Advice

(A well written post on r/CryptoCurrency by arsonbunny about investing In the market)

Since December 2017 we’ve seen a massive influx of new investors in the crypto space, and the inflow of their fiat has lead to a massive boom for altcoins. This has inflated values and with many making astronomical fast and easy gains by simply gambling on symbols on an exchange, I am seeing the market reward the very worst type of behavior for investors. More and more in this sub I see people bragging about how they randomly threw money at some shitcoin they didn’t even research but just saw shilled here and made 3x on their $500 investment, as if that’s something to be encouraged or celebrated. This type of investment style will not last and will only lead you to lose whatever gains you have made recently. I have been holding Bitcoin since 2013, through the Mt.Gox disaster and only sold recently for over $470,000. I held Ethereum for almost 2 years before I decided to take $32,000 in profits recently. Please recognize that the these type of spectacular increases are unlikely to continue, Bitcoin was the first crypto and Ethereum was the first platform of its kind, and the exponential market cap expansion to the current $700 billion is not going to continue at the anywhere near the same rate. Purchasing a $1 crypto or mining them now is highly unlikely to give you a 500x return, we would need an enormous amount of new liquidity coming in. That doesn’t mean you “missed out”, it means that now that we have a well developed ecosystem for crypto trading. Back in 2013, it was a very different situation. A 5 year investment window may seem like an eternity to the largely young investors that are coming in now, but it really isn’t that long. For crypto to be a truly life changing investment for you, you have to get over the “get rich in the next month” mentality that is rampant now and get past the lambo psychosis stage.

First of all here are some good tools that I’ve found have helped me a lot:

Market News and Tools

  • http://www.coindesk.com – Overview of what’s going on in the crypto world
  • http://cryptopanic.com – An aggregator of various crypto sites and news, filterable. I use the pro version to customize the feeds but the free version is good enough for most.
  • http://coinmarketcap.com – Not just for checking prices, they also are the most convenient way to start your research as they have the blockchain explorers, official website links and also a useful API that can be linked to Excel.
  • http://cryptomaps.org – Visualization of price across different segments, primarily hashing functions and ICO release dates
  • http://onchainfx.com – A better version of coin market cap, has all sort of columns and you can add flags. Only downside is it only has 61 cryptos, but its always adding news ones.
  • http://icotracker.net – I like this site for looking at what ICO are coming up
  • http://icobench.com – Another ICO tracker which does nice summaries, shows teams, milestones, financials and gives a rating for each ICO
  • http://solume.io – compares the number of Twitter mention increase decrease to price
  • http://eveningstar.io – this is basically like Morning Star except for cryptos
  • https://bitcoin.tax – for calculating taxes owed on your crypto gains

Communities

  • BitcoinTalk Forums – Probably my favorite place to discuss crypto. Much more intelligent discussion than in this sub.
  • Steemit and Medium have tons of great blogs about crypto, find what alts specifically interest you there.
  • Follow developers on Twitter, Reddit has decent communities for each coin, /biz/ is for pink wojaks, memes and pumping

Portfolio Tracking

  • Delta – get this app, its awesome and better than Blockfolio

There are online sites like AltPocket and CoinTracking that will do portfolio tracking but I haven’t found any I would recommend, I prefer to use a CoinMarketCap API Excel tracker which automatically updates prices and consolidates everything. Excel is still the best and most flexible thing to use by far and you can customize it infinitely to your liking.

Basic but Important Advice

In addition I’ve come up with 10 simple advice points that will take you quite far and will make you much more of an intelligent crypto investor:

1) Don’t have more than 5-10% of your entire investment portfolio in crypto, and only invest what you can afford to have locked in for the long term.

We are definitely due for another large correction, so you must be comfortable with losing 80% of your portfolio value in case of a crash and sitting back and letting it slowly recover. Personally I would recommend that once you double your profit, pull out the principal so you are only playing with profits.

2) Don’t chase a pump

Never buy on rapid upswing on the candlestick chart if you’re not sure why it happened and can’t figure it out. The reason is likely that it is a Pnd. PnD is “Pump and dump” and it refers to a trading scam where people organize to coordinate the laddered purchase of an asset, then wait for others to come in at some delay and further increase the price before coordinating the unloading of their position once a specific price target is reached. This is illegal in the stock markets, but since cryptomarkets are unregulated such schemes are rampant. There are many PnD groups and today they are largely organized on Discord channels. They are now structured into tiers where the top tiers get a signal earlier than the bottom tiers and usually by the time the bottom tiers get the signal its too late, so unless you pay money to part of the top tier or have a connection with the admins its not even profitable. They are bad for the market as a whole and they prey on those who are looking for short term moons to latch onto. Don’t look for things that you think will moon today, look for investments.

3) Holding will give you more returns over a year than day trading.

You will find that most people who made six figures or more in crypto did it by holding over the long term, very few get rich by day trading. That said you should definitely learn a few indicators to see if you’re getting in at a reasonable entry point. I find that the MACD (moving average convergence divergence), RSI (relative strength index), market depth and support-resistance lines are the most useful indicators for crypto. MACD is useful for looking at where the long term price should be in divergence to the short term movement, RSI gives you an 0-1 rating of how overbought/oversold it is and support-resistance lines gives you a floor and ceiling for how high it will move in your buying period. If you do short term trading, do it when you have high certainty that a specific news will lead to an increase. Some of these specific events are: upcoming roadmap item releases, fork airdrops, exchange additions and partnerships. For example, in mid-December it was first announced that the Bitcoin Private fork that is upcoming would release an 1:1 airdrop of BTCP to holders of ZClassic because Bitcoin Private would use the same ZSnarks technology. At this time ZCL was only a few bucks, and thus this news has made ZClassic an attractive short term buy as there would be demand for people to have it purely to get free Bitcoin Private once it launches. Short term buys like this are smart moves based on some underlying value assumption being changed, trading purely on volume and patterns is generally akin to gambling on markets that are as inefficient as most cryptoassets.

4) Take your time and research what you are putting your money into.

I cannot stress this enough, you are buying an asset with your hard earned money, and it should have some utility. Start by reading the whitepaper that is on the main site for the coin. You can avoid a lot of scams by simply critically evaluating the question: “Why does this coin exist?” Is it simply trying to apply a blockchain to something that doesn’t need it or is there a transactional inefficiency/problem that the unique properties of the blockchain can solve? For example, the blockchain is immutable so the use case of tracking designer luxury goods across a supply chain and guaranteeing authenticity of a item makes sense. On the other hand trying to push the blockchain transactions into dentistry makes little sense. Designer good companies have a problem with conterfeit goods entering the supply chain and need some solution, dentists don’t have a problem with charging people on their VISA for fixing cavities. Ask yourself what value the actual token would have in the ecosystem its part of. Does it pay out some kind of dividend like some coins, or is its value in that its used as part of transaction fees and is thus being burned? You can make a simple checklist for every crypto and just answer these questions to yourself for each coin you look at:

  • What is the problem or transactional inefficiency the coin is trying to solve?
  • What is the Dev Team like? What is their track record? How are they funded, organized?
  • Who is their competition and how big is the market they’re targeting? What is the roadmap they created?
  • How will they attract their target market, how is their marketing?
  • How does the coin derive its value? Is there some sort of dividend structure, profit sharing plan, or is it a store of value within a digital economy? What is the float schedule like going forward (ie. how many coins will be released or burned)?

5) Learn to recognize FOMO when it arises within you

If you ever feel this itch to get in on an rapid upswing because you don’t want to miss out on some new development that is causing it, stop yourself from knee jerk reacting to this feeling. This is called FOMO: “Fear of missing out” and its what drives the market now. It happens to everyone and it leads to emotional investing and knee jerk buying/selling.

6) Recognize that lots of people actually are also losing money.

Right now there is a confirmation bias happening where people who get quick gains go out and brag to all their friends all over social media, leading to this illusion that making money trading crypto is a surefire way to make money. That dopamine fix you get from seeing the position double will make you feel like a genius and its human nature to want to advertise it. What you forget is that those who lose money keep quiet about it and don’t advertise their failure.

7) Accept that you will miss out on a lot of moon missions, and that’s perfectly okay

Right now the crypto market is like a giant dumb money party filled with coked up headless chickens running around throwing money at every shitcoin with a low nominal price hoping it goes to $10,000 like Bitcoin. Everyone is a genius in a bull market, and this creates a feedback loop of more money come in. You will miss out on these gains, but don’t let that get to you. Sure by not buying into Tron at $0.07, you missed the big moon to $0.25. Buy you will also avoid FOMO-ing in and then getting stuck with the crash that will follow right after (its at $0.11 right now). By taking your time to make your decisions you end up focusing on the fundamentals rather than short term movements.

8) Understand the float.

Look at the float distribution and who owns what supply of the coin. You can avoid most scam coins by simply considering how much of the supply the owner assigned to themselves and organizations they control. A lot of coins have no purpose other than giving a substantial portion to the owner, who then hypes the coin all over social media and unloads his stake for real money.

9) Think of not only individual position, but how they fit in your portfolio and your diversification

Its good to diversify across different opportunities, but too much diversification is just saying you don’t feel confident about your positions and are just casting a wide net hoping to hook something. Generally 6-12 positions is the ideal diversification spread in my opinion. It gives you a good spread across sectors, doesn’t spread you too thin and any more than that is too much to keep track of.

I like to think of the portfolio in terms of these segments:

  • Core holdings – BTC, Ethereum, LTC…etc
  • Privacy coins – Monero, Zcash, PivX..etc
  • Finance/Bank settlement coins – Ripple, Stellar…etc
  • Enterprise Blockchain solutions -VeChain, Walton, Libra…etc
  • Promising/Innovative Tech coins – Raiblocks, IOTA, Cardano…etc
  • Speculative/Moon shots – BountyX, FUN…etc

Your risk tolerance should dictate how much you allocate between your Core holdings (which are generally considered more “safe” since Bitcoin and Ethereum will be around for a long time) and the various segments. I personally am okay with a 30% core holdings, 70% across various other segments. However 60/40 splits between core and other segments is probably a good starting point for most newbies. You can make visualizations in excel with pie charts and keep tabs on your segment allocation.

10) Look for red flags and recognize that 90% of these coins have a net present value of zero.

Look at every new coin you evaluate with a sceptical eye, because now there is way too much hype for vaporware and coins that have no use case and are just yet more ERC20 (Ethereum-based) get rich quick scams by the founders. For a lot of these coins there is a lot of shilling that tries to pray on your emotions. Recognize red flags:

  • Massive portions of the float are assigned to the founders of the coin. Anonymous teams or members with a sketchy pasts are also a huge red flag.
  • Use case does not require or benefit from a blockchain
  • Empty Github repositories, or there being scant useless code
  • Vague whitepapers and websites filled with technobabble that sounds impressive to people who don’t know tech.
  • No clear or well developed roadmap
  • A team that focuses almost entirely on shilling rather development.

11) Try to not check your portfolio more than once a day.

With apps like Delta and Blockfolio (btw Delta is a million times better) it can be really tempting to constantly pull your phone out and check the prices every hour. Don’t do this, it will drive you insane. Check once a day and you will be much happier.

…………………….

I would also like to highlight the need to try and be sceptical, which is something sorely missing now. When you first start in crypto or researching a coin, it will often funnel you on this one way street to getting hyped up. For example when I first started looking at Bitcoin info back in 2012, and seeing all these articles and videos on it, it ended up being difficult for me to imagine a world where Bitcoin wouldn’t become a dominant currency. All these people who promote it have an interest in building a rosy future, yet Bitcoin has turned out drastically different to how I imagined it would be once it gains mainstream attention. Bitcoin was able to balloon to its current price based on being the first crypto and I will always have an emotional attachment to it, however its also taught me to be much more sceptical of high S-curve adoption predictions. We are still a long way from having even Bitcoin being near mainstream adoption, let alone any other crypto with a fraction of its brand name recognition.

If someone is telling you “X coin will be [insert high price here] by Z time”, don’t believe them. They hold the coin and want you to increase its price by buying. If a coin is promising the moon and telling you that you would be a fool to not buy it now, and you’re wondering who the greater fool will be to buy it from you, you’re the greater fool.

There is plenty of good within the crypto space, and there really is no other market that behaves like it. Over 90% of the 1398 cryptocurrencies on Coin Market Cap have a zero value under any quantitative valuation model you can imagine and they will inevitably die out. However there are those coins with genuine business plans and use cases that will prosper and possible prosper spectacularly in ways we can’t yet imagine. Invest accordingly and you will be rewarded.

 


 

 

(Another great post on r/CryptoCurrency by arsonbunny right after the big market correction on Jan 17 2018)

Why we won’t have a long term bear market, and how to systematically pick your future investments in crypto

With so much uncertainty right now it would be a good time to take some time to go over what happened recently and how to invest moving foward. We’ve seen a peak bubble at around 850 billion total market cap in the first week of January, consolidated down to $750 billion and have now just experienced a 40% correction.

What’s happening now and how bad will it get?


First of all you should realize that there is a January Dip that happens every year, when we see a roughly 20-30% decline around mid January. This year its been much more severe though for several additional factors that have compounded on top.

Different theories exist on why this happens (its actually the mirror opposite of the “January Effect” that happens in the US stock market), but the two major theories are:

1) Asian markets pull into fiat because of Asian New Year spending needs

2) People in the US sell in January to defer their capital gains tax liability an extra year

While this cyclic event has lead to a healthy correction in the last few years, this year we got these new factors making more fear as well:

So in essence we got a storm of scary news along with the usual cyclic downturn. Currently I don’t see this as being a systematic crash like Mt.Gox was that would lead to a long term bear market because the fundamental ecosystem is still intact, and I suspect that after about a month we should consolidate around a new low. All the exchanges are still operational and liquid, and there is no breakdown in trust nor uncertainty whether you’ll be able to cash out. What range the market trades in will all depend how Bitcoin does, right now we’ve already broken below 10K but I’m seeing a lot of support at around $8000, which is roughly where the long term MA curve settles. I don’t expect us going below that support line anytime soon without any systematic breakdown. The fact we got closer to it is actually quite healthy in the long term because it is a valuation that can be logically justified using the cost factors of the mining network. In addition when I run a regression on the price history before the crazy Nov/December bull run, the first Fibonacci level seems to be just around $8000. So I think we should consistantly move above that support level, possibly with a few weeks of fluctuations between the $9-$13K range.

What should you do if you recently entered the market?

If you did buy in the last few months at or near ATH, the very worst thing you can do now is sell in panic and lose your principal. You shouldn’t have more money in crypto than you can afford to lose, so it shouldn’t be a problem to wait a few months. You have to realize that 30% corrections in crypto are relatively common, just last fall we had a 40% flash correction over more China fears. Unless there is a systematic breakdown like we had during Mt.Gox, the market always recovers.

The other worst thing you can do is unload into Tether as your safety net. If there is one thing that could actually cause a long term destruction of trust within the cryptocurrency investment ecosystem, its Tether having a run up on their liabilities and not having enough reserve to cover the leverage. It would not only bring down exchanges but lead to years of litigation and endless media headlines that will scare off everybody from putting fiat in. I don’t know when the next Mt.Gox meltdown will occur but I can almost guarantee it will involve Tether. So stay away from it.

What should long term investors do?

For long term holders a good strategy to follow each year is to capture profit each December and swallow the capital gains taxation liability, park a reserve of fiat at Gemini (whose US dollar deposits are FDIC-insured) and simply wait till around late January to early February to re-enter the market at a discount and hold all year until next December. You can keep a small amount in core coins in order to trade around various Q1 opportunities you anticipate. Others may choose to simply do nothing and just keep holding throughout January which is also a perfectly fine strategy. The cyclical correction usually stabilizes toward late January and early February, then we see a rise in March and generally are recovered by end of April. Obviously this decision whether to sell in December to profit on the dip and pay tax liability or to just hold will depend on your individual tax situation. Do your own math sometime in November and follow suit.

How to construct your portfolio going forward


Rather than seeing the correction as a disaster see it as a time to start fresh. If you have been FOMO-ing into bad cryptos and losing money now is a time to start a systematic long term approach to investing rather than gambling.

Follow a methodology for evaluating each cryptocurrency


Memes and lambo dreams are fun and all, but I know many of you are investing thousands of dollars into crypto, so its worth it to put some organized thought into it as well. I can’t stress enough how important it is to try and logically contruct your investment decisions. If you follow a set methodology, a checklist and template you will be able to do relative comparisons between cryptocurrencies, to force yourself to consider the negatives and alternative scenarios and also sleep comfortably knowing you have a sound basis for your investment decisions (even if they turn out to be wrong).

There is no ideal or “correct” methodology but I can outline mine:

1) Initial information gathering and filtering

Once I identify something that looks like a good potential investment, I first go to the CoinMarketCap page for that symbol and look at the website and blockchain explorer.

  • Critically evaluate the website. This is the first pass of the bullshit detector and you can tell from a lot from just the website whether its a scam. If it uses terms like “Web 4.0” or other nonsensical buzzwords, if its unprofessional and has anonymous teams, stay away. Always look for a roadmap, compare to what was actually delivered so far. Always check the team, try to find them on LinkedIn and what they did in the past.
  • Read the whitepaper or business development plan. You should fully understand how this crypto functions and how its trying to create value. If there is no use case or if the use case does not require or benefit from a blockchain, move on. Look for red flags like massive portions of the float being assigned to the founders of the coin, vague definition of who would use the coin, anonymous teams, promises of large payouts…etc
  • Check the blockchain explorer. How is the token distribution across accounts? Are the big accounts holding or selling? Which account is likely the foundation account, which is the founders account?
  • Read the subreddit and blogs for the cryptocurrency and also evaluate the community. Try to figure out exactly what the potential use cases are and look for sceptical takes. Look at the Github repos, does it look empty or is there plenty of activity?

2) Fill out an Investment Checklist

I have a checklist of questions that I find important and as I’m researching a crypto I save little snippets in Evernote of things that are relevant to answering those questions:

  • What is the problem or transactional inefficiency the coin is trying to solve?
  • What is the Dev Team like? What is their track record? How are they funded, organized?
  • Who is their competition and how big is the market they’re targeting? What is the roadmap they created?
  • What current product exists?
  • How does the token/coin actually derive value for the holder? Is there a staking mechanism or is it transactional?
  • What are the weaknesses or problems with this crypto?

3) Create some sort of consistent valuation model/framework, even if its simple

I have a background in finance so I like to do Excel modeling. For those who are interested in that, this article is a great start and also Chris Burniske has a great blog about using Quantity Theory of Money to build an equivalent of a DCF analysis for crypto.

Here is an Excel file example of OMG done using his model. You can download this and play around with it yourself, see how the formulas link and understand the logic.

Once you have a model set up the way you like in Excel you can simply alter it to account for various float oustanding schedule and market items that are unique to your crypto, and then just start plugging in different assumptions. Think about what is the true derivation of value for the coin, is it a “dividend” coin that you stake within a digital economy and collect fees or is it a currency? Use a realistic monetary velocity (around 5-10 for currency and around 1-2 for staking) and for the discount rate use at least 3x the long term return of a diversified equity fund.

The benefit is that this forces you to think about what actually makes this coin valuable to an actual user within the digital economy its participating in and force you to think about the assumptions you are making about the future. Do your assumptions make sense? What would the assumptions have to be to justify its current price? You can create different scenarios in a matrix (optimistic vs. pessimistic) based on different assumptions for risk (discount rate) and implementation (adoption rates).

If you don’t understand the above thats perfectly fine, you don’t need to get into full modeling or have a financial background. Even a simple model that just tries to derive a valuation through relative terms will put you above most crypto investors. Some simple valuation methods that anyone can do

  • Metcalfe’s Law which states that the value of a network is proportional to the square of the number of connected users of the system (n2). So you can compare various currencies based on their market cap and square of active users or traffic.
  • Another easy one is simply looking at the total market for the industry that the coin is supposedly targeting and comparing it to the market cap of the coin. Think of the market cap not only with circulating supply like its shown on CMC but including total supply. For example the total supply for Dentacoin is 1,841,395,638,392, and when multiplied by its price in early January we get a market cap that is actually higher than the entire industry it aims to disrupt: Dentistry.
  • If its meant to be just used as just a currency: Take a look at the circulating supply and look at the amount that is in cold storage or set to be released/burned. Most cryptos are deflationary so think about how the float schedule will change over time and how this will affect price.

Once you have a model you like set up, you can compare cryptos against each other and most importantly it will require that you build a mental framework within your own mind on why somebody would want to own this coin other than to sell it to another greater fool for a higher price. Modeling out a valuation will lead you to think long term and think about the inherent value, rather than price action.

Once you go through this 3-step methodology, you’ll have a pretty good confidence level for making your decision and can comfortably sit back and not panic if some temporary short term condition leads to a price decrease. This is how “smart money” does it.

Think about your portfolio allocation


You should think first in broad terms how you allocate between “safe” and “speculative” cryptos.

For new investors its best to keep a substantial portion in what would be considered largecap safe cryptos, primarily BTC, ETH, LTC. I personally consider XMR to be safe as well. A good starting point is to have between 50-70% of your portfolio in these safe cryptocurrencies. As you become more confident and informed you can move your allocation into speculative small caps.

You should also think in terms of segments and how much of your total portfolio is in each segment:

  • Core holdings – BTC, Ethereum, LTC…etc
  • Platform segment – Ethereum, NEO, Ark…etc
  • Privacy segment – Monero, Zcash, PivX..etc
  • Finance/Bank settlement segment – Ripple, Stellar…etc
  • Enterprise Blockchain solutions segment -VeChain, Walton, WABI…etc
  • Promising/Innovative Tech segment – Raiblocks, IOTA, Cardano…etc

You should also think about where we are in the cycle, as now given so much uncertaintly its probably best to stay heavily in core holdings and pick up a few coins within a segment you understand well. If you don’t understand how enterprise solutions work or how the value chain is built through corporations, don’t invest in the enteprise blockchain solutions segment. If you are a technie who loves the technology behind Cardano or IOTA, invest in that segment.

Think of your “circle of competence”


This is actually a term Buffet came up with, it refers to your body of knowledge that allows you to evaluate an investment. Think about what you know best and consider investing in those type of coins. If you don’t know anything about how supply chains functions, how can you competently judge whether VeChain or WaltonChain will achieve adoption?

This where your portfolio allocation also comes into play. You should diversify but really shouldn’t be in much more than around 12 cryptos, because you simply don’t have enough competency to accurately access the risk across every segment and for every type of crypto you come across. If you had over 20 different cryptos in your portfolio you should probably think about consolidating to a few sectors you understand well.

Continually educate yourself about the technology and markets


If you aren’t already doing it: Read a bit each day about cryptocurrencies. There are decent Youtubers that talk about the market side of crypto, just avoid those that hype specific coins and look for more sceptical ones like CryptoInvestor. If you don’t understand how the technology works and what the benefits of a blockchain are or how POS/POW works or what a DAG is or how mining actually works, learn first. If you don’t care about the technology or find reading about it tedious, you shouldn’t invest in this space at all.

Technical analysis isn’t that useful over the short term in crypto, so stop daytrading


Technical analysis was initially developed by financial professionals primarily to measure momentum based on historical data. It can be useful in regulated efficient stock markets for a very good reason: patterns are fairly predictable in stocks since they are a result of intrinsic events (such as quarterly earning reports) or extrinsic events (interest rate change announced). Its true that we also have movement that is based around insider information, however we have laws that keep that to a minimum. Add to this the fact that most stocks are held with large institutional investors and bought and sold by financial professionals who slowly add and decrease their position over long term plans, which is why its rare for the wild swings within short periods. These different intrinsic and extrinsic events all have a correlation in price, and because the markets are regulated and efficient we can use them to predict movement within a reasonable degree of confidence.

None of this is true for crypto. Its completely unregulated and insider trading and PnD schemes are rampant. No technical analysis in the world takes into account that all it takes for a crypto to double is John McAffee to post a single sentence about it on Twitter, or a sub of a smaller crypto to organize a shilling operation on /r/CryptoCurrency. Its also filled with weak hands who will dump on any sign of sellling pressure.

This is why trying to use technical analysis tools from the stock market for short term trading in crypto isn’t that useful. Technical analysis was meant to predict pricing movement in a regulated and efficient environment.

So stop daytrading. If you use technical analysis, use it for long term trend confirmation. Any attempt to trade short term based on price momentum is pure gambling. If you want to gamble get a girl and some friends and go to a casino and drink while you do it, its much more fun.

Summing it up


I predicted a few days ago that we would have a major correction in 2018 specifically in the altcoins that saw massive gains in Decemeber/early January, and it seems we’ve already had a pretty big one. I don’t think we’ll have a complete meltdown like some are predicting, but some more pain may be incoming.

Basically take this time to think about how you can improve your investment style and strategy. Make a commitment to value things rather than chasing FOMO, and take your time to make a decision. Long term investment will grant you much more returns as will a systematic approach.

Take care and have fun investing 🙂