Investing $1,000 in Crypto?

hey everyone and thanks for jumping back into the cryptoverse today we're going to talk about modern portfolio Theory and how you can maximize your risk adjusted returns within the cryptocurrency asset class if you guys like the content make sure you subscribe to the channel give the video a thumbs up and also check out the sale on into the Crypt premium at intothe crypto.com where you can of course get access to the tool that we'll be going through in this video let's go ahead and jump in now now in an Ideal World we would have a

crystal ball that would tell us where the prices of various cryptocurrencies are going to go right in an Ideal World unfortunately we have to all sort of have this admission to ourselves that no one knows where the Market's going to go but as an investor we would like to calculate out our risk adjusted returns for certain types of portfolios this means that we're saying look I don't know where the Market's going to go but if there if it's going to go up I want to have exposure to it and how do I maximize my risk

adjusted returns so for every unit risk I take on I want to maximize the return that could come from that now a lot of people just think in terms of returns right sort of you know going to the casino in Los Vegas and and betting it all on black or red but in crypto there's there's sort of a mathematical way that we can go about doing this and this is not unique to crypto modern portfolio Theory you know classical portfolio Theory date dates back several decades now in this case what we're doing is we are

plotting out the expected return of a portfolio versus volatility all right the expected return versus volatility now the way we're calculating out the expected return is dubious at best we're just basically plugging in historical returns and projecting those into the future again it's dubious at best but everything we do is dubious so why not continue on with this also note that when you're looking at historical returns you can only go as far back as the newest asset right so in this case eth you know was was launched in 2015 so we can't even use any

price history for Bitcoin before 2015 you might say well this is unfair because Bitcoin was going up for a long time before eth was even around this is excluding all that data so all the price history for Bitcoin before 2015 isn't even going into these calculations so what we're looking at here you see these all these little dots on the screen this is displaying about 5,000 simulations we ran 50,000 but we're showing 5,000 on the screen and each one of these dots is a represents a portfolio consisting of some amount of Bitcoin and some amount

of ethereum now the secret sauce potentially for a lot of hedge funds would be to instead of use historical returns to project out future returns they might just put in what they think the future returns are going to be right and then they can look at historical volatility to then figure out what their ideal weights should be for their portfolio but in this case we're not doing any of that we're just saying all right we know crypto is cyclical this is what it did in the past what if we plug in the numbers all right

so I'll scroll down in case you're not a member of ITC premium and you want to read about some of this stuff here's the description but we're going to talk about things like the sharp ratio the sortino ratio minimizing your volatility and we're also going to talk about things like the efficient Frontier but the efficent Frontier doesn't really become relevant until we start looking at at portfolios with more cryptocurrencies in them so in this case what we're saying is if I want to maximize my risk adjusted returns for a portfolio consisting of only Bitcoin and

eath what weights should the portfolio be right what weights should it in fact be now you go over here and you you find the column that says sharp ratio and you scroll down until it says Max okay 869 okay so the maximum sharp ratio for a portfolio consisting of Bitcoin and eath based on what we have here 869 this portfolio would consist of 79% Bitcoin and 21% e now that might sound somewhat Saed to you to be to to to suggest that the portfolio that maximizes the sharp ratio is only 21% e but if you're

new here you should know we just spent the last three years talking about things like Bitcoin dominance right and the reason why we spent so much time talking about it was to maximize our risk adjust returns right so we knew that for every dollar you don't put in a Bitcoin there's some opportunity cost there it's not to say that the other asset you buy can't go up it's just to say that what if it does go up but it doesn't go up as much as Bitcoin so for instance I've said for years that eth Bitcoin

would go to 03 to 04 right for years I've said it and I said for years that dominance Bitcoin dominance would go to 60% a lot of people didn't believe it but both both scenarios came to pass right Bitcoin dominance went to 60% eth Bitcoin right now is sitting between 003 to 004 right so the reason why this stuff is important is because eth Bitcoin dropped about 64% over the last few years so even though ethusd is actually not that far away from its all-time highs it's still 64% down against Bitcoin at least up until

a couple of weeks ago now it has recently bounced but it's still about 57% down against Bitcoin so for every dollar you put into eth over the last few years that was a dollar not going into Bitcoin and so again it had nothing to do with what I wanted to happen it was more so guys this is what happens every Market cycle right every Market cycle Bitcoin dominance goes up for a few years and then normally it goes down to the post having year which would be next year okay so going back over to this

tool it says that the portfolio that would maximize your sharp ratio would be 79% Bitcoin 21% eth now a few years ago it would have been a little bit less Bitcoin a little bit more eth because eth had been out forming Bitcoin for quite a while but fortunately if you followed this channel we said no no no eth Bitcoin is going to go to 03 to 04 therefore it makes sense to be heavy heavier Bitcoin at least until that time right at least until we get close to the post having year now I always have

sort of an issue with the sharp ratio I know a lot of people use it and and it's not a bad thing but my issue is that it punishes positive volatility okay so you see the x-axis we're sort of saying that volatility in this case is our risk right our risk okay which is fine in my view as long as volatility is measuring negative volatility but in this case it's also measuring positive volatility and it's punishing positive volatility in calculating out the risk adjusted returns right so if you wanted if you held an asset and

it went up 2x really quickly and then you're looking at your risk adjust returns it went up but it's also that positive volatility also you know kind of works against it a little bit so there's another metric that you can use that I think is a little bit better and it's called the sortino ratio okay now the sortino ratio is maximized at 1.57 and it actually suggests 82% Bitcoin and 18% eth so it's a little bit more Bitcoin a little bit less eth now let's say you don't fall into either of those camps let's say

you don't want to maximize your sharp ratio you don't want to maximize your sortino ratio you want to minimize your volatility well the volatility for assets of Bitcoin and eath the portfolio that minimizes your volatility is 93% Bitcoin and 7% e okay so there's a lot of ways you can go about sort of crafting a portfolio based on your risk adjusted returns now your risk adjusted returns do not always reflect the maximum return the maximum return that you could in fact get it's the maximum return per unit risk that you're taking on so in this

case if we hover over some of these data points you can see right here it's about 80% Bitcoin 20% e right 8020 but as you go further up the efficient Frontier you can see it becomes less and less Bitcoin and more and more eth that doesn't mean you necessarily make less money of course it would have meant that over the last three years the more eth you had the worse your portfolio did because Bitcoin dominance went up and eth Bitcoin went down hopefully that changes in 2025 I think it probably so so what what it

means though is that over here your expected return for a portfolio of 80% Bitcoin and 20% e annualized is going to be about 62% right about 62% but again it's plus or minus 70% so some years you know it could go as high to within the one standard deviation right I mean it could go as high as as um you know over 100% you could even have a loss and it would still be you know sort of projected by this two within one standard deviation that might sound like a lot but guys it's crypto what

do you expect I mean you know if you can wake up one morning and a meme coin's up 500% then you have to be willing to accept that there's going to be a lot of volatility it's the game you play that's the reason you're here all right now if you want to take on more risk you can do that and you can go up the efficient Frontier Higher and Higher and Higher and Higher and see that all right maybe you want to go after an expected return that's 72.5% the problem is you know it's 72

and a half% plus or minus 100% so the range is a lot more right the the draw down could be could be bad but if if you know if the market is healthy and and you get your your alt season then the upside is lot greater now again over the last few years the people that went higher and higher up the efficient Frontier and took on more risk they were not rewarded because as we showed eth Bitcoin went down right they were not rewarded so it doesn't always pay to take on more risk right sometimes

it pays to take on less risk and to just you know stay with Bitcoin I do think next year there's a good chance that eth will go up against Bitcoin but this is what we've talked about for the last few years now I know what you're thinking you're probably thinking well hold on a second Ben you just ran 50,000 simulations how do you know that you ran enough simulations to actually calculate out what the portfolio would be maybe you maybe if you'd run a 100,000 or a million or a billion you would have found out

that oh maybe it did require to have more eth to actually figure out what your maximum sorta ratio was it's a fair question but with this stuff you can use something called quadratic programming to just solve for the portfolio so you don't actually have to go through this money Carlo system you know simulation you don't have to go through a money Carlo simulation to then figure it out you can solve for it identically using quadratic programming and so that's what we did here so I know that's going to be a question it tends to come

up just telling you now you know this is calculated out using quadratic programming not the Monte Carlo based approach the Monte Carlo approach is just being shown for Aesthetics right just so we can visualize the efficient froner but it's not you know these these numbers over here are not coming from the Mony Carlo simulation now what I want to do is is really we have to add in a third asset because you know this only gets you so far Bitcoin and eth so we have a few assets over here that we can add in let's

start off with xrp right it's right here let's go ahead and recalculate it out we're going to add in xrp it obviously went up some recently I'm sure there's going to be some interest in it by the way over on ITC premium we talked about xrp right before it went up right and again we identified the double bottom of xrp against Bitcoin right against Bitcoin and that was the important thing to note and this is you know I know a lot of people don't really like thinking in terms of their Bitcoin pairs but when you

find altcoins that are essentially double bottoming on their Bitcoin pairs that's usually when they get these aggressive spikes up okay I mean and again this is not this is a common thing I mean even with eth Bitcoin last cycle we saw the same thing right I mean it was a double bottom and that's really what you want to see so when you add in xrp into the mix it's kind of interesting and again the great thing about this is that it doesn't matter what I think or what you think it's all about what does the

math say okay so don't get mad at me right take out your frustration on maybe someone else's altcoin all right but according to Modern portfolio Theory the sortino ratio is maximized 82% Bitcoin 18% e 0% xrp that might seem a little ridiculous right I mean xrp just went up 3x and if you follow the xrp Bitcoin valuation you cash in on that so then how can this possibly make sense right how can this possibly make sense that it would suggest 0% xrp for me what it suggests is that xrp is not as good of a

long-term hold as Bitcoin and ethereum that doesn't mean you can't make money on it absolutely you can in fact a lot of us just did right A lot of people did just make a lot of money on it because we saw xrp Bitcoin double bottom it also had the same rally in November of 2020 and you can make some money on it but why even if xrp can go up 3x in such a short period of time why would this suggest 0% xrp why would it possibly suggest that well the reason is because if we

go back over here and look at xrp bit coin right xrp Bitcoin as nice as this move was by actually you can see I've marked this chart up before right as nice as this move was xrp Bitcoin just hasn't really gone anywhere in a long time right like this is a nice Spike don't get me wrong right it's a really nice Spike but it had a similar Spike last cycle the problem you know is if you look at if you look at things like Bitcoin dominance it's been going up for a long time time right

if you were to look at at xrp dominance yes it did get a spike recently but you know if you look at this back in 2017 xrp dominance was 31% today it's a little less than four so no one's denying that xrp just had a really good spike it did and I I mean I honestly I truly hope some people caught that move the problem is that even though it made that move you know since 2017 right even though it made that move since 2017 if we were to measure this out it's still 90% down

against Bitcoin right and that's the hard part of investing in crypto is that so many of the altcoins follow this trajectory that doesn't mean they won't occasionally Spike and it's always possible to get some more aggressive Spike but my point is that in terms of crafting a long-term portfolio there're your blue chips which are definitely Bitcoin and arguably ethereum as well right I think ethereum is a blue chip obviously some people would disagree with that but modern portfolio Theory wouldn't disagree with that because even xrp which just gave us a 3X move in a really

short period of time modern portfolio uh just says me who cares right you know so what I found a quarter as well um the sortino ratio is maximized with 0% xrp the sharp ratio is maximized with 0% xrp that doesn't mean you should never hold it right there's money to be made it just means that you know it might not be the best long-term investment and there's going to be a lot of people are going to listen to this be like well you know you know last cycle the the returns got muted because of of

the SEC and ripple and I'm not disagreeing with you right I'm not um and I even pointed out this xrp rally before it happened right I'm not I'm not against it going up it's just that do you want to be the person right do you want to be the person that sat in xrp for seven years just to see that little move and say you were right or do you want to be the person that you know stuck with Bitcoin and then see this double bottom take a little bit of risk and and then get

a 3X return in 2 weeks you know this is the argument right it's not yeah the people that have held xrp for years are doing fine right now right they're doing fine but the point is is you know they've had to hold through all of this and it still isn't really necessarily any different than what we've historically seen hopefully it does go up right I mean I actually do think it'd be nice for xrp to to uh you know to to see more upside but at the same same time you know there's a difference between

what do you value your portfolio in you know is my unit of account eth xrp US Dollars no my unit of account is Bitcoin because you see what altcoins do against Bitcoin over a long enough period of time right and even in a world where xrp Bitcoin comes back up to the top of the range that'd be great but the inevitable outcome would be likely that it would just bleed back down again and one of the ways you can also visualize this is to look at Bitcoin USD over the last few years right if you

look at at Bitcoin USD um uh you can see that it's just been generally trending higher let me get one with a little bit more history here so if you look at Bitcoin USD you can see that it's you know you have your 2017 Peaks you have your 2021 Peaks and now you're all the way up here in 20124 if you pull it up for xrp you know here's your 2017 Peak here's your 2021 Peak and then now you're you're at 2024 I have to imagine there's someone that bought xrp in 2017 2018 and they

just check the price like ah it's the same price as it was you know all those years ago so again it's easy to to sort of for people to fall into the well they're attacking my altcoin everyone's here to make money right don't marry an altcoin don't don't be the person that just kind of sits in it for years just to wait for a rally when you could have just stuck with Bitcoin until it's you know until it until it got to higher dominance levels and then take it on the risk and that's why modern

portfolio theory is so useful it helps you to identify the better longer term holds so that you know for the shorter term holds you're not you don't get stuck married to those altcoins and you draw you know you watch them draw down say 70 80 90% now in this case that doesn't mean that you can't find a portfolio that does call for some xrp uh let's this green line up here is the efficient Frontier okay this you know you could even think of the red line down here is the inefficient Frontier although I don't think

they actually call it that but the green line is the efficient Frontier so if you want to be on if you want to let's say you want to make your expected return you're going after 65% annualized okay then you're going to want to come across the screen right here and find this portfolio right so that would be you know 57% Bitcoin 41% e 4% xrp right so you want to be on the efficient Frontier what you don't want to do is be down here on the inefficient fronts here because here you're going after a return

of 65% plus or minus 77% you don't want to be down here going after an expected return of 55% plus orus 77% right you see the difference you want to make sure that your volatility is as low as it can be and your expected returns are as high as they can be so you can go all the way out over here on the efficient Frontier and say you know what I don't want to maximize my Sharp ratio I just want to take on some risk and to hell with r you know to hell with with

calculating out my sortino ratio you know I don't want to worry about that I just want to you know to take on some risk but I want to make sure I'm on the efficient Frontier I don't want to be on the inefficient Frontier for instance if you on the inefficient Frontier down here it would suggest you know 9% Bitcoin 3% eth and like 87% % xrp that's a a really difficult portfolio to look at you know over the last four or five years because xrp just has bled to both Bitcoin and ethereum but you would

like to go up here and see what those portfolios would consist of does that make sense so for every unit of volatility or risk you're taking on you want to go up as high as you can on the chart so if you want to take on volatility expected volatility of say 80% you want to go as high up here as you can and find the portfolio that maximizes your expected return at 80% volatility does that make sense that's the idea okay now we could throw on some other assets here as well right we could look

at Litecoin and let's calculate it out with Bitcoin eth and Litecoin and let's see if it gives us anything different it doesn't right it's still 82% Bitcoin 18% e 0% Litecoin right or for the um you know for the other one the the sharp ratio 79% Bitcoin 21% e it is what it is and I don't control what it is so don't get mad at me this is just classical portfolio Theory modern portfolio Theory right it's all about just looking at what it's done right I mean I don't care what you think it's going to

do I just want to know what it's done before and I will then figure out based on that and looking at its historical volatility if it deserves a spot in my portfolio a long-term spot that doesn't mean you can't take short-term trades absolutely yeah I'm not going to I'm not going to argue against that right and just because I I I say dunk on Litecoin or dunk on xrp doesn't mean that they never deserve a spot in your portfolio in fact normally in in in uh preh having years like coin does pretty well for the

first half of that year Litecoin also usually does pretty well um in post having years okay I mean we saw major Peaks by Litecoin in 2017 and 2021 so I'm not suggesting that you never have them because there are times where they could make sense but is it a long-term hold probably not right I mean again if you to go carry out the same exercise that we just did with xrp but with Litecoin look look at the Litecoin Bitcoin valuation every time I look at this it just goes down more right so the last time

I looked at this it was down 96.5% since then it went all the way down 98% almost now it's back up to only being down 97% against Bitcoin right so over the last you know since 2014 Litecoin is down almost 98% against Bitcoin so do you want Litecoin to be your unit of account no because it bleeds against Bitcoin some people say well what does Litecoin do best well what it does best is bleed against the king it's just what it is right that doesn't mean you can't make money on Litecoin Litecoin does do well

sometimes you know I mean it does and in fact if you were to Overlay Litecoin if you were to Overlay Litecoin with um xrp you can see they generally track each other not always there are some deviations where one gets a spike up and the other one doesn't really see that same Spike but the point is that you know you can you can still sort of respect an asset and respect how it moves at certain phases of the cycle but also not treated as your unit of account because you know over a longer period of

time it's going to bleed to bitcoin and it's going to bleed to ethereum and hell since 2017 eth has been putting in lower highs against Bitcoin it's also been putting in higher lows since 201 2015 lower highs higher lows litecoin's just been putting in lower highs and lower lows right at least e has been putting in higher lows but I don't know what to tell Litecoin hopefully it does well again if it fell as xrp it could Spike but the point is is is your unit of account Bitcoin or is it something that bleeds against

Bitcoin and we're likely going into a year where dominance will likely go down a lot at some point next year right so you should remember that when you know if and when that happens don't forget how the market Cycle Works if the alts spike against Bitcoin they will eventually come back down to earth Bitcoin is the unit of account not the altcoin market the last thing we'll look at here is US dollars so if you throw a US Dollars on the same calculation just you know because people are like well how much cash should you

have on hand you know how you know what should you do and and and it really depends on on how much risk you want to take on right I mean you could you could make an argument you know some people might only have no cash right they want to be fully deployed they're all in you know some people might say ah I want you know 10% cash some people might say they want 20% or 30% right so it all depends on what you fine important right and I can't tell you what that is you know

what's right for you is not going to be right for some someone else so just think about how you know this stuff can be useful um to navigating the asset class and that way you know if you ever get to the point and I'm not I'm not talking about just right now right I mean everyone wants to know about right now guys this is a tool that you can use for years and years and years you know at any given point if you want to put money into crypto you should at least think about your

risk adjusted returns your risk adjusted returns like and think about you know over the next six months what do I expect but what do I expect over the next four years right in four years is Litecoin going to be at a higher valuation against Bitcoin than it is today probably not could it be at a higher USD valuation yeah but it's all about opportunity cost right and a dollar into Litecoin or xrp or ethereum or Bitcoin you know where do you want to put it and there are times in the cycle where Litecoin and xrp

and ethereum outperform Bitcoin and there's a good chance you know you could see some of that happen next year and xrp has already been op forming Bitcoin the last few weeks but it's all about making sure that you don't go through three years of the cycle just watching your altcoins bleed to the Kink and that was sort of what I wanted to impress upon Everyone by following Bitcoin dominance all these years and I know a lot of you guys have no clue what I'm talking about with regards to bitcoin dominance because you just joined the

cryptoverse but don't worry you'll find out uh at some point in the market cycle when Bitcoin dominance also teaches is you the cruel lesson of how the altcoin market behaves but until then um you know just remember that there is sort of a rhyme and reason to all this stuff there is a cyclical component to it and while it does seem like altcoins at phas of the cycle only outperform Bitcoin just remember there are about three years of the cycle where most alts bleed back to the king we saw it happen in 2022 2023 and

now we've seen it happen again in 2024 my guess as you'll see altcoins potentially do better against Bitcoin next year um but we'll probably repeat the process we just had in 2026 through 2028 but anyways guys that'll wrap it up for this video make sure you tune in uh next time please subscribe give the video a thumbs up and again check out the sale on into the cryptoverse premium add into the cryptoverse decom I'll see you guys next time bye