Maximum Asset Allocation

The maximum asset allocation prevents conditions where using a market cap weighted index results in a single asset holding too much of the weighting in the portfolio. Continuing from the last example, we can see that BTC is still holding almost 50% of the value in the portfolio. If we wanted to reduce this amount to 20% for example, the resulting portfolio would look as follows:

·        BTC - 20%

·        ETH - 20%

·        XRP - 19.51%

·        BCH - 8.14%

·        LTC - 7.35%

·        BSV - 5%

·        XLM - 5%

·        TRX - 5%

·        ADA - 5%

·        XMR - 5%

We see that placing a maximum asset allocation on our index has reduced our BTC weighting to 20%. In doing so, we redistributed some of the weighting to other assets in the index. ETH for example increased in weighting enough to also exceed the maximum asset allocation, resulting in it also capping at 20%. The remaining amounts left over are distributed to the remaining assets based on market cap.

Amun is an example of an index fund which uses a minimum and maximum allocation percentage. You can read more about their methodology on their site here:

Amun Crypto Basket Index

Minimum Asset Allocation

The minimum asset allocation sets a minimum limit to the percent of a portfolio that can be allocated to a single asset. This prevents conditions where using a market cap weighted index results in a significant number of low weighted assets. For example, allocating the top ten assets on Bittrex by market cap at the time this article was being written would result in the following distribution:

·        BTC - 66.76%

·        ETH - 12.69%

·        XRP - 8.2%

·        BCH - 3.42%

·        LTC - 3.09%

·        BSV - 1.86%

·        XLM - 1.14%

·        TRX - 1.1%

·        ADA - 1.04%

·        XMR - 0.7%

We can see that the majority of the assets in the index are allocated less than 5% of the total value for the portfolio. This might be undesirable, so we can set a minimum percent. For example, if we set a 5% minimum allocation, the resulting portfolio would look like the following: 

·        BTC - 49.51%

·        ETH - 9.41%

·        XRP - 6.08%

·        BCH - 5%

·        LTC - 5%

·        BSV - 5%

·        XLM - 5%

·        TRX - 5%

·        ADA - 5%

·        XMR - 5%

We can see the weightings from the larger assets are decreased in order to increase the weightings for each of the assets that are below the 5% threshold. The outcome is no asset holds less than 5% of the total value of the portfolio.

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