Crypto Investing: The light side and the dark

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It’s official. Crypto mania has taken the world by storm, and it’s here to stay. Money is literally falling from the sky, and we’re seeing a level of wealth creation that is unprecedented in human history.

If you’re like most, FOMO is kicking in. You’re wondering how to get involved in the madness and earn your fair share.

This post will tell you how, while helping to avoid the countless hours of emotional turmoil and psychological pain I’ve recently experienced in trading crypto assets.

Going into this, know that there is a “force” within this space that is powerful and strong. And yes, it has a a dark side and a light side. I’ve flirted with the dark side and I’m here to help you stay in the light. I’d be doing the world a disservice by not sharing and allowing others to benefit from this experience.

Before diving in, the majority of this post assumes you have an elementary understanding of this space. If not, here’s a quick primer.

(If you’ve been following the space closely, feel free to skip ahead. Also, this post is on the longer side and meant to be comprehensive, so settle in and get your mind right)

Crypto Primer

Bitcoin, crypto assets, and blockchain have been hot topics of conversation within the tech community for years. Wall Street and governments used to dismiss crypto as a scam. A Ponzi scheme with no tangible value. Amongst the general public, Bitcoin and Ethereum were fleeting buzz words that sparked interest, but left many scratching their heads. So they continued to live their lives without a second thought.

In the past few months, it has blasted into a whole new stratosphere.

Within the tech community, crypto and blockchain tech has reached a level of pure legitimacy and limitless potential. ICO’s have forever changed how capital is raised, how communities/networks are built, and how wealth can be created and democratized. Wall Street and governments are in a complete frenzy, climbing over one another to better understand, get involved, and avoid complete disruption. On Main Street, well, you know something big is happening when during Christmas your mom, grandma, sister, brother in law, sister in law, roommate, and friends, all ask for help opening a crypto account. And I’m not talking about the basics like Coinbase or Gemini, we’re talking about the advanced stuff- platforms like Bittrex and Binance for buying and selling “alt coins”, and Coinigy for charting and analysis.

This is in contrast to last Christmas. Satoshi who? Miners to do what? What the hell are you saying?!

In retrospect, it all does sound a bit insane, and I don’t blame my family for being concerned for my wellbeing at the time.

But my, how that tune has changed. There is now a tsunami heading our way that is going to change how information and value flows, how people connect, and how systems of all types operate. If you’re not already following this stuff, it’s time to dial in and pay attention. Look up blockchain on Wikipedia. Watch the Netflix documentaries. Become a voracious reader and consume as much information as you can. The crypto revolution is going to make Web 1.0 and 2.0 look tame.

I’ll explain why in a later post, diving deeper into the fundamentals of blockchain, crypto assets, and their relation to other technologies like AI, AR/VR, IOT, etc…. But that post can wait. Because if you’re like most people, you’re seeing token prices go through the roof and your head is spinning. 100% — 2,000% returns are occurring on a daily basis. Stupid numbers. Teenagers, friends of friends, and fools are becoming overnight millionaires. Your financial instincts and FOMO alarms are screaming to get involved.

The worst part is that your instincts are right.

It’s not too late

Most think it’s too late, and many are kicking themselves for not getting involved earlier. You’ll be hard pressed to find a single (relatively plugged in) person that hasn’t experienced the following inner monologue, “Ugh, what if I bought bitcoin at $1! Okay, maybe $100! Fine rational self, you’re right, I wouldn’t have bought it then… but maybe at $1,000? Shit even $10,000!? Ugh, why didn’t I pay more attention! What an idiot!”

A friend of mine bought a few bitcoin years ago when it was at $14, only to sell immediately when it went to $13.70. That’d be worth around $40,000 by now. Not a bad risk adjusted return… I’ve had to talk him off the ledge on numerous occasions.

Another friend put $1,000 into an ICO. He forgot about it, and when he looked back back a few months it had grown to $50k. (But what the hell is an ICO?! It’s an Initial Coin Offering. But don’t confuse it with IPO. It’s very different. Essentially crowd-sourced fund raising. A Venture Capitalists nightmare)

Okay maybe you haven’t had these thoughts. But you will now. And for that, I’m sorry…

But don’t fret! There is hope! Just relax and realize that it’s not too late. Not at all. In fact, we are just getting started. This space has miles and miles to run and there is still money to be made.

That said, while an exciting an opportunity looms ahead, I’m primarily here to say: PROCEED WITH IMMENSE CAUTION.

While you’re entering a realm of golden opportunity, it’s also rife with landmines of psychological torment and financial distress. Without the right strategy, it’s a world filled with emotional highs and lows like you’ve never experienced.

I caught the crypto bug early this year, dabbling in Bitcoin and Ethereum. Some nice gains in hands, I decided to put some house money to work, diving headfirst into the crypto trading scene- studying technical analysis, learning about the Ichimoku Cloud, relative strength index, the MACD lines, finding myself in quite the trading rabbit hole…

New knowledge acquired, I started slow, dipping my toe into various alt coins (tokens that are a spinoff from the major projects like Bitcoin, Litecoin, etc). I got lucky and saw ridiculous gains early. Once I could unplug from work over the holiday break, I dove in deep. Really deep.

I was hooked and addicted. The fun little rabbit hole soon became a polarizing vortex of joy and sorrow, bliss and pain, complete confidence and total self doubt. I became the perfect case study of investment psychology 101, engulfed in fear and greed. Or as they say in the crypto world, FUD (fear, uncertainty, doubt) and FOMO (and I must say… you don’t know real FOMO until you experience crypto FOMO).

I hope this case study helps you invest in crypto the right away, without too many hard lessons learned.

The Day Trading Experience

When you get a trade right, you can really get it right. You’re suddenly up 100% and your mind is enthusiastically bathing in a bubble bath of pleasure chemicals unrivaled by any drug known to man. You’ll find yourself splashing around in copious amounts of dopamine, dumping buckets of it on your head and giggling with internal glee as you self proclaim your genius to the world.

Then out of nowhere, it gets very dark. I’m talking “the upside down from Stranger Things” dark… Price candles start turning red. That beautiful, bright green ascent to higher highs quickly flips to a violent red plunge to lower lows.

Suddenly, you’re free falling in a wind tunnel of terrifying adrenaline and fear. Your rational brain tells you not to panic. Just hold your investment and ride out the storm! (aka: HODL in the crypto world, a term from bitcoin folklore, filling memes globally. As the story goes, back in bitcoins early days a drunk and frustrated developer took to an online forum and slammed away on his keyboard, typing in a drunken rage that once and for all he was just going to HODDDLLLLLLL!!!!!! his bitcoin. Cute, in jest, very difficult in practice. This word will become your mantra.)

You try and stay robotic and ignore the ever ticking red bars going lower, and lower, and yet…. lower still.

You look back at the historical price charts to reinstate your original confidence in the buy. Your technical signals told you this was a good idea. You trusted your instincts and the charts. How could it be wrong? The price has done nothing but go up and up for the past few weeks, it couldn’t possibly go much lower. Could it? It has to bounce back, right?

Then you black out.

When you come to, you see that you sold everything. The panic resides and you’re off the roller coast. You lost a little bit of money, but at least you can catch your breath and sigh with relief. You didn’t stick to your guns and maintain conviction in the trade. You completely went against the advice of every seasoned trader. The guilt stings. Bad. But screw it, at least the panic is over.

Then, just when that turbulence subsides, your eye catches a new token and chart. The price is running up. Wow, it’s really running! You scramble between tabs to sanity check the price movements, looking at all your signals. Everything screams buy. Should I dump everything and go all in!? Go big or go home baby! Wooooooooo!

You black out again.

This time the buy order has filled. The green candles tick up and up and up. You’ve made a 40% return in minutes. Is this real life?

Then a few hours later….

Tick. Red candle. Tick tick, two red candles. Tick tick tick, holy shit that’s a very large red candle. AHHHHHHH!!!!

And so goes this carousel from hell. Round and round.

After a few weeks of this dizzying experience you’ve accumulated a number of impulse buys and panic sells. You might be up around 200% net. Which sounds great, right? Objectively speaking, yes it is, and all should be well and good. But upon a quick analysis of the historical 1–2 week chart, you’ll quickly start hating yourself, realizing that for the majority of those buys, the ones where you blacked out and sold… many of them are all up over 500%+ over that same time frame. A few are closer to 1000% over a 1 month time frame and longer.

What… the…. $&#^!? Why didn’t I just HODL!!??

Reflection

If this experience sounds terrifying, it’s because it is. If that 200% sounds gratifying, it is… but the data shows that with a longer term focus and much (much) more patience, I would have made twice as much money, with 1/4 the time spent and way less mental anguish.

Safe to say it’s time for a new strategy.

Now if you’re an adrenaline junky who loves to gamble, has nothing better to do, and loves to feel “the rush”, by all means, day trade the hell out of Bittrex and Binance and spend countless hours staring at a screen.

I’m taking a much different approach. This isn’t the only strategy, and it should not be anyone’s bible. Rather, view it as a playbook that you can take and make your own. If you have better ideas and alternative strategies, please share!

Strategy Revamp: 80/20

First, trading is hard. But it’s also fun, and you can certainly get lucky and catch some runners every once in a while. That’s how I was able to get to that initial 500% percent return. But active trading took up WAY too much time, and in attempts to sustain this approach through levels of volatility, the portfolio quickly came down to 200%. As mentioned, I could have gotten to 500% with a much more passive buy and hold approach.

All this in mind, I’m going to adopt what I’ll dub the 80/20 rule. No, not the Pareto Principle. Rather, a reverse spin on the concept. 80% of the long portfolio will earn the vast majority of gains. Also referred to as a “bag” in the crypto community, this will consist of 10/12 assets that I love, and have super high conviction in over the long term.

However, we also know that this is as much a game of luck as it is skill. And fortune does indeed favor the bold in crypto. So with that in mind I’m using the other 20% to buy cheap alts on a multi-day and weekly time horizon, taking profits as they run and re-distributing those profits into the longer positions, accumulating the longer terms hold along the way.

This should be a much lower stress, but still very high yield approach.

The next question you might ask… what the heck should I “HODL”? Great question, glad you asked (and again, this is my personal opinion, not professional trading advice!)

Let me start by saying that you MUST do your own research and find projects you believe in. Ones in which you understand the use case, find it compelling, and can have complete conviction in.

Disclaimer and Side bar

Over the longer term (6/12 months +), many of these projects are going to fail. But over the next 6/12 months, their growth will be fueled by incredible speculation, which means there is a lot of money to be made. While many will fail, you only have to be right once. Think of yourself as a micro-VC. They invest in hundreds of companies, and it’s usually only 1-2 that really take off, accounting for an eye popping proportion of their overall returns.

That’s why this space is so fascinating…. Crypto is giving the masses a chance to get involved and have exposure to the next Google, Amazon, or Facebook. Historically, investment exposure to these assets (equity) at the seed, venture, and IPO phase was reserved for a tiny fraction of the population. The already wealthy elites like VC’s, Investment Banks, Wall Street insiders. Now, crypto gives the global population an opportunity to partake. Huge opportunities for massive wealth accumulation can be realized by anyone with a computer.

On this note, some things to think about when you hear that this is a bubble and you shouldn’t invest… First off, it is a bubble and it is incredibly high risk. You could lose everything. I wouldn’t suggest investing much more than 10/15% of your net worth (and that’s on the high side). Caveat stated, that doesn’t mean you can’t make money in the interim and there are some interesting macro facts floating out there that give me peace of mind.

One being a contrast to the Web 1.0 bubble. It was in the trillions of dollars (around $4–6 trillion I believe). It reached those heights with only a few hundred thousands participants (VC, Angel investors, Investment banks), maybe into the low millions of people post IPO (Wall Street).

Crypto is only at $500 billion and the number of people who have access to investing is in the billions. Currently, the number of people who own crypto globally is in the low millions, maybe tens of millions? This is a guesstimate, and a high one at that, but even if the higher end of that spectrum is accurate, these numbers are a compelling macro signal of the potential for this market at large.

And… back to our strategy

Once you pick your favorite tokens, continue to revisit the projects along the way. Track their roadmaps and follow them diligently (Twitter is a great way to do this, and most of them post roadmaps on their home page). The day of reckoning for these projects will come. Code must be shipped, and product/market fit must be achieved. The likeliness of these things occurring is low with many of them, so keep that in the back of your mind and pay attention.

Until then, speculation is a real thing, and market dynamics are powerful. So how might one take advantage? Before jumping in, it’s important to understand the various types of crypto assets and what the ecoystem looks like. Now this is pandora’s box. The space is getting increasingly complex and there are thousands of tokens doing thousands of things.

I’m going to try my best to keep it simple and easy to understand.

Verticals

There are three primary verticals within the crypto asset space. Within them lie certain asset categories that I think are the most likely to gain momentum early, while also being the most likely to succeed long term. The primary token verticals are currency, platform and utility.

Currencies are your mediums of exchange and/or store of value tokens. Think Bitcoin or Dash.

Platforms are the foundation upon which other decentralized applications and services will be built. Ethereum is the incumbent everyone knows and loves, but there are some other really interesting projects out there as well. NEO is viewed as Ethereum’s Chinese cousin, focusing on a platform to power a the future of a “smart economy”, powered by blockchain. This includes things like identity, physical asset registration, IOT capabilities, etc. Ethereum is more of a raw computing platform allowing developers to leverage blockchain tech to run smart contracts.

Utilities are tokens that give you access to a service and/or a digital good or commodity. An example here is the FunFair token, enabling participation within a decentralized casino (an age old human vice, giving it a relatively high probability of traction), or maybe computing power from a Golum, or cloud storage from a Sia.

Asset Categories

Within these verticals, these are the categories I like most: infrastructure, privacy, fin tech, and Blockchain 2.0 (i.e.: evolutions of bitcoin and other core assets that take a different approach to scale and securing the blockchain).

(FYI: see links embedded in each coin name)

Infrastructure is where I’m the most bullish. They provide essential elements of the crypto ecosystem that will be foundational to the success and adoption of blockchain technology at large. This includes many of the platform plays upon which other apps or services can be built, (ie: Ethereum, NEO, Stratis), projects like Ark or Icon, (technology to connect various blockchains and allow for interoperability), or perhaps an Aragon, which provides a platform for the management and governance of decentralized organizations (Aragon is to the crypto world what the state of Delaware is to corporate world).

Lastly, there are a variety of interesting “layer two” solutions out there (a layer of tech on top of a Bitcoin or Ethereum), aiming to help with transaction speed and volume, fees, and general blockchain scalability problems at large. One example I find compelling is the Raiden Network. They are attacking these very problems within the Ethereum ecosystem (which far and away boasts the most applications, all of whom could greatly benefit from Caiden’s tech). As the pipes, rafters, and electrical wiring of the crypto eco blueprint, these are safer bets than, say, consumer facing applications… which have a VERY long way to go.

Privacy is what it sounds like. Currency that allows for autonomous transaction (some question the need and think that the general public doesn’t want/need this, but there is certainly a large niche market that wants to remain sneaky and off the grid, within both the enterprise and consumer world).

Fin tech is general financial technology projects looking to integrate crypto into existing infrastructure (ie: Ripple and Stellar) or spin off all new necessary services around use cases can solve a lot of new pain in crypto and fill a huge need. My favorite example here is Salt- a platform for lending fiat against crypto.

Blockchain 2.0 is the higher risk, higher reward category, consisting of extremely ambitious projects that are trying to take the learnings from incumbents like Bitcoin and Etheruem to create hybrid competitors, blending the best of numerous blockchains to solve the some of the aforementioned challenges. These guys are implementing fancy tech that is difficult to comprehend, but includes things like off/on chain transactions, various types of algorithms for achieving consensus on the network (i.e.: proof-of-stake, Casper, etc), and all kinds of fancy cryptographic tricks. Cardano and Verge are good examples of this.

All this in mind, what might ones portfolio look like? This is how I see the world, but again, make your own judgements.

Portfolio Breakdown

Obviously, you need to hold Bitcoin, which acts as the backbone, and the “central bank” of the entire ecosystem.

From there, I think we’ll see a lot of speculation and price appreciation around privacy and anonymity. These are tokens like Monero, Z-Cash, Dash, and two new up-and-comers currently gaining momentum, Verge and PIVX (while Verge just got absolutely murdered the past few days after a absurd initial run, there is certainly long term potential there if they can pull off what’s known as the “Wraith Protocol”, which essentially allows users to switch between private and public transactions).

Within the platform world, I think the most compelling and quick to adopt will be in the realm of Financial Tech. Stellar is building an open-source, distributed payments infrastructure to connect people, payments systems, and banks. They are backed by IBM and have a founder who came from the Ethereum project. Read up on it first, but I’m liking Stellar long term quite a bit. EOS is also a compelling project with a sexy spiel. If Ethereum is a “blockchain super computer” to build other blockchain technology, think of EOS as a “blockchain operating system” for building higher level applications (similar to how apps are built on iOS or Windows today, vs. having to start with a raw kernel/computer and no OS). The founder talks a big game, but if he can deliver, hold on to your hats…

If you believe in the internet of things, IOTA is another exciting project utilizing a technology that is a literal twist on the blockchain, called a Tangle. While they experienced turmoil with some nonsensical FUD moments in the media (questions over what turned out to be a legitimate collaboration with Microsoft, and concerns over a bug that was identified by MIT, but since being addressed), they are a very strong team and with partnerships in the works. If they succeed, IOTA could act as the foundation for a future in which your refrigerator order groceries on your behalf.

Given that I’m working in AR/VR, I see a ton of promising use cases for asset/app distribution and marketplace development. Voxel and Decentraland are current leaders within the platform category, allowing people to easily create a distribute VR experiences and content. Not to mention, if we’re talking about speculative price appreciation, the frothy combination of buzz words like AR/VR and Blockchain is sure to draw investors like bees to honey, right? (just kidding, but maybe it is that simple…. Don’t give the crowd too much credit)

Continuing in Fin Tech, I mentioned a great projects in Salt which I love (platform for lending against crypto). There’s also OmiseGO (platform to build decentralized crypto exchangers and connect existing financial infrastructure) and 0x (another platform for building decentralized crypto exchanges/marketplaces).

Going into platform vertical and infrastructure category, VeChain is showing some promise. Their goal is to use blockchain tech to create a trustworthy, distributed business ecosystem. In so many words, they are looking to increase transparency and trust within business processes. For example, you can use this platform to create applications to prevent the counterfeit of luxury goods, or to make it easy to access records of specific items in retail.

I’m less bullish on the utility space, as I think it will take a while for winners to flourish, and many of the digital commodity players will become just that… commodities. Competition will be brutal and picking a winner more difficult. That said, I am indeed long on FunFair, and I think projects like Redd and Tron have potential (these are tokens that give you access to social media communities and entertainment content, rewarding users for content generation and sharing. Think decentralized Facebook or YouTube). A more commons sense utility token that I’m more bullish on than most is Qauntstamp. They are solving a real need, which is the testing and auditing of smart contracts. There are over 1 million smart contracts in existence today, and many are suffering from unforeseen bugs and security issues. Quantstamp aims to bring a much needed level of trust and security to these otherwise very promising pieces of code.

That’s all folks

Well, that’s it. I hope this can act as a point of reference as you go to dip your toe into the crypto space.

In closing, I can’t stress enough the importance of doing your own research and making your own decisions. I am not a financial adviser by any stretch of the imagination nor do I play one on TV. If you didn’t already know that… well then I guess I should work on my personal branding.

Happy investing and happy holidays. Here’s to squashing FOMO and FUD once and for all!

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