As a crypto investor, I used diversification to spread my risk. The question then was: How much Algorand would fit my portfolio?
In my framework, I capped Algorand at 20% of a cryptocurrency portfolio. The actual percentage depended on several factors, especially risk tolerance.
Let's get into the details, and calculate how much Algorand to buy:
How To Figure Out How Much Algorand To Buy:
To estimate the number of Algorand coins, I first estimated the total cryptocurrency allocation.
The broader allocation framework is in How Much Cryptocurrency Should You Buy?.
However, in this article, we'll figure out the appropriate diversification in terms of percent of your total crypto holdings.
This depends on you risk tolerance.
In my model, a higher risk tolerance corresponded to a larger Algorand allocation, and a lower tolerance to a smaller one.
Let's get more specific, and figure out your risk tolerance, and appropriate diversification:
How Much Algorand To Buy At Different Risk Tolerances:
To figure out your risk tolerance, you have to put yourself in hypothetical situations where you win or lose money.
For instance, imagine losing 50% of your capital. How does this make you feel?
Do you feel like your world is falling apart, and hear the hell hounds barking at your feet?
Then you risk tolerance is low.
If you feel a sense of motivation, due to the challenge of starting over, then you're risk tolerance is high.
Try to drift into scenarios like this, and figure out your risk tolerance on a scale of 1-10.
If you're just as excited by the thought of winning, as you are afraid of losing, you're a 5. If you don't mind losing at all, but jump through the roof when thinking about winning, you're a ten.
I then mapped the allocation to risk tolerance:
My rule of thumb capped a cryptocurrency outside the 10-15 largest at twice the numerical risk-tolerance score.
For example, a score of seven produced a maximum allocation of 7% * 2 = 14% in this framework.
This was the table I used:
| Risk Tolerance (1-10) | Appropriate Diversification (Max) |
|---|---|
| 1 | 1% |
| 2 | 4% |
| 3 | 6% |
| 4 | 8% |
| 5 | 10% |
| 6 | 12% |
| 7 | 14% |
| 8 | 16% |
| 9 | 18% |
| 10 | 20% |
How To Figure Out The Exact Number Of Algorand Coins To Buy
Using the percentage above, I multiplied it by the total value of the hypothetical cryptocurrency portfolio.
Let me show you how:
Let's pretend I have a crypto portfolio worth $10 000. Also, my risk tolerance is 5/10.
The maximum long-term diversification according to the table above is then 10% (2 * 5).
This means that I should not buy more than $1000 worth of Algorand.
However, my belief in Algorand is not that great. I, therefore choose to only diversify 7% of my portfolio into Algorand. That means that I should buy $700 worth of Algorand.
Now, to figure out the number of coins I should buy, I only need to divide the dollar amount by the current price:
At the time of writing, the price was $1.50 (CoinMarketCap source). The example produced:
10% diversification: $1000 / $1.5 = 667 ALGO
7% diversification: $700 / $1.5 = 467 ALGO
In this example, the allocation gave me exposure to positive price moves while limiting its effect on the overall portfolio.