As always, this article is made for educational purposes. This does not constitute financial advice nor trading advice. Past performance does not indicate future results.
Do not invest more than you can afford to lose. This is not financial advice; always do you own research :)
Mid-May hurt.
The total crypto market cap fell from $2.5T to $1.5T in the span of a week. BTC fell by 40%, ETH by 60%, and some altcoins by 80%+.
Protocols on Binance Smart Chain kept getting exploited by flash loans and sometimes outright rugged.
It was an easy time to live in fear — to stare endlessly at the red candlesticks on Coinbase, debating if you should click the shiny red button to sell it all.
Crypto Twitter was flooded with bearish news. People were getting liquidated left and right. The anxiety was palpable.
I guess my only saving grace from those two week so anxiety was that I was that I had just gotten to New York and was too busy with IRL plans to stare at the charts and be on Twitter all day lol.
And as a result, I diamond handed all of my crypto positions. And while I could’ve made a little bit of money by exiting and re-entering, I’ve come to acknowledge that I am terrible at timing the market and feel comfortable just HODLing.
And not only that, but I’ve been slowly buying the dip because of my trust in the underlying technology.
And why has that been the case? Why do I have such high conviction on this technology?
I can inspiration from two great minds: Roy Amara and Charlie Munger.
Amara’s Law
“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run” — Roy Amara
American scientist Roy Amara’s adage gives us a glimpse into human psychology: we get really excited about new things, but rarely are capable of understanding the magnitude of impact.
I strongly believe that the future will look a lot stranger than we can ever fathom.
Autonomous vehicles, drone delivery, the Metaverse, permissionless money, genomics and infinite life.
And because of Amara’s law, we see bubbles in asset classes in the short term, but when we zoom out, the growth of truly transformational ideas and technologies becomes exponential.
See Amazon and Salesforce below as a small example:
Sorry, the embedded tweet isn’t really clear. Here’s another Amazon chart to showcase Amara’s law:
The left-hand chart shows the Amazon “bubble” popping during the dot-com bubble, but it was a minuscule correction in its trajectory to redefining how the world shops (shown in the right-hand chart).
Poor Charlie’s Almanack
I’m sure many will read the previously section and think, “Well obviously transformational technologies will exponentially increase in value… but Jimmy, how do you know that crypto is one of those technologies? We’ll only know in retrospect. Also, how do you know that crypto won’t be another Yahoo or AOL that seemed like a transformational technology until it wasn’t?”
On the first point, you’d be correct… having high conviction on a nascent technology is one of those “secrets that few people agree with you on” that Peter Thiel talks about in Zero to One.
On the second point, this is where we get down to brass tacks from Charlie Munger (even though he doesn’t understand crypto).
In his book Poor Charlie’s Almanack, Charlie Munger of Berkshire Hathaway describes his investment thesis — especially regarding the relationship of entry price and return on capital.
In the long term, the return an investor gets from a business will roughly equal the return the business itself earns on its capital.
To expand on that, investing in a “bad” (i.e., high) entry point for a good business will always trump investing in an OK business at a “good” entry point.
Let that sink in because this is foundational to Warren Buffett’s renowned value investing.
And on that note, in my mind, there’s no asset / company that gives a better return on capital than ETH.
Post-ETH2 merge and post-EIP 1559, Ether will become the native asset of a Proof-of-Stake consensus mechanism with a deflationary supply model.
ELI5, that means holders of ETH will be directly compensated for the fees (i.e., the revenue) that the Ethereum platform generated.
And due to the deflationary component of EIP-1559, the greater the usage of the platform, the more valuable the underlying asset of the platform.
Ethereum 2.0 researcher Justin Drake projected that, at least initially, ETH stakers will receive up to 25% APR.
Essentially a 25% return on capital, since digital assets have simpler financial structures than businesses.
If Charlie Munger thinks that 18% ROC is a “great” company, wait until he hears about ETH…
And it’s not just ETH.
DeFi blue chip protocols like Aave, Uniswap, and Yearn generate insane return on capital for their asset holders. These are real companies generating revenue and essentially redistributing it back to users — building on the ethos of Web3 with democratized access to money.
Yearn for example currently trades at a P/E ratio of 12… an order of magnitude smaller than a 3-year old, 100%+ CAGR growing, profitable tech startup should be valued at.
Closing Thoughts
The Bitcoin Fear and Greed Index tracks crypto market sentiment on a daily basis. For the past few weeks, sentiment has hovered from “Extreme Fear” to just normal “Fear”.
But this is where it’s time to stand by my high conviction plays.
It’s not just blind trust, there’s strong financials and data behind the decisions I’m making.
And I’m not alone in my thinking: a16z is raising their largest crypto fund to date of $1B, Cathie Wood is accumulating more GBTC and COIN, and capital inflows are still positive — signaling bullish accumulating from institutional investors.
To quote Charlie Munger’s mentor:
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