It actually is.

We can’t stop here, this is bat country!

There has been a recent flurry of posts across medium, twitter and reddit trying to reassure newbies that thisisfine.jpeg. Whenever there is a crash, some old hands decide to help out/motivate/karma-farm/accrue upvotes/act high and mighty…

These feel-good posts are all well and good, but once you’ve seen one, you’ve seen them all. So I’m going to try and add a bit more substance (though I am aware of the irony that I’m basically doing the same thing, only with more references to peer-reviewed journals). I’m mostly focused on building and think the price can be a distraction. I much prefer to write about the unique design challenges posed by DeFi, than in how to approach investing, but if there is ever a time to say a few words about the market… it’s probably now.

Just know that this crazy journey isn’t stopping. It’s guaranteed to take us into more dizzying highs and terrifying lows. It will be fun, but it will be scary. If you want to come along, that is the price of admission. Buy the ticket, take the ride.

This is a rewrite of something I put together a few years ago, and I think it holds up fairly well. And that’s largely the point — a decent investing strategy should stand the test of time. I spent a while researching and writing this, so if you think it’s useful, please do give a clap for visibility. Next month, I’ll probably go back to writing incredibly niche articles on the UX of web3 apps.

Tl;dr: If you play it safe — with boring strategies, such as dollar-cost averaging, diversifying in high-cap tokens, and taking advantage of compound interest — you will probably still get massive return on investment.

Why you are likely to lose money in the short term

As I get older, I’m starting to realise a few years isn’t that long. Traditional financial investment might make you rich over 30–40 years. I believe crypto can do it in 5–10. This might seem like a lot, but it’s not. Stop thinking in days and weeks and start thinking in months and years.

First, some data on trading

The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually

Profitable day traders make up a small proportion of all traders — 1.6% in the average year.

The typical day trader loses money by a considerable margin after adjusting for transaction costs

Furthermore, the authors of the second study write that “inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative”.

This is all about regular stock trading. But I imagine the same is true in crypto, only on a more exaggerated scale.

Second, some anecdata about crypto friends

Maybe academic papers aren’t your thing. Fair enough.

Back in 2017, two friends of mine got into crypto and we started a WhatsApp group to share tips. One friend invested steadily into Bitcoin and a few alts. The other friend invested heavily into altcoins and traded every day. In a bull market everybody thinks they’re a genius. He made a lot of money then lost it all. In 2018, he tried to carry on trading, but this was now a bear market. He lost even more.

Fast forward to 2020, and he’s now anti-crypto. Regrets all the money he lost. Thinks it’s all a scam. At the first sign of recovery, he converted the dregs of his altcoins to BTC, sold via Coinbase and left the chat. If he’d held on for another month or two he would have recouped his losses, and then some, but he didn’t. He completely missed out on the 2020–1 run up and tortured himself by looking at the price of Bitcoin everyday.

My other friend carried on DCA’ing into BTC and ETH and is now up considerably.

Third, some cognitive biases

Survivorship bias means that we concentrate on the people who win. See some smug bastard proclaiming his shitcoin profits on social media? He won. What you don’t see are the hundreds of Wojaks who tried different trades and lost. Badly. You are more likely to be one of them. Sorry.

Hyperbolic discounting is the preference for immediate payoffs to greater payoffs at a later date. Crypto is seen as a “get rich quick” scheme. If you’re new to this game, reset your expectation to “get rich more slowly than I’d like, but still fairly quick, all things considered” scheme and you’ll do just fine.

Don’t even pretend…

The boring basics

There’s nothing special here, and even if you know this already, it’s good to hear it again.

Dollar Cost Averaging in theory and practice

Buying $100 of Bitcoin every month for 3 years starting 3 years ago would have turned $3,600 into $10,362 (+187%)

When you consider that we’re currently >50% down from the all time-high, that stat seems even better. Even if you bought the absolute peak in 2018, you would still be up 300% by now, simply because you will have spent more time in the market.

Buying $100 of Bitcoin every month for 5 years starting on 2017–12–15 would have turned $5,400 into $22,462 (+315%)

That is INSANELY good. But it required buying into a brutal bear market for three years. Every month would have seen lower prices and you would have had to stomach those losses and carry on regardless.

The reason this works so well is because even though your investment stays the same (eg $100), you actually accumulate more BTC as the price goes lower. In this sense, dips are a great opportunity.

Visit https://www.bitcoindollarcostaverage.com/ and start inputting some numbers.

Dollar cost averaging $100 Bitcoin biweekly from May 2016 — May 2022 gives 800% ROI. You would have spent $15,000 acquiring 5.1 BTC, which would now be worth $155,000. $300,000 a couple of months ago.

OK, 2016 was early, but it shows how a little time in the market works.

Can you beat the market by buying the market?

Check out the top ten crypto fund posts. The answer is… probably.

There is a lot of data to comb through, but the main points appear to be:

• BTC and ETH have outperformed the other picks over the longterm
• Altcoins outperform BTC and ETH in a bull market
• Crypto is still beating the stock market
• The upside in a bull market is huge.

We can draw the following lessons from these experiments:

1. Ignore Bitcoin at your peril
2. Eth is now a blue chip comparable to Bitcoin
3. Altcoins do well in a bull market
4. This year’s top 10 will not be next year’s top 10
5. You should sell gains back into Bitcoin/Eth to protect wealth

You can get fancy with this and start exploring Modern Portfolio Theory, which aims to calculate the best risk-adjusted returns on different percentages of assets. Here is Benjamin Cowen talking about sharpe ratios and the efficient frontier.

Here is a great piece on Modern Portfolio Theory by a finance professor.

Diversifying away from bitcoin and buying a few alts will lead to better returns than a bitcoin-only portfolio. On the flipside, having a zero-bitcoin portfolio, consisting of only new altcoins, is pretty much a surefire way of getting rekt over changing market cycles.

Longterm predictions

Mathematical analysis of crypto gets a bad rap. John McAfee famously got it wrong. But that doesn’t mean it’s all nonsense. Patterns tend to repeat. Trends emerge. Data converges.

Here are various predictions for a $100,000 Bitcoin.

The logarithmic regression band shows an upward trend, with decreasing volatility. It’s a reasonable assumption that this will continue. There is a non-trivial probability of Bitcoin going to zero, but I think at this point there is simply too much momentum for that to happen. Countries are making it legal tender. Investment funds are buying billions of dollars worth. There will be bubbles, there will be corrections, but BTC will continue going up. And if you iron out the swings, it will give greater returns than any other asset class. Crypto as a whole will also go up and other coins will give even greater returns. These will be hard to predict. Diversifying a small amount into a few other coins will give you some exposure to this effect without too much risk.

Some thoughts on compound interest

OK, not your keys, not your crypto.

But… Someone once said compound interest is the eighth wonder of the world and the key to wealth.

The reason for the 2020 boom was DeFi. For the first time, it was possible to earn interest on crypto. A world of borrowing and lending has opened up, and with it, huge opportunities outside of traditional finance gatekeeping.

There are risks involved, but it is a force multiplier that can massively improve your success, and it would be remiss of you to not consider it.

Compound interest is great on its own. But using compound interest to accumulate more units of an asset that is itself appreciating, will accelerate the process dramatically.

Consider the following:

• You bought one Bitcoin at $10,000
• You HODL for ten years and it reaches $100,000
• Go you.

• You put that Bitcoin into an interest-earning strategy
• You get 6.5% compounding interest
• You HODL for ten years and BTC reaches $100,000
• But you now have 1.91 BTC
• You have $191,000
• That’s an extra +91%. Nearly twice as good as just HODLING.

I urge you to play around with a compound interest calculator.

If nothing else, it should show you the value of thinking in longer timeframes.

Currently, the best bank accounts are offering around 0.1% interest. Which means you’re actually losing money after inflation. These days you need to be making 8–9% interest just to keep up with inflation! On the other hand, DeFi offers a variety of financial primitives that a savvy investor can use to generate yield. There are simple strategies and there are complicated strategies, and all have their risks. If something looks too good to be true, it usually is. The recent spectacular meltdown of UST Luna was a sobering reminder of this fact. Crypto yields also vary, so a true farmer has to rotate their positions occasionally.

If you are uneasy about yield farming, a number of “crypto banks” have sprung up in recent years that offer interest on your deposits, while also claiming some level of insurance on the assets you entrust to their care. BlockFi, Celsius, Nexo and Crypto.com are the largest players in this space currently. Behind the curtain they’re utilising DeFi protocols with the best of them, and nobody really knows if they would come good on their insurance claims if shit hit the fan, but they at least offer a user-friendly way of earning interest.

You’re between a rock and a hard place: there is a steep learning curve to DeFi; but using crypto custodians is philosophically at odds with the dream of pseudonymous digital cash.

That’s for you to think about.

But use the calculator above, plug in some numbers, and see where 10% interest gets you in 20 years. Even if you just used fiat, that would get you pretty far. Now think about getting even 5% return on ETH or BTC. Factor in dollar cost averaging on top of that. Use a calculator, do this properly, and you’ll be amazed at just how much BTC/ETH you might be able to acquire over 5–10 years. Now think about what 1 BTC or 1 ETH could be worth in 10 years. Even if you pick the most sober price predictions, you’re probably looking at a pretty big number… And you’re risking it all chasing pumps every day?

There is nothing wrong with a bit of trading, or testing the most degen of DeFi dApps. But don’t do it with your full stack.

Slow down, and consider the safe, boring, options. It’s a lot less stressful and you might be surprised where you get to in a few years.

Relax and stay calm.