Overview
Global markets remained volatile, although the asset markets have shown an initial sign of recovery from the March selloff. At the time that double-digit gains or losses seem to be a new normal, balancing risk and reward in investment appears to be more critical than ever. The barbell strategy has long been adopted by fixed income and equities investors to diversify their risks and potentially able to achieve higher returns in an investment portfolio. Could the barbell strategy work with crypto assets? How to structure a crypto barbell?
What is the barbell strategy?
The barbell strategy is the mixture of extreme high-risk investment and no-risk investment in the same portfolio while avoiding everything in the middle. The rationale behind this approach is to maximize potential returns while limiting downside risks. Because the return stream is usually in a negative correlation, meaning one performs well when the other struggles. Strategists can adjust the weighting on each side as market conditions change.
In a bond portfolio, the barbell strategy could mean holding short-term bonds, which considered risk-free but pay less, and at the same time, some long-term bonds, which can provide higher yields but have greater interest-rate risk.
In the equities space, strategists could put defensive stocks on one end of the barbell, and high-risk speculative stocks that potentially offer higher returns on the other end.
Scholar and statistician Nassim Nicholas Taleb, who made the barbell strategy famous, once said, “If you know that you are vulnerable to prediction errors, and accept that most risk measures are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be, instead of being mildly aggressive or conservative.”
Widening risk spectrum in crypto space
Even though cryptocurrency has been considered as a riskier asset in general when comparing to other asset classes like equities and bonds, the risk spectrum within the crypto space, however, has been getting wider.
Crypto traders and investors are now able to enjoy greater flexibility when it comes to adjusting their leverage and strategies according to their risk tolerance levels, thanks to the rapid development in the product space. One on hand, traders can increase their leverage by adding derivatives into their portfolio (higher risk of the spectrum). On the other hand, with the addition of staking, investors can earn passive incomes with cryptocurrencies (lower risk of the spectrum).
With the introduction of these products and their easy access over crypto exchanges like OKEx, it opened up new opportunities to allow market participants to adopt strategies like the barbell strategy, and make it available to the crypto world.
Barbell’s crypto applications
There could be multiple dimensions when we talk about the application of the barbell strategy in a crypto portfolio. For a buy and hold investors, the barbell strategy could be something like this:
One of the reasons for picking XTZ and LINK is that they have been providing some decent risk-adjusted returns. Data compiled by Messari shows that XTZ has a 90-day Sharpe ratio of 1.80, while LINK’s at 1.33. Those are some of the highest readings among leading altcoins.
Of course, there were some other tokens and coins that have an even higher Sharpe ratio (meaning risker and potentially higher returns). However, other factors such as liquidity, market size, and availability will likely limit the choice. OKEx explained what Sharpe ratio is, and how it could impact your crypto portfolio, read more here.
On the other side of the barbell, given the fact that stablecoins are not riskless, such as DAI’s prices could be intensely fluctuate caused by the moves in ETH. USDT and USDC could also expose to other systemic risks. However, comparing to major altcoins, even bitcoin, putting stablecoins on the one end of the barbell seems to be a more appropriate choice.
Buy-and-hold investors who can handle more risky assets, higher volatility, and would like to have a shorter investment time frame, their barbell could be like this:
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70% – MKR
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15% – MCO
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15% – BSV
Take this combination as an example, in the period between March 13 to April 13 right after the March selloff, a portfolio like this generated a return of about 38%, outperformed BTC’s 29% in the same period. Again, investors can adjust their allocations on each side of the barbell with an asset that fits their investment goals.
Barbell strategy in crypto savings
Earning passive income with crypto has been gaining more popularity among investors. At the same time, staking, savings, and term deposit products have been more versatile than ever, with an increasing number of supported tokens and coins.
While savers may have more savings/staking products to choose, the yields of these products could range from 0.04% to as high as over 11%, which makes constructing a proper strategy for the EARN portfolio seems to get more important. The barbell strategy could also be useful in this space.
In the fixed income space, higher-yield bonds usually come with greater credit risk. In the currency world, higher yield FX will get investors exposed to higher volatility. In cryptocurrency, the concept is similar. Cryptos that provide higher saving rates, usually are mid/small-cap altcoins, which usually are higher volatility.
For example, YOU Chain (YOU)’s staking rate was standing at 4.58% on OKEx, while DAI’s staking rate was just 1%. The barbell strategy for a 30-day term deposit saver could be like this:
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20% – MCO (7.68% APY)
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80% – EOS (3.13% APY)
Investors can also explore the combination of different staking/savings/term deposit products to maximize the returns while balancing the risks of price fluctuations.
Conclusion
The Barbell strategy may not be a conventional strategy. However, the post-COVID markets are not conventional, either. The pandemic-led economic damage is potentially massive, yet, it’s still not fully materialized. At the same time, global policymakers have been rolling out some extensive stimulus packages trying to cushion the markets. Investors’ expectations have been seesawing between falling into a depression and V-shape economic recovery, created ripples that affect all asset classes in all the markets, and cryptocurrency is no exception. An unconventional strategy like the barbell strategy could be one of the answers to such market conditions. Investors are encouraged to tweak the traditional version of the barbell and make it suitable for their applications.
