9Mar 2021

Allocating to Today’s Crypto Markets

by Tim Johnston

We are receiving record inflows at Apollo Capital. A common question from new investors is the sustainability of recent returns.

As bullish as we are on crypto, we think it is fair to suggest these returns cannot go on unabated forever.

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Periods of performance like this are not uncommon in crypto markets. But for new investors, what is the best strategy to allocate into these markets?

Before we put forward some thoughts, please let us be clear that this is not financial advice. Please do your own research and seek advice. We’re simply trying to conceptualise ways in which to allocate to a strong market.

Many new investors ask “how do you see markets performing over the next few months.” As much as people love to forecast, the only answer is “we don’t know.” Crypto markets are highly volatile and the market could just as easily ‘correct’ down 30% as it could jump another 100%.

We understand why investors ask this question. A new investment will be judged most harshly in its first months, particularly one in a volatile market such as crypto. A 30% correction is much easier to stomach after 2 years and +700% than it is after an initial allocation.

However, we must acknowledge that we don’t know the short term price fluctuations. Instead, we take a longer term view – new investors in crypto markets are still very early. We acknowledge that we’re in a bull market, we don’t think it’s over, but there will always be corrections and periods of consolidation.

If an investor accepts this starting point, the question then becomes one of timing. When is the best time to invest?

We believe we see a number of investors making mistakes with the timing of their investment decision. A common mistake we see is waiting for a pullback. We have spoken to a number of investors who are keen to allocate to crypto, but are “waiting for Bitcoin to retrace back to $30,000.” If an investor is keen to invest in crypto assets, we think this is a risky strategy. We know many investors that are still waiting for a pull back to $2,000. Now that might happen one day, but it’s becoming increasingly unlikely and increasingly painful for those investors.

We think a more prudent strategy is to carve an allocation into different tranches. If an investor has $100,000 to allocate to crypto markets, they could think about investing in crypto markets in say 3 or 4 tranches. Let’s say an investor chooses to invest across four tranches of $25,000. This strategy is commonly known as dollar cost averaging.

One strategy that we have seen is to make an initial allocation of $25,000, and at least get into the market. If an investor thinks a pull back to $30,000 is more likely than a jump to $100,000, it might still make sense to invest the initial tranche. If markets continue to increase, the initial allocation increases in value and the investor is up. If markets decrease, then it presents a buying opportunity to deploy further tranches. If Bitcoin and broader crypto assets end up retracing to $30,000, it might be an opportunity to deploy another one or two tranches.

Dollar cost averaging might seem like an overly simple strategy. It is often dismissed and ridiculed. Investors often like to think they can time their investments more strategically with the right amount of analysis and insight. Yet, as much as we humans like to think we can predict the future and time our investments to perfection, we think a more prudent strategy is to recognise our limitations.

We simply don’t know how crypto markets will perform over the short and medium term. Dollar cost averaging might be a prudent strategy in the highly volatile world of crypto assets, and make that initial allocation a little easier.

Tim Johnston

Tim is the Managing Director at Apollo Crypto. He has substantial expertise in both traditional financial services and technology investing. In financial investing, he worked at DMP Asset Management, a boutique Australian Equities Fund Manager, and was part of the investment team that managed a $33 billion super fund. On the technology side, Tim has worked as a venture capital Associate at Dominet Venture Partners and has been active in crypto markets for over four years. Tim is a CFA charterholder.