How Stoic Manages Risks
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The biggest risk in crypto is volatility.
Crypto is rife with uncertainty. Nobody knows how to fundamentally price crypto. Different cryptocurrencies compete among each other for capital, applications, and users. Regulations are still underdeveloped.
On the other hand, crypto is also full of optimism. Cryptocurrencies are natural protection from inflation that plagues fiat currencies. DeFi is a promising alternative to corrupt traditional banking. NFTs are attempting to revolutionize art, culture, gaming, and even property titles, and other legal constructs.
As a result, the mood in crypto constantly shifts from fear to euphoria, causing wild price swings. And given lax regulation, these moves are amplified by excessive leverage (and waves of liquidations) and most likely even blatant market manipulations.
So in the medium term (up to 6 months), you should not plan on withdrawing profits or even what you have deposited initially to your crypto exchange account. A 10-40% drawdown in the crypto market is nothing new and should not come as a surprise.
On the other hand, the crypto market looks very bullish in the long term (1-3 years).
Volatility is the risk that Stoic accepts as a price of future returns.
However, some risks could be reduced, and Stoic’s algorithm and execution platform do that.
It’s hard to exit thinly traded assets. To avoid that, Stoic automatically weeds out any assets with less than $10 million in daily trading volume.
Having too much of any asset would expose the whole portfolio if that particular asset would go down. Stoic prevents excessive concentration through built-in constraints on asset weight and position share in the asset’s total market cap and trading volumes. As a result, usually Stoic won’t keep more than 5-6% of the portfolio in a single asset.
Placing large orders can move the price and lead to buying too high or selling too low. To prevent that, Stoic estimates slippage based on the current order book and plans execution accordingly.