Some morning-thoughts on portfolio structure while sipping on some coffee
99% of assets in crypto correlate with Bitcoin, almost every altcoin behaves like bitcoin on leverage (also called beta). This means you face the same or more volatility in every crypto assets when comparing it to bitcoin. It gets interesting when you start denominating in bitcoin. Altcoin/BTC. This is when you start to see different flows and trends. A Bitcoin denominated portfolio will still show strong correlations and drawdowns during bear markets. So the question is, what is the aim of your portfolio? Is it to short the dollar? Short volatility? Long volatility? Or generate the best risk adjusted returns. In general you’ll perform better and compound faster if you can reduce overall volatility.
The federal reserve forces us to put on a very basic base trade. Short the dollar, on a long timeframe horizon. With this in mind it makes sense to structure a portfolio with these key principles. There are some assets that serve this purpose pretty well and is the driving force behind the success of the index ETFs. However in crypto land we would look for the least risk, best dollar short for our base. In this case we got gold backed tokens and bitcoin as optima candidates. Around this base you can then start layering riskier assets, yield generating assets or even quantitative strategies.
The Ureka treasury is going to hold base reserves denominated in some cash (dry powder) wrapped bitcoins and gold backed tokens (diversified across providers to reduce 3rd party risk). Around this base we then layer riskier assets such as competitive L1s, Ethereum, yield generating DeFi protocols (real yields, as measured by our r-APY metric covered in a previous article) and our quant strategies, both on-chain and off-chain on exchanges.
The exact breakdown of the portfolio ratio varies with asset volatility and macro outlook. The federal reserve gives the paces as it’s the driving force behind market flows and fiscal spending of governments around the world. The current environment of increasing wages and inflation is fairly inflationary for the dollar and at this time a driving force of flows into Bitcoin and other inflation hedges.