How to ride the volatility rollercoaster without getting sick?
by Tom Debus
Have you been tempted time and again to make your first move into crypto? But then the next storm of catastrophic news broke loose and you, once more, shied away from this vicious new asset class. So many promises, so many exciting tales of fast riches and so much drama of kingdoms lost.
I have spent my career of more than 30 years in the traditional financial markets around the globe. Always at the crossroads of data, technology and new opportunities in all financial hubs around the globe. I saw the dot-com bubbles grow and pop and I was in the Big Apple as Lehman fell. But never have I come across such a fundamental shift in the global financial architecture as that promised by decentralization technology. And I explicitly do not talk Cryptocurrencies exclusively but all elements and components tied to them, be it blockchains, smart contracts or distributed ledgers.
Yesterday was always the right time…
So what should and could be my motivation as a traditional investor to embrace this up and coming new asset class? The answer might not be as obvious as it is simple: to learn, to study and observe.
Both cryptocurrencies as well as other decentralized or tokenized business models have several new characteristics that almost form a new overlay of our historic understanding of enterprises and their value creation. A new dimension, that needs to be understood and evaluated in addition to the classic fundamental analysis. In essence decentralized business models are about trust, transparency, speed and scalability. And since many factors are equally important for other economic models many startups simply ride the crypto- and blockchain hype without having the proper ingredients to become a genuine decentralized business. Those are the ones that will pop and vanish in the mid term. The questions to be answered by all serious crypto investments should be:
- Does the business model require a decentralized operation and execution?
- Do the clients and partners benefit from that decentralization?
- Does it have a network effect, transcending traditional contracts?
- Can it be copied by traditional firms using traditional methods and tools?
Only if the answer to these questions is 3x „Yes“ and „No“ to the last should you consider an investment. But even then many things can go wrong. The technology is in its infancy and still will experience tectonic shifts regularly. There are great opportunities but also great risks involved:
- The people - usually the teams pushing and supporting a new crypto based business are small and hence fragile. Is there a key person risk involved.
- The laws – regulation only slowly adopts to the new decentral paradigms and may throw up new obstacles not relevant for a business model before.
- The noise – as in any bubble there are many fraudsters and false fast money prophets out there. Beware of simplicity and generic answers.
But with all these obstacles, dear reader, you might ask. Why in heavens should I put my money onto such a slippery slope? Because it is here to stay.
Invest in things that don’t get killed easily.
Decentralization as a whole is technology‘s answer to one hyper trend of our times – the vanishing trust in central institutions. Whether these institutions are your (central) banks, your government or your healthcare provider, chances are there are decentralized versions of them popping up around the globe.
Cryptocurrencies are just the earliest and most obvious application of this new trend. And while nobody can say for sure which ones will stay for good, there are good indicators that the large and early movers have found their spot in the market and their long term followers.
And just like you don’t have to invest in individual small cap stocks but can buy a fund that sorts out the day-to-day monitoring and trading, there are specialized Crypto investment managers out there. Cryptonomics Capital Ltd. for example has created a fully automated crypto-only fund, that leverages large cap cryptocurrencies as a base currency and then trades conservatively against relevant alternative crypto coins. Combining more than 20 technical signals and a set of artificially intelligence bots, this fund is able to watch the crypto market at a speed, accuracy and width no human trader could cope with. Creating a conservative and steady profit in spite of the huge volatility of the crypto asset class is the core objective of the CC Crypto Quant Fund. An ideal vehicle to make your first foray into this exciting new world.