- Assets vs Liabilities
- It’s A Marathon Not A Sprint
- Time In The Market vs Timing The Market
- Asset Volatility
- Asset Allocation & Diversification
- Compound Growth
- Let Your Winners Run
- Buy Momentum
- Add To Your Winners
- Cut Out The Noise
- Asymmetric Risk
- Avoid Lifestyle Inflation
- Invest Where There’s A Competitive Moat
There’s a lot of innovation happening in crypto, but that doesn’t mean traditional investment principals don’t apply. With the help of my buddy Tom, The Crypto Investor, we’ve gathered some timeless investment principals to keep in mind when planning your crypto investment strategy.
Assets vs Liabilities
Are you buying things that will appreciate? Or for vanity reasons? If you stood in line to buy the first iPod on November 10th 2001 for $400 - you were the coolest kid in town. If you’d taken that $400 and bought AAPL stock instead at the split adjusted price of $0.333, that $400 would have gotten you 1,200 shares of $AAPL. At today’s price of $195/share your iPod cost you $234,000.
It’s A Marathon Not A Sprint
It’s natural to get caught up in the day to day chaos of crypto news and wild price fluctuations. But savvy crypto investors aren’t in it for the short term trade. Crypto adoption is a generational investment opportunity. On one hand that means it’s a BIG opportunity, on the other hand it means it will literally take generations to play out. We’re talking decades. Sure, being early helps, but zoom out to see that we’re just getting started.
Time In The Market vs Timing The Market
The goal is always to buy low and sell high. But that’s not always how things work out (it never is LOL). Just take the example of Bob, who has the world’s worst timing when it comes to crypto investing.
Bob only buys bitcoin and always at the top of each market cycle. He plunged $10k into bitcoin at $1,100 in 2013. Another $10k at $19,500 in 2018. And finally $10k more at $60,000 in 2021. Bob bought the top three times in a row! He and invested $30k total which got him 9.768 BTC worth $293,040 at today’s price of $30k per BTC. An 876% return on investment! Not bad for being the worst market timer of all time.
To say this another way, Tom Lee of Fundstrat has a “Rule of 10 best days” which shows that if you’d invested in bitcoin from 2013-2019 but missed the 10 best days, you’d be down 44% annually vs up BIG like Bob.
Volatility is scary, but you can’t expect massive returns without it! In order to get 10X gains you’re going to have to suffer through some paper losses along the way. The best antidote to enduring major drawdowns is to de-risk over time. No one ever lost money taking a profit. Do the opposite of what your instincts tell you! Sell when the market is up big, and buy more on the dips.
Asset Allocation & Diversification
What percentage of your portfolio is allocated to crypto? Within crypto, what percent do you have allocated to hard money (BTC), decentralized super computing infrastructure (ETH) or DeFi and Web3 apps (dApps)?
As your portfolio fluctuates, keep an eye on this breakdown and adjust accordingly. Don’t be afraid to make adjustments if you find yourself with a breakdown you’re uncomfortable with. And be sure to consider the tax consequences when rebalancing.
Apparently Einstein said:
Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.
Whether he actually said that or not, the math is clear. For some reason our tiny human brains aren’t capable of comprehending compound growth. Doubling your money a couple times can get you from 10k to 20k to 40k which is EPIC. But doubling it just 4 more times gets you to $1M! and another 4 is $10B! Uhhhh… woah. That’s serious.
The lesson is simple. It’s a combination of 2 previous lessons. Time in the market vs Timing the market + It’s a marathon not a sprint = Compound growth.
Let Your Winners Run
There are countless stories of early bitcoin miners who sold all their bitcoin at $10 in 2012 thinking they’d absolutely crusheddddddd it. And they’re right. They did. The problem isn’t that they sold, taking profit makes sense after a major gain, the problem is that they sold it all.
The most difficult part of investing is finding exponential opportunities. Once you’ve found one, let it run. An object in motion stays in motion! Let compound growth work in your benefit.
It’s in our nature to root for the underdog. We want to buy low and sell high, and nothing is lower than a token who’s price is in a straight line down and to the right!
There’s an old saying about trying to catch a falling knife - don’t. Buy assets which are appreciating. Buy assets which appear expensive. Bitcoin is $30k because it keeps going UP - thats what you want. If you must attempt to buy something cheap, wait for it to turn. A good technical indicator for this is to wait for it’s RSI to be > 0.7.
Add To Your Winners
So you’ve got a plan, and you’re sticking to your plan, but the market doesn’t agree with your plan. That’s normal. A token you $1 is now at $10 and another you bought at $10 is now $1. Should you take some profit and double down on the cheap $1 token? NO! In fact, quite the opposite.
The goal here is to cut your losers ASAP, let your winners run, or better yet ADD on to them! Remember, the hardest part is finding a winner in the first place. Now that you’ve got one, keep adding fuel to the fire.
Cut Out The Noise
The amount of chatter today is through the roof. Everyone has an opinion and everyone thinks they’re right. Everyone has a token and everyone thinks their token is the future of all tokens. What do you think? Who are the few people you’ve come to trust and respect? Go for quality over quantity and cut out the noise! Find the signal in the noise. Your portfolio (and your mental health) will thank you.
When deciding where to allocate your funds, reserve a selection of your portfolio for low downside with infinite upside. Easier said than done I know... But it’s possible. If this sounds familiar, you’re on the right track:
Either it goes to zero, or becomes the base layer money that every government on earth uses to back their currency.
Avoid Lifestyle Inflation
The flip side of investing is spending. We want to make sure the spending side of the equation doesn’t creep in! Just because your portfolio is growing doesn’t mean you expenses have to as well. The occasional splurge is one thing, but stick to what you need when it comes to day to day lifestyle expenses.
Invest Where There’s A Competitive Moat
Category defining assets with no competitors tend to outperform all else. Want to invest in the future of money? Buy BTC. Want to invest in the future of decentralized computing? Buy ETH. Think DeFi is the future of finance? Buy UNI and COMP. It’s not rocket science.
The best performing assets are that way for a reason. Either they were first, or somehow they were able to keep the competition at bay while they built their category defining product. These are what we often call blue chips, but in a new sector like crypto, the crypto blue chips still have a long way to go before making a dent in the traditional financial markets.
Written by: @gerbz Gerbz is the founder of BitLift and has been journeying down the crypto rabbit hole since 2013.