Proportion before price

Why proportion

Most of what happens to a portfolio over years is decided by how it is divided among kinds of assets, not by which single asset was picked. Digital assets are one kind. For some holders the right share is small; for many it is none. The decision is a proportion, and it comes before any price.

The same discipline that applies to any asset class applies here with more force, because the asset class is young, moves fast and has a short record. A method that works when prices rise and still holds when they fall is the only kind worth writing down.

Three beliefs

Judge the whole, not the part

No holding is understood on its own. What matters is how it moves with everything else that is held, in ordinary times and in a crisis. Assets that moved apart for years can fall together in a week; a portfolio that counts on them moving apart has a risk it has not counted.

Size by the loss, not by the gain

The fall that can be borne without being forced to sell is the number that sets a position's size. It is set first, in writing, in calm conditions. The gain that is hoped for sets nothing: hope does not help when the price is down and the limit is being tested.

Count the risk, not the capital

Capital is spread by weight; risk is not. A small weight in a volatile asset can carry a large share of the portfolio's swings. Measuring each holding by the risk it adds, rather than by the money it took, shows where the exposure really sits.

Allocation, in four parts

Each part is a question a written policy answers before any position exists.

Drift and rebalancing

What it is. Weights drift as prices move: a holding that was five percent can be ten after a strong year, without anyone deciding so. Rebalancing is the act of returning to the chosen weights.

What goes wrong. Drift is quiet. A portfolio that was never meant to hold ten percent of something now does, and the risk it carries has doubled without a decision. In a stressed market, rebalancing may be impossible at a sensible price.

What a policy covers. The chosen weights, the band around them that triggers a rebalance, how often weights are checked, and what is done when the market will not allow a sale.

Limits in writing

What it is. A limit is the largest share one holding, one kind of asset or one counterparty may reach. It is set before a position exists, not after.

What goes wrong. Limits set during a rise are generous; limits set during a fall are panicked. Neither is a policy. A limit that lives in someone's head is not a limit at all.

What a policy covers. Each limit, who may change it, how a breach is reported, and the rule that limits are written in calm conditions and reviewed on a calendar.

Markets and regulation

What it is. Digital assets trade on many venues, around the clock, under rules that differ by country and change often. Where an asset trades, and under which law, is part of what the asset is.

What goes wrong. Prices differ between venues; a venue can close, freeze or fail; a rule can change overnight and end an activity. Correlations rise in a crisis, so the diversification counted on in calm times is weakest when it is needed.

What a policy covers. Which venues and which jurisdictions are acceptable, how a change of law is reviewed, and the assumption that in a crisis everything may fall at once.

Sources and review

What it is. A price is only as good as its source. A valuation needs a named, dated source and a rule for assets that have no reliable price.

What goes wrong. Different venues give different prices; a thin market gives no price at all. An allocation made on last year's facts is a different allocation when the facts change.

What a policy covers. The sources used for each asset, how they are checked, and the events that trigger a review of the whole allocation rather than waiting for the calendar.

Risk assessment, in five steps

The steps run in order, and the last one runs forever.

Naming the risks

Risk is more than price. Whoever holds an asset can fail; the asset can be lost for good; the venue can close; the law can change. Each risk is named before it is measured, because a risk that has no name is not being watched.

Measuring the loss

Volatility is how much a price moves; drawdown is how far it falls from a peak and how long it stays down. Both are read from the record, and the record of digital assets is short, so the worst day seen so far is treated as a floor, not a ceiling.

Checking the exit

Before a position is opened the question is asked how long it would take to sell the whole of it in a stressed market, and at what cost. A position that cannot be sold in a bad week is larger than it looks.

Testing under stress

A position is tested against the crises already seen and against events not yet seen: a venue failing, a rule changing, a correlation jumping to one. The test asks what the whole portfolio would do, not what one holding would do.

Reviewing the limits

Limits are reviewed on a calendar, and sooner when the facts change. Whoever watches a limit should not be the one who decides the position, so that a breach is reported by someone with nothing to defend.

Governing a framework

A framework is only as good as the way it is kept. Four things keep it: a written policy, so that every rule exists outside anyone's head; a calendar, so that reviews happen without a crisis to prompt them; a separation between the people who decide positions and the people who check limits; and records, so that every decision can be read back with its reasons.

None of this makes a loss impossible. It makes a loss a known size, taken on purpose, and noticed when it arrives.

What this framework does not do

• It does not forecast prices, and nothing on this website is a forecast.
• It does not pick assets. It sizes them.
• It does not promise an outcome. The whole amount held in digital assets can be lost.
• It does not describe any product or service. It describes a method.

Risk notice

Digital assets are highly volatile. Their value can fall sharply, or to zero. The full list of risks is on the Important information page.

‘The Monetary Authority of Singapore (“MAS”) has consistently warned the public that the trading of digital payment tokens (“DPTs” or commonly referred to as cryptocurrencies) is highly risky and not suitable for the general public.’ (MAS Guidelines PS-G02, paragraph 1.1, 17 January 2022)