How much should you allocate to crypto in your portfolio?
Using 2 variables - the probability of losing your whole investment and your upside target for the investment - the writer discusses what the optimal allocation should be
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THE more bullish you are on an investment, the more of it you'd like to own. After taking into account the risk of things turning out worse than expected, investors with some level of risk aversion would moderate their bullishness, and decide their allocation according to these 2 variables.
In equities, there are academic financial models that can determine an optimal allocation, such as the Geometric Brownian motion that can simulate stock price paths, and is used to price equity options using Black-Scholes.
The problem with using such models for crypto, is that during the asset's short life so far, the price-return distributions do not follow these models.
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