Crypto portfolio risk management is an important practice that helps investors manage risk and protect their capital. In order to calculate the optimal position size in each portfolio asset, several factors should be taken into account:
Crypto portfolio size. It is important to determine the total amount of capital you are willing to risk. It is not advisable to invest your entire savings in cryptocurrencies, as this may entail large losses if the market falls.
Risk in every asset. Each asset in a crypto portfolio has its own level of risk, which can be assessed based on historical data and the current market situation. Some assets may be more volatile than others and may have a higher level of risk.
Desired level of risk. Every investor has their own level of comfort with risk. Some investors are willing to risk more capital for greater potential returns, while others prefer a more conservative approach with less risk.
Diversification. It is important not to invest all your funds in one asset, as this can result in large losses if that asset falls in value. Diversify your portfolio to reduce risk and increase potential income.
When determining the position size in each portfolio asset, you can use the so-called “Kelly formula”. This formula allows you to determine the optimal position size based on the probability of success and the amount of possible profit.
Kelly's formula: f = (bp - q) / b where f is the optimal position size as a percentage of total capital, b is the bet size, p is the probability of success, q is the probability of failure.
For example, if you have $10,000 and want to invest $1,000 in Bitcoin, given that the probability of Bitcoin going up is
