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/ Cryptocurrency

Cryptocurrencies and Modern Portfolio Theory

Cryptocurrencies and Modern Portfolio Theory

Are your crypto investments truly diversified? What's missing?

Every investor that wants a diversified portfolio should have exposure to cryptocurrency assets — or digital assets as they are sometimes called. Digital assets make up an asset class that has more volume every year and has shown to be uncorrelated to the stock market. One digital asset in particular, Bitcoin, has outperformed the S&P 500 since its inception, and is the best performing asset of any type over the past 10 years. Even Mike Novogratz the Founder and CEO of Galaxy Digital has said every Hedge Fund should hold 1% of their entire Portfolio in Bitcoin as a hedge to the systemic market risks.

In all markets, being correlated with how well the economy is performing has distinct advantages and disadvantages. If the economy is doing well, it often has low unemployment rates, strong productivity and controlled inflation. In these periods of economic boom, it’s good to have assets that perform accordingly. But when the economy starts to slow down and sentiment from markets shift, it is important to have a portion of your portfolio that takes advantage of the market downturn. Traditionally this is achieved through derivatives of underlying assets; however, in recent times cryptocurrencies have provided another way to add non-correlated assets to any portfolio.

What is Modern Portfolio Theory?

Modern Portfolio Theory suggests that the return of an asset should follow the amount of risk that asset has. This means that if an asset has a lot of risk then you should be expecting a higher return from that asset.

Those who subscribe to Modern Portfolio Theory target the best performing assets in multiple industries and asset classes including stocks, bonds, commodities, and in today’s market, digital assets such as cryptocurrencies and smart commodities. These types of investors aim to reduce correlation among the assets they choose for their portfolio, so that they can target high returns, but hopefully hedge downside by choosing assets that move in an unrelated (or uncorrelated) fashion to each other. Investors then weigh their allocations of each asset in their portfolio to maximize returns, as well as to additionally hedge their risk by securing assets that have different levels of correlation to the broader economy.

In today’s market, there is a new opportunity to introduce a diverse asset that has it’s own unique risk/reward profile and a brand new level of correlation to traditional asset classes. That new opportunity is, of course, digital assets like Bitcoin. Having digital assets in a portfolio can add a previously unattainable level of asset mix to an investor’s holdings, and can impact the level of risk and exposure an investor has in a potentially positive way. It’s also quite realistic for retail investors to be able to attain digital assets if they so desire. Digital assets like Bitcoin, Ethereum and other altcoins have provided the first opportunity in recent history for retail investors to add unique assets to their portfolio without requiring them to meet minimum net worth thresholds.

But what is uncorrelated with Bitcoin?

With the critical role uncorrelated assets play in modern portfolio theory, it’s important to hold assets that perform in an uncorrelated way to their broader asset grouping. In the digital asset world, we’re currently in a period of time where price discovery is a metric that gets a lot of attention by the media and it outlines an approach that a majority of crypto investors attempt to use to value and evaluate digital assets. Within the digital asset bucket, it’s important to have alternatives. This is because historically, virtually all digital assets follow Bitcoin’s price movements closely. Investors in digital assets need to have an alternative to current day cryptocurrencies in order to hedge and perform well when the broader asset class is down. With a redundancy in performance from cryptocurrencies following Bitcoin’s price movements, where can we find a digital asset that performs in an uncorrelated way?

Enter Ampleforth. Ampleforth is the first sound money with an elastic supply. The unit is called the AMPL. AMPLs are a completely different crypto model that spreads price information into supply. The Ampleforth protocol aims to achieve price-supply equilibrium, and it does this by expanding or contracting the amount of AMPL for every wallet holder at the same time every day: 4pm EST. This daily expansion or contraction is rules-based and transparent you can find the expansion or contraction rate at the AMPL dashboard. This daily event can lead to a different movement pattern for AMPL than Bitcoin and other cryptocurrencies. Should AMPL show to be uncorrelated over time to other digital assets, that could make it a very interesting tool for portfolio construction. This is because finding digital assets that are uncorrelated with Bitcoin can be advantageous in every crypto portfolio, in the same way that crypto can be advantageous in every asset management portfolio.

Out of all of the industries where investors hope for high returns, where risk and return run hand in hand, digital assets are at the top of the list for many of today’s investors. As the world continues to innovate, and digital assets add to and improve on the options we have for transacting, storing value and even creating new synthetic commodities, it’s important to consider assets that not only capture potential upside, but also include some assets that have their own price movements uncorrelated with Bitcoin. Should AMPL generate movements that differ from Bitcoin in a random way, AMPL could very well be the tool institutional and retail investors need to achieve the risk/reward balance missing from the digital asset space today.

/ Economics

Great Economists: Milton Friedman

Great Economists: Milton Friedman

Milton Friedman was called "the most influential economist of the second half of the 20th century ... possibly of all of it" by The Economist. This is for very good reasons, as he challenged many of the policies that our nation held dear and made us question exactly what we were doing. Often times he would hold public seminars and challenged people’s beliefs. He had a knack for breaking things down to their simplest elements so that everyone could understand. His ability to be understood by people from all walks of life made him loved, respected and admired by many.

Among Milton Friedman’s many accomplishments he was awarded a Nobel Prize in Economics for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. Friedman also helped shape the future of the nation by mentoring renowned economists such as Gary Becker, Robert Fogel, Thomas Sowell and Robert Lucas Jr. Friedman taught at the University of Chicago where he was able to educate and shape the lives of thousands of students.

Milton often promoted an alternative macroeconomic viewpoint known as "monetarism" and argued that a steady, small expansion of the money supply was the preferred policy. As a result of his works on monetary policy, taxation, privatization, and deregulation the 1980’s saw an economic boom. During that time Friedman was advising global policy makers Ronald Reagan and Margaret Thatcher. Friedman’s positive influence didn’t end in the 1980’s. Immediately following the global financial crisis in 2008 the Federal Reserve was influenced by his monetary theory to achieve recovery.

Over his lifetime Friedman wrote many books, papers, and columns. He also appeared in many lectures across the country and open debates. Perhaps most of all, Milton is remembered for his engaging televised lectures where he advocated for responsible monetary policy. Those lectures and television broadcasts still live on today, as you can see in this video where Milton Friedman discusses inflation (click image above to view video).

Time tested and proven principles such as those discussed by great economists such as Milton Friedman are what shaped our technology at Ampleforth. For more detail on the Ampleforth protocol please check out our website and whitepaper, and stay up to date by following our Twitter!

/ FA Hayek

Friedrich August Hayek Predicting Bitcoin and Cryptocurrencies

Friedrich August Hayek Predicting Bitcoin and Cryptocurrencies

For those of you who are not familiar with Friedrich Hayek we think this is a great video to introduce you to him. FA Hayek was an economist and philosopher who had the honor of sharing the 1974 Nobel Prize in Economics with Gunnar Myrdal. The duo were awarded the Nobel Prize for their work in the theory of money. Hayek had some truly ground breaking ideas that set the stage for our current day digital asset ecosystem.

In this video FA Hayek discusses that law, language and money, the three paradigms of spontaneous government institutions have had very different life cycles. While law and language were allowed to develop from their initial forms into their current states, money was halted and frozen in its most primitive, original form. Money was initially formed as physical coins, a form of money that we still use  today. At the time of this recording, Bitcoin and cryptocurrencies did not exist. Hayek goes on to predict the way in which he felt money would need to be experimented with in order to develop. That prediction turned out to be incredibly accurate, from the idea of creating and "opening accounts in something" to the "sly, roundabout way" Bitcoin was able to be introduced to the world in a way that can not be stopped.

Great economists like FA Hayek provided the time tested concepts that underpin the work we're doing at Ampleforth. To dig deeper into our protocol please consider checking out our website and whitepaper. Stay up to date by following our Twitter or joining our Telegram!