Position Sizing & Risk Management

# Position Sizing & Risk Management

The single most important factor in long-term crypto investing is not *what* you buy — it's *how much* you buy and *what happens when it goes wrong*.

---

## The Core Principle: Asymmetric Risk

Crypto has asymmetric risk profiles:

- **Downside**: -100% (any single asset can go to zero)
- **Upside**: +1000% to +10,000% (has happened repeatedly for major assets)

This means position sizing is not just about risk tolerance — it's about **survival**. You need to still be in the game when the big moves happen.

---

## The Kelly Criterion (Simplified)

The Kelly Criterion gives the mathematically optimal bet size given your edge and odds. For crypto, a simplified version:

```
Allocation % = (Win probability × Average gain) - (Loss probability × Average loss)
               ─────────────────────────────────────────────────────────────────────
                                     Average gain
```

In practice, most serious investors use **half-Kelly or quarter-Kelly** to account for model uncertainty.

**Rough practical guidance**:

| Risk Tolerance | Bitcoin Allocation | Altcoin Allocation |
|---|---|---|
| Conservative | 1–3% of net worth | 0% |
| Moderate | 3–10% | 1–3% |
| Aggressive | 10–25% | 3–10% |
| Crypto-native | 25–50% | 10–30% |

---

## Dollar-Cost Averaging (DCA)

DCA is the practice of buying a fixed dollar amount at regular intervals, regardless of price.

```
Week 1: BTC at $60,000 → buy $500 → 0.00833 BTC
Week 2: BTC at $50,000 → buy $500 → 0.01000 BTC
Week 3: BTC at $40,000 → buy $500 → 0.01250 BTC
Week 4: BTC at $55,000 → buy $500 → 0.00909 BTC

Total spent:  $2,000
Total BTC:    0.03992 BTC
Avg price:    $50,100 (vs. simple avg of $51,250)
```

**Why it works**: You automatically buy more when prices are low and less when high. It removes the psychological burden of timing.

---

## Stop-Loss Strategy

Unlike stocks, crypto has no circuit breakers. Drawdowns of 80–90% have happened to Bitcoin, and 95–99% to altcoins.

**Tiered approach**:

```
Position entry:           $10,000
Mental stop (reassess):   $6,000  (-40%) → review thesis
Hard stop (exit):         $3,000  (-70%) → close position
```

The hard stop prevents a bad investment from becoming catastrophic.

---

## Portfolio Diversification

```
Example: $10,000 crypto portfolio

Core (60%) = $6,000
├── Bitcoin:  $4,000  (40%)
└── Ethereum: $2,000  (20%)

Satellite (30%) = $3,000
├── Large-cap alts: $2,000  (20%)
└── Mid-cap alts:   $1,000  (10%)

High Risk (10%) = $1,000
└── Speculative positions, DeFi, etc.
```

---

## The Rules Nobody Follows (But Should)

1. **Never invest what you can't afford to lose entirely**
2. **Take profits on the way up** — don't give back 80% of gains
3. **Keep records** — tax authorities are catching up with crypto
4. **Cold storage for long-term holdings** — not your keys, not your coins
5. **Don't tell people what you own** — operational security matters

Position Sizing & Risk Management

// COMMENTS

ON THIS PAGE