Occasionally, we all have to eat our vegetables- and don’t get me wrong, I hate vegetables just as much as the next guy. The truth is that the path to wealth is paved with slow days, unsexy advice and can be a grind sometimes. Still, cryptocurrency is a blooming asset class and has tons of room for explosive growth given so few have adopted a technology that can fix a lot of the world’s biggest problems, including banking the unbanked. But as Michael Jordan once said- never forget the fundamentals. An American billionaire and one of my idols, Warren Buffett, has two rules for investing:
- Don’t lose money.
- See rule #1.
This makes clear the fact that not losing money is doubly as important as making gains- literally. If we look at the below chart we can see that it takes a lot more in percentage gains to recover from a certain percentage of loss.
This chart assumes that investors make a one-and-done investment on an asset- which to be fair is rarely the case. If you can (and almost everyone can), you should dollar cost average into crypto so you can get coins on sale when we’re in a big market rut. There are certain coins that lose far less in market ruts- mainly large cap coins like Bitcoin and Ethereum. When enormous doubt is cast on the crypto market, these two specifically have been able to hold their own. Since there’s so much hype in the blockchain space, there are unfortunately a lot of scams and fakes that are only going to disappoint investors and speculators.
Beware of shitcoins and memecoins
These are the ‘assets’ that are the least likely to make you money out of all cryptos, and they exist for no other reason than to make their founders rich or be the subject or pump and dump schemes. Since cryptocurrencies do not produce cash flows for their investors (unless they are automatically staked coins like ATOM or you have actively staked or lent you coins), they are difficult for investors to value in the traditional sense. Remember, the one long-term thing that’s going to raise the value of a coin is adoption of that coin/its technology. Most memecoins and shitcoins are just carbon copies of another coin’s code and have no economic value-add other than being a laugh. Examples include Shiba Inu, Baby Doge, and the like. If it looks stupid, it’s probably stupid and a bad investment.
The echo chamber
Another thing that’s dangerous in the crypto space is the echo chamber effects that happen on the internet. Reddit subs, Facebook groups, and other social media tend to be echo chambers for crypto endorsements or dissenting opinions. If you don’t know what I’m talking about, check out this Reddit thread that does nothing but hate on crypto. Mature investors make allowances for doubt and entertain those doubts, and adjust their actions accordingly. As an investor, I still have immature tendencies, like submitting to the chorus of voices online that’s saying “this shit is about to explode!” If you do look at media and articles about cryptocurrency, you should include a balance of publications who are bearish, neutral, and bullish on blockchain. A healthy amount of doubt can save you from allocating an unhealthy amount of your portfolio to an asset class as volatile as cryptocurrency.
Stake or loan your coins with BlockFi or Celsius to earn and help offset risk
If you’re not doing so already, you need to be staking at least some your crypto if you’re holding a proof of stake cryptocurrency (most coins are). Even if you’re only holding Bitcoin or stablecoins, you can make a guaranteed 3-4% annual percentage yield by lending your crypto on BlockFi or Celsius. These returns will help lessen the blow when the crypto crashes do come. While earning passive income on your crypto coins is a no brainer, it’s still a good idea to keep some of your crypto locked up in your hardware wallet or on your exchange so that you have liquidity should a nice buying opportunity come around. Or worse- BlockFi or the stake pool you’re in loses liquidity (unlikely to happen, but still).
Pull the weeds and water the flowers
Billionaire investor Peter Lynch is credited with this saying, and I love it. It basically means to cut your losses on bad investments, and invest that cash into your good investments. We have a tendency to hang on to things long after they’ve been any good for us- this is called the sunk cost fallacy. If you purchased a ticket for $20 to see a movie, and twenty minutes into the movie you realize it sucks- what do you do? Those who cave to the sunk cost fallacy would try and convince themselves to stay because they spent $20 on the movie. But that money is gone- if you leave the movie when you decide you don’t like it at least you’ll get some of your time back- something much more valuable than money. A few months back I purged smaller cap coins outside of the top 10 from my portfolio and put that money into Bitcoin, Ethereum, Cardano, and Polkadot. When the crypto market suffers corrections, small cap coins often lose enormous amounts of their value.
Only invest in crypto what you’re willing to lose
For most of us, although we may like to think differently, cryptocurrency should be less than 5-10% of our investment portfolios. Something I have found through my time in crypto is my risk tolerance is actually less than I had originally thought- I’ve lost plenty of money in small cap coins I thought were going to be the next big thing. If you invest a small percentage of your portfolio, you can still be an innovator/early adopter of cryptocurrency. Remember- less than 2% of the world’s ~8 billion people own or transact in cryptocurrency, so if the blockchain technology further gains traction (and it will because it’s amazing!), we’re likely to see some big returns on coins, with large caps (top 5 cryptos) being the safest bet.