Greetings, frens. My name is Colton Dillion, cofounder of Hedgehog, a revolutionary crypto robo-adviser that offers a hassle-free way to diversify and manage your portfolio with ease.
Our goal is to empower everyone to make informed cryptocurrency investments by providing a secure and user-friendly platform that ensures optimal diversification and risk management.
Last week was all about credit. If you want to get caught up you can find Letter #96 and all of our newsletters here.
Why Diversification Works
Diversification is a bona fide investment fundamental, and a prime example of working smarter not harder. You’ve heard the idea before: Don’t put all your eggs in one basket.
But it goes further than that. Don’t keep all your eggs in the same kinds of baskets, period. What if your house is suddenly invaded by speed-eating basket termites?! Every egg would roll off the table and explode.
Take action to mitigate the threats to your egg stash: some eggs should be in a carton in the fridge, where they’re easy to grab for an impromptu omelet; some should be hard-boiled and left in the hand-made bowl you painted for your mom with anthropomorphized warrior-eggs. Maybe you want to pre-blend some of your yolks and store them in a Nalgene for bulk baking tasks. Lend half a dozen to your friendly cake-baking neighbor, who will return the favor when you’re the one short on eggs. Heck, buy some chickens for the backyard.
Of course, this is a metaphor. When it comes to actual eggs, most of us are fine with a combination of the fridge and the supermarket. (If you do keep your own birds, more power to you!) The point is to spread your money around so that your whole bankroll is not subject to just one type of risk. If that risk ever comes to fruition, you’ll be wiped out.
Be wary of devoting your entire savings to a single choice, like tech stocks or local real estate… or crypto. Instead, diversify your portfolio by investing in different types of assets — buy stocks and bonds and real estate and crypto. If one sector performs poorly, the others may help balance out the losses.
You can also diversify within a given asset class. Index funds were invented as a low-fuss method of diversifying your stock portfolio, automatically putting money into the economy’s top-performing companies across any and all industries.
You can even diversify within a particular sector. Take tech stocks: Amazon, Google, and Microsoft all have cloud computing divisions that compete against each other, but you as an investor don’t have to pick just one of them to back.
Diversification does have a flip side that’s important to acknowledge. If one of your investments blows up (in a good way), you will only benefit in proportion to the amount of your portfolio that was allocated to that specific investment. Risk and reward are inextricably intertwined; reducing the risk of failure wiping you out also reduces the impact of wild runaway success. That’s the tradeoff, and usually it’s a good one; though you might have to build an efficient frontier to find out when that’s the case.
Diversification takes some emotional maturity. You have to admit to yourself that you’re not prescient, the future really is unknown, and trying to pick one winner (or a small handful) is like playing roulette with the market. Which leads us to a future topic… the efficient-market hypothesis. We’ll get into that in the near future.
Diversification is integral to Hedgehog. We designed Stacks to make it easy for all crypto investors to benefit from this age-old principle, inspired by the impact that index funds have had on retail investors’ stock portfolios.
Due to its newness, crypto is a high-risk corner in the big realm of finance, fraught with volatility — which is actually a good thing, because sometimes number do in fact go up. When number go down, you don’t want to lose everything; but when number go up, it’s nice to have a slice of that pie.
Anyway, just because crypto is risky overall doesn’t mean your approach to crypto has to be risky. With the ever-growing number of digital assets available, it's wise to distribute your investments among several cryptocurrencies and tokens that meet a minimum standard of legitimacy, rather than relying on any single coin. Doing so:
- dampens your exposure to market volatility
- provides exposure to multiple profitable opportunities
- helps you capitalize on emerging trends within the crypto ecosystem
We often say that Hedgehog exists to bring traditional best practices to the Wild West of crypto. Diversification is one of those best practices and it’s a cornerstone of Hedgehog’s product.
Quick Hits
CoinDesk turns 10! - Look back at the stories that made crypto headlines over the last ten years. So many main characters, innovations and some… well, not so great ideas.
Turns out, ‘this is not financial advice’, as a disclaimer may not be enough to keep influencers off the hook for their shills.
Mixed feelings on CBDCs? Not too worry, Quant CEO assures the masses by stating, “Central Banks don’t care about how much people spend on sandwiches”. - I feel better already but I would prefer to keep my sandwich budget between me and my sandwich guy.
Giveaway
Answer the question of the week for a chance to win three of these prizes:
- insulated stainless steel water bottle with Hedgehog logo
- official Hedgehog team baseball cap
- snazzy Hedgehog socks
- cozy Hedgehog hoodie
- comfy Hedgehog baseball tee
What is the best place to get a sandwich? My favorite sandy shop is no longer of this world, but the ice skating rink in this small town in Idaho had an open-face reuben with the perfect blend of savor and texture. Reply to this email with your opinion and you'll be entered in the giveaway.
Keep hedging,
Colton
