# How to use modern portfolio theory in Bitcoin?

19. November 2020## Diversification can be our ally in the middle of this field of volatility.

Modern portfolio theory (MPT) has long been one of the most accepted financial portfolio optimization theories in the world of large investments. More than a theory, it is a practice that is widely used by portfolio managers. Basically, it’s a model that combines different types of assets, taking into account their profitability and risk, calculating past volatility and market correlation. Does it apply to Bitcoin Profit platform investments?

This theory is born from academia and is a theory derived from the theory of the efficient market. In fact, its creator and main exponent, Harry Markwitz, Nobel Prize in Economics in 1990, built his theory on the efficient market theory. In other words, the two theories are closely related. Since its creation in 1952, modern portfolio theory has enjoyed great popularity in the investment world. And one could say that it is considered the norm. Its popularity is due in part to its great simplicity.

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Of course, despite its success, this theory has many critics. In fact, it’s considered absurd by many reputable investors. By Warren Buffett and Charlie Munger, for example. Well, in general terms, it is criticized by all the critics of efficient market theory. This includes primarily value investors and opposites. In other words, all those who think that markets are essentially irrational.

Now, if we go straight to the results, modern portfolio theory is quite mediocre. In this sense, value investing, as an investment strategy, has yielded better results. In this case, Buffett and the other disciples of Ben Graham have a basis for dismantling modern portfolio theory.

What is the underlying problem? One of the problems is the use of volatility as a primary measure of risk. That is, it reduces risk to a simple number. Of course, in practice, many of us fall into the trap of saying that volatility is risk for simplicity’s sake. However, it is not that simple. It is obvious that the risk of a business goes much further. Logically, there are other factors that we must take into account, such as its indebtedness, the valuation of its assets, its business model, sales, and its market share. In short, if a business produces profits constantly, the risk decreases. It doesn’t matter much about the volatility of its actions.

**Here’s something to think about when it comes to diversification. If you have a good business, it would not make sense to diversify. In other words, having several mediocre businesses instead of one good one does not reduce risk. In this case, diversifying would be absurd.**

Modern portfolio theory places too much importance on past data. That is, it is based on the premise that with past performance and volatility data, future performance and volatility can be calculated. And thus ignoring other variables. This emphasis on quantitative factors for the composition of a portfolio underestimates the irrationality of the markets and the surprise factor.

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*However, one could conclude that volatility is not the only element to determine the risk of a business or other productive asset. However, in the case of a merely speculative asset, the volatility factor does take on greater importance. The mere fact that it has no use value or intrinsic value, only exchange value, places a greater weight on variations in the exchange rate.*

Let’s suppose for a moment that we borrow in dollars. If our income is in dollars, we will most likely be able to sleep soundly, because the dollar is an extremely stable currency. In this sense, the risk is relatively low. The matter changes if the loan is in dollars, but our income is in Venezuelan bolivars or Argentinean pesos, for example. In this case, it would not be unreasonable to say that the volatility of the local currency increases the risk of the operation.

Now let’s suppose that we apply for a bank loan to invest in Bitcoin. If we listen to the crypto-influencers in vogue on Twitter, this operation would not be very risky. After all, according to the official story, Bitcoin is a “safe haven” and fiat money will soon collapse. Apparently, the scarcity of Bitcoin guarantees its value in all climates. However, this supposed Bitcoin security is just rhetoric. Because no one in their right mind would think that the idea of this reckless loan would be risk-free. The green