the answer!
I understand the logic behind your suggestion: I don’t lose anything relative to where I started, I’m able to remain bullish on what I believe in, and am able to make a calculated high risk bet for potentially higher future returns.This makes a lot of sense. Thanks Fred!
also, the mentality that it will always come back with enough time is something to be wary of. Just look at Japanese stocks (which reached a 21 year high last week)…https://tradingeconomics.co…Unless I’m reading it incorrectly you’d still be down about 35% at that 21 year high if you’d invested in the run-up to it and waited for the last 30 years.
Agree with this but how to average people get access to the crypto hedge funds?
That’s tough. For many of them the minimum is now $1mm
Someone needs to create a fund of funds…
thanks for sharing – unbelievable idea
No problem – if you poke around there may be some familiar names as well haha.I should probably add the full disclaimer that I own a small amount of ICN… forgot to do so in my initial response.
That’s tough. For many of them the minimum is now $1mm
It’s an interesting investment strategy and I totally respect those who put their money where their advice is…Still investment uncertain but learning more and more…
Interesting… If more people agree with Fred, we’ll see a move of wealth to the crypto space in the next decades, not years. We are very far away from having 3% of the world wealth in Crypto.
I fit easily into the “young risk-taker” category and I have around 90 % of my assets in crypto. It’s diversified across a number of currencies, but I also plan to move a substantial amount of that to “regular” assets.
Crypto currencies will have more value when they are a part of real world value chains, pun intended. Look to see them in development funding in foreign countries, and as a pay pal like exchange in yet to be developed social networking e-commerce networks. They are not the primary value of block chain tech
I don’t understand people sometimes – having a balanced portfolio is a good thing
I think it depends on your net worth & annual income. If you are early in your career, and your net worth is on the same order as your annual income (e.g. you have $300k total and make $150k) why not give it a higher percent allocation? It has minimal downside (at worst will go to 0, costing you an amount which you’ll make back before long), and maximal upside (at best, might go 1000x, and completely change the dynamics of your life and career). All this especially stands if you work in the space and actually understand the technology / ecosystem.
I see a big decline coming, possibly in November. But will be a good opportunity to buy at much lower prices., not quite half of the current price near 6k.
in a nutshell what’s the winning bitcoin play?
ETA ? 🙂
Spoken like a seer.Let’s see 🙂
Unfortunately I think it’s DIY for now