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    Lesson 3

    Caps + Correlation Risk

    13 min read

    Set position caps and understand why correlated assets don't provide real diversification.

    Holding 8 DeFi Tokens = 1 Concentrated BetToken 1 — DeFi-72%Lending protocolToken 2 — DeFi-68%DEX protocolToken 3 — DeFi-75%Yield aggregatorToken 4 — DeFi-70%Liquidity protocolToken 5 — DeFi-65%Options protocolToken 6 — DeFi-71%Stablecoin protocolToken 7 — DeFi-69%Derivatives DEXToken 8 — DeFi-73%Insurance protocolSame narrative = same crash. Correlation destroys the illusion of diversification.
    Eight tokens from the DeFi sector share a single underlying narrative — when DeFi sentiment turns negative, all eight drop 65–75% simultaneously regardless of their individual protocols.
    Size Limits Prevent Single-Token BlowupBTC + ETH CORE60–70% of total portfolioCATEGORY / SECTORMax 30% per narrativeINDIVIDUAL ALTCOINMax 15% of crypto portfolioLargestallocationSectorcap ruleHighestrisk tierCaps apply independently — a 15% alt in a 30% sector is within both limits
    The position-size pyramid enforces three independent caps: no single altcoin exceeds 15%, no sector exceeds 30%, and BTC plus ETH together anchor 60–70% of the portfolio to prevent any single failure from being catastrophic.

    Key Takeaways from this Lesson

    1. 1No single non-BTC/ETH token exceeds 15% of total portfolio
    2. 2No single CMC category exceeds 30% — narrative crashes wipe all tokens in a category
    3. 3Most altcoins are 70%+ correlated with BTC — altcoin diversification doesn't reduce BTC risk
    4. 4True diversification requires different categories, not just different ticker names
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