The importance of having a plan
Having been invested in cryptoassets for a number of years I have been fortunate enough to learn a few things about the best way I can operate when investing. Although they are points I think are generally sensible, my approach will not be for everyone and essentially can be boiled down to three factors.
Have preset limits
Probably the most important lesson I’ve learnt — and it took me a while — is to work according to preset limits which take the emotion out of the volatility. I do this in two main ways.
Firstly, I now cash out at predefined limits along the way. When I first starting investing I made the mistake of cashing out 100% following some quick gains, blinded by the allure of rapid appreciation. It couldn’t possibly go up much more. Only it did, much more. I now only take out 10% at a time at certain trigger points e.g. when ETH ran up from ~$300 I took out 10% at $700, 10% at $1,050 and another 10% at $1,400. The limits are fairly arbitrary but it helps to have some idea ahead of time of when you will take profits. It meant I took money off the table and had reserves ready to buy back in with should the price fall. And if it never fell — well, I still had most of my original amount left in so that would have been fine too.
Secondly, I trust my prior experience when it comes to market crashes. Every crash I have seen has resulted in most cryptoassets dropping 70–90% from their ATH (Bitcoin being at the 70% end of the spectrum, the smaller caps and those that ran up the most closer to 90%). I do not get interested in buying in a crash until we hit the 70% mark. At this point I buy in in increments, so at 70%, 75%, 80%, 85%, 90% (depending on the cryptoassets and the extent of the prior runup I start at different levels, so whilst with ETH and BTC I would start at 70%, with smaller cap ones it would be at 80% instead).
If my buys do not hit then, again, that is fine — I retain most of my stack in crypto and not fiat anyway. I would rather wait and trust my system than make an impulse buy for fear of missing out on some gains. In the most recent crash I bought into ETH from $420 down to $370, OMG at $8, AST at $0.26 down to $0.21. This is not intended as a form of braggadocio but rather the opposite; it is intended to highlight my deficiencies when it comes to trading and the measures I take to remove those issues from how I work.
Justify what you are doing
Do not blindly buy a cryptoasset immediately because you read one positive article. There are wider considerations than simply the project itself. Buying the right project can still be a bad buy if the timing is wrong. Why am I entering the trade right now? Should I buy in entirely now or stagger my buys over a set period? What has the recent price action been like (both vs $ and vs ETH/BTC)? What is the wider market doing? What will my target to sell be? What short term news is there coming up that could affect the price either way? How does it fit into my portfolio? How much of my portfolio should I put into this? Could that be better used somewhere else? What is the market liquidity? Are there any other projects coming up e.g. ICOs that I would like to go in and therefore should retain these funds for?
These questions will eventually be resolved in a matter of a second, but it is good to be mindful of them. One of the quickest improvements to make is simply taking the time to put in sensible orders so that you aren’t losing out on 1–5% (spreads can be large on smaller coins) from the beginning.
Your world view is not necessarily the correct one
I believe there is very little research on a crypto project that is that useful when it comes to investing. This is a counter-intuitive point when it comes to investing, where we are routinely told that to be successful we need to research to the point of exhaustion. Even more so than with traditional investments, I do not believe this to be of great value in crypto.
I am not suggesting that people shouldn’t do a baseline level of research — this is necessary. But researching the project to death, making sure you understand every technical aspect, analysing potential exploits, ignoring cryptoassets because there is no way they can justify their speculative value with any real revenues — this is not always helpful.
Nassim Taleb spoke about the “Green Lumber Fallacy” in his book Antifragile which referred to the idea that simply because someone is a specialist in a field does not mean they can translate this into trading. Taleb uses the example of a highly successful green lumber (freshly cut wood) trader who spent years trading the commodity under the misapprehension it was wood painted green outperforming someone who was a commodities expert.
Sometimes having too much expertise or background in the project can be a hinderance — it makes you focus on things that might not be that important to the market at the expense of things that are. In this example, the experts grand theories failed to work in reality, whilst the trader understood the market — despite not knowing a basic detail such as what the product actually was.
The crypto market serves up example after example of this. The project Tron is widely derided for offering nothing new technically wise, having no working product, having a plagiarised whitepaper and a whole host of other offences — but it routinely sits in the top 15 by market cap. Why? Because the crypto market has cared more about hype and speculation than fundamentals. Do I think this is a good thing? No. But equally I don’t only invest in things I think will be around in five years or which are going to change the world.
This will be (and has been) a source of controversy to many.
Taking this to the extreme, I got embroiled in an argument in December when I (somewhat flippantly) said that I had stopped doing any research altogether on projects and wasn’t bothering to read the whitepapers of any ICO until the market corrected, instead solely focusing on market cap and sentiment. Why? Because every project was rising 10–50x as a result of the projects above them having risen so much. The smaller and lesser known market caps were the last game in town for the outsized gains investors had become accustomed to. Just look at Lamden, a project so inept they gave out 200% bonuses instead of 20%. The project went 10x in a week. No-one cared about the ‘fundamentals’.
Why did this assertion cause so much consternation? Because it is an affront to common sense and the idea the market fairly values a project by its merits. I have seen many people complain about the market being ‘unfair’. That is not how the market works. The market value should be a representation of a projects worth according to their perceived merits — but everyone has their own idea as to what constitutes a good project (rightly or wrongly), especially in crypto where there are so few true fundamentals to work. Long term holders would likely still do well to stay away, but there are often great opportunities for short term trades in projects you otherwise wouldn’t want to touch.
The example I give on December was an extreme one and we might not see a situation like that again anytime soon — but being able to recognise and adapt to market trends is important. The crypto market in particular moves quickly, with trends changing with it.
The crypto market has a lot of issues working against the average investor — it is heavily speculation driven, prices are manipulated as it is unregulated, the technology is often incomprehensible to many. However, these issues can be mitigated by understanding the wider market behaviour and putting in place the systems that enable you to succeed. Trying to fight either your own abilities (or lack thereof) or the market is ultimately futile.