Cryptocurrency has captured global mindshare due to its open and permissionless nature, which brings in capital from places that were unreachable by the legacy financial system. It has created massive fortunes for those who are lucky and have put in the time to learn from the numerous free resources.
Also…
“Easy come, easy go”
“A fool and his money are soon parted”
“Retail got dumped on”
These are all common refrains heard after the wave of cryptocurrency mania comes to a screeching halt. Paper gains mean nothing and many investors have found their portfolios draw down by >90% since the November top.
Here are some lessons I’ve learned as an active investor in the cryptocurrency space. This list will continue to grow, but the goal is to always keep learning and apply these teachings to preserve hard earned profits and survive the volatility of crypto.
Take profits - We’ve all heard it before! Capital preservation is the most important rule any speculative investor should follow. As mentioned before, paper gains are simply a number on your screen that represent the current value of your portfolio should you sell. Many investors believe the number will only go up after getting conditioned during a bull market, but we’ve observed the parabolic ascent and lightning quick crashes during each cycle.
A Stablecoin is not without risk - This one hit hard when $UST, Terra’s stablecoin, death spiraled to zero. $18b of stable dollars disappeared in under a week. Many investors and project treasuries had huge amounts of their net worth deposited in Anchor or held in UST on Curve. Something that yields 19% APR on a ‘stable’ asset is not risk free, it’s just too good to be true.
The next time you hear about a high yield stablecoin opportunity, ask these questions:
What is backing the coin?
Are the assets backing the coin volatile and if so, what’s the risk?
Is the liquidity locked or can you quickly withdraw at any sign of trouble?
Protocols on Terra and Osmosis had lockups for UST between 2 weeks and a year. Those depositors were completely wiped out with no chance of withdrawing their liquidity in time.
Use DeFi knowledge to your advantage but think like a trader - The most successful traders in the speculative world of crypto follow the space extremely closely. They are reading governance forums, keeping up with Discord/Telegram conversations with the project teams, following narratives on crypto twitter, and watching token flows on tools like Nansen and Etherscan. When a new opportunity is launched by a protocol to ‘bond’ or ‘vote lock,’ it’s enticing when we see 3 or 4 digit yields. The price usually responds in kind and everyone is happy, both traders and stakers. However, in crypto, liquidity is king - the traders will have the ability to exit the position and take profits while the stakers are stuck in a time locked contract. Thus, staking/locking are -EV on shorter time frames.
Disruption is constant - We have observed a Cambrian explosion of very cool decentralized finance applications over the last 2.5 years. Projects like Aave, Uniswap, and Synthetix have become DeFi darlings, however, it’s important to acknowledge how hypercompetitive this space is. Open source code is forkable, communities and liquidity are not loyal, and we’ve only just started to scratch the surface of what’s possible with smart contracts. Getting emotionally attached to your investments can often lead to underperformance. It’s important to change bias when something better or a new opportunity comes along.
Observe other’s opinions and listen to advice but DYOR and form your own opinions - Even if this is just for your own mental sanity, it’s much more rewarding to develop a thesis and make an investment than blindly throw your money behind your favorite ‘influencer.’ Many personalities are not trustworthy and are likely looking for exit liquidity when they announce an investment in a token publicly. It’s also very easy to blame someone else when an investment goes wrong, but at the end of the day, you pushed the button to make the trade. Building an investment thesis leads to conviction, but always remember rule #1, capital preservation. If things don’t play out as you expected, have an invalidation point.
Trade on high time frames - The majority of professional traders have two things in common:
The trend is your friend
Don’t fight the Fed
The 200 week moving average has been a very good indicator for being in or out of the market. If price > 200 week moving average, this is bullish, and if it falls below, bearish. Alternatively, dollar cost average buying when BTC is under the 200w MA is a good strategy for longer term investing.
A lot of new investors are experiencing a macro bear market and recession for the first time and learning hard lessons. In response to rising inflation, the Federal Reserve announced interest rate hikes and balance sheet rolloff in November. The global markets have all drawn down since the Fed turned hawkish.
Don’t trust CeDeFi - Centralized DeFi (CeDeFi) is the term applied to custodial DeFi platforms. These are centralized service providers that offer high yield on crypto or stablecoins by taking enormous amounts of risk (usually). Two examples of this were Celsius and Voyager, who both made uncollateralized loans of 9-10 figures to Three Arrows Capital. That money evaporated when 3AC went bankrupt and the CeDeFi users/depositors were left with nothing. Another big problem with centralized lenders is their complete lack transparency. Blockchain is supposed to improve transparency, a huge advantage DeFi offers. These centralized shops will undoubtedly get the regulatory hammer slammed down on them. Listen to the guys from Framework summarize this well.
4/ Episode 1 goes live today: "CeFi is Dead, Long Live DeFi" Our guests are @pythianism and @im_manderson from @hiFramework. Listen: sptfy.com/LhDJ Watch: youtu.be/HURlq6rIEEw This episodes tees up the rest of the season.
Leverage - This isn’t going to be what you expect to read; “NEVER USE LEVERAGE!!!11!” My take on leverage is that it can be a very powerful tool in DeFi. Getting liquidity from your digital assets to yield farm stablecoins, etc, and can be very +EV. However, many people buy risky assets on leverage and then get wiped out when the market tanks. The value of their loan is much higher than the investment they made and their debt cannot be repaid.
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*None of this is financial advice*
I learn more about Crypto from your enews, than anywhere else. Thank you! Alayne