Building the “Perfect” Digital Investment Portfolio & How to Value “Hard to Value” tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many “professional” investors and analysts seem to miss the point. You often hear, those who only see rewards (or lack thereof, ie. “Hey, Ether went up 150% last year!”) or those who only see risks (or lack thereof, ie. “Bitcoin is too volatile to make a good investment”). This last point has been espoused not only be novice retail investors, but by global investment banks, the Financial Times, CNN/Money and even the London Business School. I’m actually quite serious about this (Financial Times, London Business School and Credit Suisse) – all entities that really should know better.

We’ve given a lot of thought to the topic of valuation with regards to investment. We have an excellent public track record over the last 10 years, and even more of a record in private performance. We have decided to focus our expertise and experience on the burgeoning digital token ecosystem by creating a Digital Asset Valuation Framework and issuing tokens to support it. The framework encapsulates two aspects:

1. The economic performance of the entity’s underlying token (risk-adjusted historical reward), and;
2. The forensic valuation of the token’s issuing entity and its potential and prospects

The balance of this article will focus on number one. The next missive will focus on number two and will be deliveed live and in person at my office at 350 Park Avenue, NY, NY. Holders of Veritas (our own token) can purchase custom and bespoke analysis focusing on either. Before we discuss risk-adjusted return, we must first agree on terms. Reward is the total return on the investment. Risk is the actual downside movement of the underlying. This is quite different from the typical academic definition of risk which is generally volatility or deviation from average pricing. The problem with this is long-only holders of assets are actually quite happy to receive upside movement, hnace risk defined as bliteral movement of the asset makes very little practical sense. 

Now, taking that into consideration, a truly realistic risk-adjusted reward analysis shows three out of four of the most popular digital assets handily outperforming most of the global asset classes. If you take the top two risk-adjust reward performers, they handily outrun all popular asset classes and investments from around the world.

Now, many of you may be wondering, “How can assets that are as volatile as Bitcoin and Dash have a better risk-adjusted return then the stock markets?” It’s because there are two sides to the risk/reward equation (as stated above) and just focusing on one side can be DANGEROUS! Now matter how risky bitcoin may be, it could still be the investment champion of the world if it throws off enough return to justify the risk. The relationship is actually very simple – Risk is the price one pays for reward. As long as the ratio of risk paid for reward is less than 1:1, your good. In other words, you want to pay $1 of risk for every $2 of reward. You don’t want to pay $2 of risk for every $1 of reward, through. 

On that note, look at the amount of excess (above your benchmark rate, the minimum required for you to be in the market) returns that bitcoin has thrown off relative to the S&P. It’s not even close!

Now, when you put your investment portfolio together, you don’t only have to worry about the risk of your individual investments, but the risk of the entire portfolio. For instance, you can have a portfolio of only euros. You say to yourself, euros are the default currency of the EMU, and it can’t be but so risky since it’s volatility is limited (at least historically, and even that can be called into question). So, you sit with a $500,000 portfolio of euro (with the requisite EUR/USD exchange rate risk) and Mario Draghi does his QE/Currency Debasement/NIRP thingy. You’re entire portfolio tanks! Why? Because you not only put all of your eggs in one basket, but you got those eggs from the same bird!

So, as has been made painfully obvious, economic diversification in your portfolio is key. But don’t most of real strong performing assets tend to move in unison, like equity markets? Nope! At least if you are dealing in digital assets…

Not only has Bitocin, Ether and Dash totally trounced the reward (not adjusted for risk, see the first chart) of the S&P 500. They not only mostly non-correlated, some actually have a negative correlation. The portfiolo that you see above, not only trounces holding currencies and/or stocks in terms of raw performance and excess returns, it also blows out a forex portfolio, stocks, bonds, and oil in terms of risk-adjusted return as well. As a matter of fact, if I were actively managing this, it would have had a higher return, for we would have known to stay away from Litecoin – alas a topic for a different (and upcoming) discussion.

Now, how about companies and entities that are launching thier own tokens??? News item: Fastest-Ever ICO: Ethereum-Based Gnosis Creates $300 Mln in Minutes, Raising $12 Mln. Well, no… Note Really!

 Here’s what the Gnosis futures are saying about that $29.85 token price.

Much has been said about the Gnosis offering, particularly the prices and apparent fervor. There is one thing that I can say about the chatter that I’ve heard and seen from around the web – It appears that very few have any clue as to how to properly value or financially evaluate an entity such as Gnosis or its token offering. Here’s a clue, taking what the tokens sold for and multiplying that by the total Tokens available is nonsense and simply just wrong – and unrealistic.

So, what gives? I’ll be doing part two of this series live at my office space at 350 Park Avenue in NYC on May 11th at 6pm. Email me at Reggie AT Veritaseum DOT com to RSVP if you are an investor or represent an entity in the buy side industry. We’ll discuss token performance analysis and how it fits in the buy side portfolio (the stuff above) as well as token issuing entity valuation – the real interesting stuff. In attendance will be:

• a billion dollar family office;
• several hedge funds;
• one of the world’s largest fund administrators;
• finance partner at Sullivan & Worcester;
• partners in one of the most prolific derivative liquidity providers to hedge funds

and your buyside firm or institution if you RSVP fast enough.

Our token offering is actually ongoing now, and our tokens can be redeemed directly back to us for custom and bespoke analysis and valuations, like this 63 page report we did on Google. Our tokens are also the only method of accessing our selective Diigital Asset Exposure DAOs – basically a robot hedge fund that lives totally on the blockchain – with no asset manager or aset management fees. This makes it up to 90% cheaper than a traditional hedge fund. For more information, see 2. Look What Happens When the Hedge Fund Fee Fight Hits the Blockchain – Redisruption. To purchase our Veritas tokens and learn more about Veritaseum, download our Veritas Informational Tear Sheet with live links to a plethora of information. or proceed directly to the Veritas 2017 Token Purchase: Step-by-Step Tutorial. .