In a new episode of the Coinist Podcast, Ari Paul, the chief information officer at BlockTower Capital, debunks some of the biggest reservations that potential investors have about Bitcoin and cryptocurrency.
Host Luke Martin calls out three major challenges for investors.
- So volatile
- Doesn’t make sense
- Too risky
“There’s a lot of professional investors, wealth managers, endowment investors who personally own cryptocurrency but will say it’s inappropriate for their institution…
Anyone who understands risk in the financial concept, anyone who has an MBA or a CFA designation, anyone who works in risk management team should have a full understanding of this basic idea – which is, you only care about marginal risk. I’ll explain what that means.
In 1920 there was a belief that it was irresponsible for most people to own equities at all. Because equities are risky. Equities are volatile. You should only be in blue chip corporate bonds. That’s safe. And if you were a wealth manager and you put your investor in – let’s say you put one dollar of your investor’s money in any stock or a corporate bond of a risky enterprise and they lost money, you would be on the witness stand and the judge would say, ‘Why did you think that investment was safe?’
Today we recognize that that’s nonsense. If you invest in the S&P 500 index where you own a basket of 500 stocks, you’re not saying that every individual stock is safe. What you’re saying is that as a whole, that basket of stocks looks attractive. And that maybe there’s a really, really risky company in that 500, but I only have 20 basis points of my money in that one company.
And so, a basic idea of risk is there’s two types of risk at a very high level within a portfolio. There’s systematic risk, which means risk that contributes to the risk of the total portfolio because it’s correlated to the market, and there’s idiosyncratic risk which is the…