What is Asymmetric Risk/Reward? Investing 101.
What is Asymmetric Risk/Reward?
A situation in which the potential gains and losses on an investment are uneven. For example investing one dollar in crypto could reward hundreds of dollars while only risking the initial investment of one dollar. The floor is known ($0) but the ceiling is infinite.
Great, but I never want to lose 100% of my investment.
Let's bring that $1 investment up to $100. Investing $100 would give us one-hundred times the return of investing $1, but by default you are risking one-hundred times more. A simple setup is displayed on the graph below:
- Invest $100 into an asset.
- Setup sell orders if the asset has lost 10% or more of value.
- over time the asset has the potential to grow infinitely on the $100 base.
In the above you are *technically only "risking" $10 but have the potential to make profits as if you were risking $100.
Wait.. There must be downsides...
You are correct. You must be very careful at what you set your "loss" sell orders at. In a volatile market like cryptocurrency 10% loss is another day in the park. If you set your loss orders too low you will probably end up just "buying high and selling low". You will also need to keep your assets on an exchange with sell orders pending.
Flash Crashes
Remember when Ethereum went from $300+ dollars down to $10? It's because traders were trading on margin or had stop/loss orders. Just because you buy something at $100 and set a sell at $90 doesn't mean you are guaranteed to get 90% of your money back.
Do you invest only in things with Asymmetrical Risk/Return?
No. I see my investments as my retirement fund. Retirement should be predictable. Investing in symmetrical risk/return assets like Bonds and Index funds are a necessity. I always contain some investments in less predictable asymmetric assets like cryptocurrency though. This is the wealth generating portion of my portfolio. Everyone's life situation is different and requires a different asset allocation.
Summary
- Speculative investments like cryptocurrencies have the potential to return much more than you put in.
- Investments like Index Funds or Bonds Risk/Return are more symmetrical and bring more predictable returns.
- Although setting loss orders will likely get you a portion of your investment back - you are always risking 100% you put in.
Please remember that the above post is not financial or investment advice but instead a look into how I invest in crypto. Always seek assistance from a professional financial fiduciary.
If you would like to learn more about my investment practices please visit my website cryptoindex.info
If you don't have time to watch for every price movement buy coins directly and sell when they go up! Or hold when they are undervaluated i preferr bitcoin cause i know that it will grow for sure for the next few years as crazy!
Yup I usually buy and hold without loss orders. Only a few speculative coins I have loss orders in. I've been in 50% dips before and would not want to sell my position
worst thing you can do is to close on a loss
Maybe for you - mentally, but it's not always the worst thing. If something drops and you know it's going to keep going down and down forever there is no reason to hold it. You can't always wait forever for it to bounce back.. Some things never bounce back.
Your money always needs to be working for you. Sometimes we make mistakes and invest in the wrong thing. There is no shame in moving that money out .
And this isn't an attack on "holding". The majority of my investments are in a hold strategy.