Price fluctuations are a part of investing; they can act as a threat as they can provide opportunities. However, when wishful thinking plays a role in ignoring threats, that can expose one to catastrophic downsides. Also, not being willing to do deliberate research can cause missing opportunities financial markets can offer.
Most of the time, life is simpler than we make it. In crypto markets, you see tokens increase tenfold in value. As Newton’s Principle suggests, “For every action, there is always an opposite and equal reaction.” Tokens can also go down ninety percent (opposite of tenfold). One should always consider themselves as one can be affected by each possibility resulting in one having a plan for all probable outcomes.
Managing the risk: How much are you willing to lose?
Risk management is a word thrown around for investors, but it is an overloaded word, and unfortunately, it is obscured by complexity. It simply conveys: how much a person can bear the possibility of losing resources. Guessing how much of an asset’s value can go down is a fool’s errand because markets are too complex. Financial markets are completely random in the short term. Still, pre-determining the loss accepted for a particular trade, action, or investment is not only possible but also required to stay in for the long game to be successful in the end.
The saying goes: Never invest money you can’t afford to lose. Investing $1,000 you can afford to lose makes you more rational, peaceful, and clear thinking than investing $10,000, making you obsessed, stressed, and unhappy. Specifically, most assets/tokens can go to zero without repercussions to their founders in Crypto, so this rule is exceptionally important.
An investor can take the diversification route for risk management too. You can have a house(so you can live there) and have stocks you believe in(so you can be exposed to traditional financial markets). In addition to a balanced portfolio, you can buy battle-tested, well-known crypto-assets(such as Bitcoin and Ethereum). Then you can go for micro-cap crypto tokens to capture tenfold, a hundredfold, or thousandfold returns by investing small sums(limiting the down-side while gaining exposure to the unlimited upside as an asymmetric bet)
Understanding leverage: decision multiplier as it increases the degree of the result
Leverage is not only something that has to be borrowed. Something that is already owned can also be leveraged. Anything that multiplies the result of an action is, in fact, leverage. I will talk about something other than traditional financial leverage that you borrow money to raise your exposure. It is already covered countless times. Let’s dissect the idea of leverage to build a high-level understanding.
People can be leveraged in the form of labor. Labor raises your ability to get something done, multiplying your efficiency and workforce. If you have other people working for you, they will do what you want them to do; the things you don’t have time to do; maybe something you cannot do yourself. People who work hard, are smart, and with high integrity are essential for a project’s success because their time is multiplied by their labor, raising the probability of success.
Capital is also a form of labor. If you have $1000 to invest, your results will be proportional to your capital. 20% of $1000 is $1200, while %20 of $100,000 is $20,000. Even though both parties made the same decision and bought the same token, their results differed substantially, creating a gap of $19,800 in profit. Hence trading crypto for $1000 is not that smart because time spent on research will not have a high multiplier; raising one’s income is better than investing more efficiently for small investors until gathering substantial capital around their investments. Also, some projects(such as blue-chip NFTs) cannot be bought with low capital, price out the small investors, and disqualify them from the opportunity altogether. Trading crypto for $1000 is not that smart because time spent on research will not have a high multiplier; raising one’s income is better than investing more efficiently for small investors until gathering substantial capital around their investments.
Media is another form of leverage. If you speak to one person in a physical environment, your ideas, advice, or offer have reached a single person. That person might not be interested in what you are talking about, they might not have time at the moment, or the situation that they are in could prevent them from participating in whatever idea you have given them. Two hours of a meeting would turn into useless time waste. However, you could broadcast your thoughts, advice, or offers(advertisement). In that case, the same effort you have given for your 2 hours meeting can be multiplied to the computer screens of 20,000 people, widening the prospect to a substantial degree, multiplying the result of the same action 20,000 fold. This is also why investing in projects with a high social presence is a good practice.
Last but not least, computer code is the greatest leverage created so far. This is why crypto projects with superior technology in practicality win in the long run. Take Bitcoin for an example: a person or persons with the pseudonym of Satoshi Nakamoto assembled 168,000 lines of C++ code. They created 3 trillion dollars worth of value when crypto markets were topped in 2021 without doing anything extra. This is why looking for great technology to invest in crypto assets is important to create a deterministic path toward success. At the right time, the right technology has made an extreme difference in history over and over, and it will continue to do so.
Probabilistic Thinking: Planning all of the possible outcomes and your response to it
How bad would it be for you to lose your 10% net worth?
How good would it be for you to raise your net worth by 10%?
Would Crypto go down? If so, how much? 5-10-50%? How probable is that event?
Would Crypto go up? If so, how much? 5-10-50%? How probable is that event?
The basic layout of probabilistic thinking is featured above.
Although it is almost impossible to predict highly complex systems, estimations can be made along with our responses to the likely outcomes to prepare our plan better ahead.
Let’s assign a probability to an asymmetric bet on a hypothetical low market cap crypto token:This argument is the most simple form of technical analysis:
Imagine a token with a market cap of $1,000,000 and an average liquidity of $100,000 for the past month, setting its liquidity/market cap rate to 10%, which is a decent amount. This means the token had a good demand for the past month, and many traded it measured by its volume relative to its market cap. If the token price fluctuated between the -+10% range price, we could conclude that its price was stable and healthy according to its market data. This can signal that this token’s price is stable in current and general market conditions.
Matching fundamental analysis with quantitative technical analysis to increase the accuracy of our prediction is the next move:
During the past month of this token’s price action, check the developments of the subject project. If there was substantially important development news, but the price was still stable, this would signal that the project’s advancement needs to be reflected in markets. It can also signal that the project has consistent development, and it is an undiscovered hidden gem that the real value of the token has yet to be priced in. Remember, though: it might never be reflected in its market valuation, rendering investment a loss via uncontrollable externalities.
Trying to estimate the fate of the investment with proper risk management could go for this imagined token could be:
- A: Token’s developments are not what the market and its participants are looking for, so it will die out in the end – 90%
- B: The token is a decent project, but it needs more systematic improvements for a project’s future succession(social media presence, community development, adoption, etc.). There can be a short-term price appreciation for a trading opportunity, but the project will die out in the end — 8%
- C: Project is a hidden gem with a great team that has efficient execution; as an early investor, you will benefit from this micro-market cap project where it will increase tenfold its current price — 1.9%
- D: You have found a real unicorn; expect a hundredfold or thousandfold valuation of your initial investment — 0.1%
Simplifying estimations:
- A — 80%: You will lose your money
- B — 8%: You might make a small return if you act smart; you might lose it if not.
- C — 1.9%: You will have a substantial return
- D — 0.1%: Jackpot!
When you set a probabilistic estimation instead of wishful expectations, you take a position from knowledge instead of uncertainty so you can design your response by envisioning each outcome. Let’s say you are thinking of investing $1000 into this project and making an assessment:
- A — 80%: You lost $1000
- B — 8%: You might make $250 to $500 or lose that amount.
- C — 1.9%: You made $9000.
- D — 0.1%: Congratulations, you are a millionaire if you weren’t already.
So the question becomes, did you like these odds? If yes, go for it; if not, look for another small project with better fundamentals or smaller returns with safer probabilities.
There is no formula to come up with these estimations. It is an artful and intuitive process that comes from experience through market participation while educating yourself consistently. This is why exposing yourself to the market, information, and fundamentals of blockchain/crypto technologies is the only way to become a good investor/trader with deterministic returns in a long enough time frame.