Modern Crypto Investing (1 of 6)
I’ve long said that the biggest barrier to crypto is not capital, but knowledge.
The sheer volume of information is enough to paralyze even the most seasoned analysts, making it even more intimidating for the new entrant to figure out where to start. Let’s face it, the space is fundamentally different than when I started back in 2015…
While excellent for innovation, the fast pace makes it harder for investors to pick winners. Keeping track of the best tokens, purported (vs. actual) protocol upgrades, social media hype, and other ‘indicators’ can be quite time consuming and daunting, especially if you don’t know where to start.
Put simply, the signal-to-noise ratio is getting worse and quality projects are, at best, getting less recognition than they should, and at worse, slipping under the radar entirely.
This is exacerbated by the tribalism that exists among niche communities. Maximalists, so to speak, of any coin will push and promote only that particular coin, to the point that a member of that community would be seen as disloyal for diversifying their bag (holdings).
In an industry where the systemic risk already flirts with the upper bound of most investor’s risk tolerance, this analyst argues that patterns of insular thought are likely not a net benefit. When you go too far down any road, you are likely to develop blind spots.
Ok, so what do we do from here?
Well first, do something. Following analysts, debating friends, watching youtube videos, and scrolling subreddits are all great ways to feel like you are taking action, without actually taking action.
From my experience, the gateway is buying some bitcoin. Below, is a good theoretical progression from a ‘no-coiner’ to a well-diversified crypto portfolio.
Note that this and any further content is for informational purposes only, you should not construe any such information or other material as legal, tax, financial, investment or other advice.
The Broad Strokes
Stage 1: Buy bitcoin
Stage 2: Diversify into top 10 coins (excluding stablecoins) through a market-cap weighted index
Stage 3: Perform idiosyncratic analysis to pick favorites and form an individual investment thesis. Re-weight your existing portfolio to make room for your top 5 picks
Stage 4: Once you feel comfortable with tracking and reporting, re-allocate your portfolio again to make room for growth allocations (between 10–30%)
Stage 5: Re-balance your core portfolio by market cap and perform continuous analysis on your top 5 picks and growth portfolio to stay up to date
Sounds easy enough, but I know that it can be difficult to conceptualize it from words alone, so lets look at it more practically from an allocation perspective (all % are illustrative):
Stage 1: 100% BTC
Stage 2: Ex. 60% BTC, 30% ETH, 5% BNB, 1.5% DOGE, 0.7% LTC, 0.5% BCH etc.
Stage 3: Ex. 45% BTC, 30% ETH, 5% BNB, 5% SOL, 5% DOT, 5% AVAX, 5% LUNA
Stage 4: Ex. 35% BTC, 30% ETH, 20% top 5 picks, 15% Growth Portfolio (the topic of future posts)
Stage 5: 30% BTC, 25% ETH, 22.5% top 5 picks, 17.5% Growth Portfolio, 4% Yield Protocols/individual NFTs/DAOs (selected through idiosyncratic analysis), 1% Moonshots/Slush Fund
You probably will enjoy 70% of the benefits just from traversing stage 1 to stage 2, then gains will be marginal past that point (especially small between stages 4 and 5, unless one of your picks moon).
Theoretically, if I were you, (and I fancied myself a savvy investor), I would consider one of the following:
- A progression to at least stage 3, or
- Frequent rebalancing if you never progress past stage 2 (at least bi-quarterly, but depends on your methods and transaction costs incurred)
If you only get to stage 2 and worry you aren’t doing enough, consider the fact that if you stuck to this strategy from Jan 2018 to now, you’d have seen over 6000% return. Broadly speaking, this kind of strategy is appropriate for 99% of investors.
But, if people were content with what was appropriate for them, there would be no point in writing this article.
Unfortunately, or maybe not unfortunately (I really haven’t decided yet, given my field of work), people are always looking for a leg up. A way for them to “beat the market” and FIRE (financial independence, retire early).
This drives them to seek disproportionate risk-return profiles and ultimately diluting their positions in our previously established index strategy (Stage 2).
Holdings as measured by number of total coins grow, reporting gets more complicated, and losses become more plentiful.
Often times, people read a single whitepaper, see how “revolutionary” a token is and go all-in, blinded by the possibility of exponential growth and dollar signs.
This can happen to even the most rationale person if they join the project’s community, are influenced by the “social proof”, and are swayed by the echo chamber of negative (fear, uncertainty, doubt, greed) and positive (hope, belonging, hype) voices.
So why am I saying all of this?
Not to show that I am better than these people — I am not, in fact, I have been this person many times over. I am saying all of this to remind you that a return to the fundamentals might be boring, but it pays well.
The notion that a large chunk of your portfolio holdings, when chosen correctly, should provide the lion’s share of your returns is basic and intuitive in the traditional portfolio management world.
The issue is that in crypto, it has been forgotten.
Perceptions have been diluted by the breakthrough stories of people 10,000x’ing on some moonshot project and investors are suckered into the fantasy that if they sprinkle nominal amounts across a pool of low cap coins that they will be a whale in no time.
This is not to say that investing a small part of your portfolio into these low-cap moonshots is inherently bad, but it should be done on the heels of solid analysis and consideration. In fact, I myself have advocated for, and been influenced by, a Jason Calacanis approach to venture (read: crypto) investing.
But enough preamble
This article’s purpose was to contextualize my views on crypto investing (for informational purposes, I might again add).
For posterity, if I was talking to the average investor I might sound something like this, “70–90% of your holdings should be allocated in a manner similar to Stage 2, in a market cap weighted index”. Not innovative, not flashy.
But, now that’s out of the way, I want to present my analysis for what I might do theoretically, with the last 10–30% of my funds. Taken with the understanding that this is if I was greedy, wanted to make my life difficult, thought I could outsmart the market, blah blah blah.
You should know that it is incredibly hard to outperform the two behemoths in the space (BTC/ETH) and the proportion of your funds/portfolio allocated towards individual picks outside of these top two should positively correlate to your individual risk tolerance.
Great. After all of that, if you’re not persuaded to keep it simple, then I invite you on to read the second article in this series.
Full Disclaimer: The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. Kiran Malik does not recommend that any cryptocurrency should be bought, sold, or held by you.
