3 Strategies to Manage Bitcoin’s Volatility

When looking at allocating bitcoin in an investment portfolio, strategy must be carefully considered, in large part due to bitcoin’s very high volatility.

Some market commentators point to bitcoin’s very high volatility as a major deterrent for use and investment; however, investors may be able to either minimise or otherwise utilise this volatility in a portfolio through varying familiar approaches.

Many traditional strategies are applicable when managing bitcoin’s volatility. This piece will introduce three of these that may be of interest to financial advisers and investors alike.

1. Target-based Allocation Sizing

Target based allocation is built around the concept of establishing limits for asset exposure percentage as a part of a broader portfolio. An example would be a 2.5% allocation to bitcoin in a $10 million portfolio, meaning investors target $250,000 in bitcoin exposure.

This can be expanded to include ‘tolerances’, allowing the allocation to fluctuate within a defined range. This is particularly useful for a very high volatility asset like bitcoin. If this tolerance percentage is exceeded, bitcoin would either be bought or sold (rebalanced) to bring it back within range. For example, a portfolio may set a 5% allocation to Bitcoin with a 2.5% tolerance - the allocation can range from 2.5% to 7.5% before rebalancing is performed.

2. Time-based Rebalancing

An alternative to target-based allocation sizing, time-based rebalancing instead focuses on rebalancing on a set time basis, ranging from weekly to annually. This can be used as a standalone strategy, simply harvesting loss or gain before an investor brings their exposure back in line with the exact targeted sizing on a regular basis.

Rebalancing strategies can significantly alter the risk/return characteristics of a portfolio, with long timeframe strategies (e.g. yearly) potentially leaving a large window for cascading price actions. Inversely, rebalancing too frequently can lead to potentially missed returns.

Rebalancing on both set time basis and when tolerances are exceeded may offer investors a more versatile strategy to manage bitcoin’s volatility, specifically when considering something like a yearly rebalancing.

3. Dollar Cost Average

Dollar Cost Averaging is another traditional strategy that can be applied to bitcoin investing, where a fixed amount is invested over recurring periods of time, for example purchasing a set amount weekly, monthly or quarterly.

This is sometimes done continuously, accumulating an increasing large position with no defined sell-off or balancing strategy. This strategy (often termed a “HODL” strategy) is one commonly employed by retail crypto investors to build long-term holdings. The intended effect is to lower the average price paid for the investment and maximise returns with minimal continuing management – in effect a “set-and-forget” strategy.

However, this may lead to allocation sizing creep beyond original targets, in turn skewing your actual exposure in a manner which is inconsistent with your risk profile.

Combining a DCA strategy with target-based allocation and/or time based rebalancing strategies may allow investors to slowly acquire a portfolio allocation over time while also ensuring that it does not exceed the total amount of risk and exposure they are prepared to accept.

In Closing

The above strategies can be used individually or in combination depending on one’s broader investment theses and risk appetite for Bitcoin.

This list is not exhaustive and is intended to raise the viability of simple, potentially overlooked strategies to consider when managing bitcoin exposure.

While this piece covers strategies to manage the volatility of one’s exposure to bitcoin, investors may find it useful to consider bitcoin’s suitability in their investment portfolio more broadly.

If you are considering gaining or managing exposure to Bitcoin or crypto-asset markets, speak to a licensed financial adviser.

This publication has been prepared by Monochrome Asset Management Pty Ltd ABN 80 647 701 246 (Monochrome) the Investment Manager of the Monochrome Bitcoin Fund (the Fund). Monochrome is a Corporate Authorised Representative No. 1286428 of Non Correlated Capital Pty Ltd ABN 99 143 882 562 AFSL 499882 (NCC). NCC is the Trustee of the Fund. This publication has been prepared by Monochrome to provide you with general information only. In preparing this publication, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Monochrome, NCC nor any of their related parties, their employees or directors, provide any warranty of accuracy or reliability in relation to such information or accept any liability to any person who relies on it. You should obtain professional advice and consider the Information Memorandum before making a decision in relation to this product. Any forecasts and hypothetical examples are subject to uncertainty and are not guaranteed. Past performance is not a reliable indicator of future performance. You can obtain a copy of the Information Memorandum for the Fund by contacting Monochrome at https://monochrome.co.