Asymmetric risk is a trading term that you should know if you are in the crypto space. The altcoin space, a more volatile space when bitcoin and ether are considered outside of it, is actually the best place to invoke the technique.
What is Asymmetric Risk?
Every investment has a risk to reward ratio. Your job as an investor is to find a ratio that works in your favor. Asymmetric risk is when the reward outweighs the risk so much that putting money into the investment virtually guarantees a positive payoff if the investment is allowed to fully invoke probability theory.
You have $10. You are given a 50-50 chance of winning a blind bet. Choose correctly, and you win $1000. Choose incorrectly, and you lose your wager. You get to choose the amount that you wager each time.
Even with odds like this, betting $10 is not a good bet. You do not give the investment time to work in your favor over time. If you lose once, you are out of the game.
However, betting $0.01 per roll gives you 1000 chances to win. With a 50-50 win-loss ratio, you are expected to win 500 times. This is asymmetric risk in your favor. The amount that you win makes up for multiple losses.
Asymmetric Risk in the Altcoin Market
Asymmetric risk occurs most frequently in startup environments. Startups require the least amount of money to invest in, and they have the most potential for gains.
The altcoin market as a whole is quite new, so even more established projects are considered still in the startup phase. Most analysts believe that projects like Chainlink and Polkadot, already multibillion dollar market cap projects, still have asymmetric upside. Projects that are just starting out will have even more.
The way to take advantage of asymmetric risk is to invest a percentage of your portfolio in many projects with potential. Because the upside for all of them is so great, your wins will more than make up for your losses.
Using Asymmetric Risk Most Efficiently
No, blind investing in random projects is not what I mean! Here are the nuances of using asymmetric risk in your favor.
1. Create a list of criteria to limit your potential losses. There are more altcoin projects on the market than funds in your Metamask. Asymmetric risk will only work if you can cut out the obvious losers from your potential investments. Invest only in projects that meet your criteria. This will limit your investment into scams and losers and increase the amount of money you have left for winners.
2. Limit your investment to an altcoin subset that interests you. You will be more likely to select winning projects if you focus on the subsection of altcoins that you are actually interested in. If you grew up on MMORPGs, then you likely have an edge in the NFT gaming world. For a better chance at success, you can limit your investments to those coins.
3. Prepare a budget. To invoke this strategy, you'll need to allocate a percentage of your portfolio to each of your chosen investments. Set your total budget so you will know the level of investment you can make in each one. This may further limit your selection, and that's a good thing. If all of your projects are on the Ethereum network, you need to have a large enough budget to deal with the expense of fees. If you don't, then you may want to focus on projects that are running on BSC or Hive.
4. Be prepared to hodl to 0. Early stage projects may take a while to develop, although a properly marketed altcoin can come out of the gate with a bang. Recognizing these and getting the timing right is an entirely other article. For the purposes of using asymmetric risk, you should be prepared to let these projects develop or completely fail.
5. Have an exit strategy. Before you enter any investment, you should have a target price for your exit. You can approximate this by comparing your chosen projects to similar projects from past investment cycles.
Controlling Your Trading Psychology
If you are using asymmetric risk as a strategy devoid of any other, you should fully expect a low win rate. Early stage startups are a volatile space, and there are many reasons that an investment can fail. Perhaps the most important ingredient to success using this strategy is an iron hand. Come up with a plan, invoke your criteria, and stick to your guns.
This doesn't mean that you can't reassess an investment if it turns out to be a lie. For instance, if you find that the LinkedIn profile of the lead dev on one of your investments is a fake, get out. If you have credible information from the Telegram group that a rugpull is imminent, consider it seriously. But overall, you must stick to the plan that you make in the beginning of your cycle.
I take all credit for your success and none for your losses. Don't come crying back to me if all of your investments rugpull and hit 0. No matter what anybody says to you online, this is crypto. If you can't take a total loss, better to just buy and hold big daddy bitcoin!