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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. When you look at crypto markets, you see tokens go up tenfold in value. As Newton’s Principle suggests, “For every action, there is always an opposite and equal reaction.” meaning tokens can also go down ninety percent(opposite of tenfold). That is to say; one should always consider themselves as they can be affected by each possibility resulting in them 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, but 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 that 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 with no 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). You can buy battle-tested, well-known crypto-assets(such as Bitcoin and Ethereum), and 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 not talk about 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 profit. Also, some projects(such as blue-chip NFTs) cannot be bought with low capital and prices out the small investors and disqualifies them from the opportunity altogether. This is why capitalism favors the rich because when they strike the right cord, their returns are dramatically high. 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 are speaking to one person in a physical environment, your ideas, advice, or the offer you provide has 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, if you could broadcast your thoughts, advice, or offers(advertisement), 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, the greatest leverage created so far is computer code. This is why crypto projects with superior technology 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 are topped in 2021 without doing anything extra. This is why looking for the great technology to invest in crypto assets is important to create a deterministic path toward supporting success. At the right time, the right technology has made an extreme difference in history and 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 which event? Would Crypto go up? If so, how much? 5-10-50%? How probable which 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 has a market cap of $1,000,000, and it had 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 people traded it relative to its market cap. If the token price fluctuated between the -+10% range in 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 sound in general market conditions. 

Matching fundamental analysis with technical analysis to increase the accuracy of our prediction is the next move:

During the past month of this tokens 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 isn’t being reflected in markets. It might never be reflected in its market valuation. It can also signal that the project has consistent development, and it is an undiscovered hidden gem that the real value of the token hasn’t been priced in.

Trying to estimate the fate of the investment that could go into 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 lacks systematic improvements in all aspects 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, you as an investor are early, and this micro-market cap project will 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 a $1000 

B — 8%: You might make $250 to $500 or lose that much 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 constant returns and survive these beautifully made but brutally cold markets.

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