The Concentration Risk Indicator : Raising the Bar for Financial Stability and Portfolio Performance Measurement

We have developed a novel risk management measure called the concentration risk indicator (CRI). The CRI has been created to address drawbacks with prevailing methodologies and to supplement existing methods. Modified and adapted from the Herfindahl-Hirschman (HH) index, the CRI is focused on the current facet of the decentralized terrain, wherein the majority of the wealth is restricted to a small number of tokens. The CRI, when used alongside other well known portfolio measurement yardsticks, allows us to gauge how portfolios are performing and to compare them to the wider set of crypto investment opportunities. Such an approach will give a more complete picture of how well any investment machinery is working. The concentration risk indicator can be calculated for individual assets and for portfolios of assets as well. When comparing two investments, the lower the concentration risk, the better the investment from a diversification point of view. We calculate and report the CRI, along with other metrics, for individual crypto assets and portfolios of crypto assets using a daily data sample from January 01, 2019 until August 10, 2022. We discuss how the CRI can become an indicator of financial stability at any desired aggregation unit: regional, national or international level. We point out the primary riddle of risk management, which is that the life of a risk manager is very similar to someone doing a slow walk on a tight rope. We provide a set of directives, the five pillars crypto risk mitigation guidelines, aimed at brevity so that it is readily apparent what actions to perform, and implement, without much confusion