asset allocation cryptocurrency – the paradise paradox

In the world of cryptocurrency, a lot of investors know this word: HODL. It started as a typo in a hastily typed post on bitcointalk, in which a fellow was telling everyone NOT to sell their bitcoin but hold on. Later it turned into a backronym, “hold on for dear life”.

Now, whenever the market goes down, people bring on the old memes telling people not to panic, not to sell and above all, HODL. I’m here to tell you why that’s really stupid.

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HODL is for chumps

RIght now, March 2019, it looks like we’re nearing the end of a bear market in crypto. So not many people are thinking about what they’re going to do when it blows up again, how they’re going to protect their gains. That’s why I want to tell you to plan ahead now. Remember the 6 Ps of success: “Proper preparation prevents piss-poor performance.”

It’s great to be prepared for this now, to get your mind primed so you already have a plan for when the market takes off.

“Bitcoin to the Moon” Scenario

It’s around the end of 2020 or 2021. Crypto has been going up, accelerating steadily for the last 6 months. Then suddenly, the market makes a big 20% jump in a single day. More people than ever are scrambling to put in their cash, and a week later the market drops 40%.

People start pulling out their doge memes and their HODL memes, saying you’re a sucker to sell now when it’s far down from the peak. You look at how much you have in dollar terms, and think about how much you had a week ago, and you feel ugly inside.

That feeling is important. Emotions are information, and in a market like this, they give you a clue about what everyone else is feeling. In this case, they can be a trigger to look at how much you’ve lost and consider how much more you might lose.

A lot of people will be saying “It’s already dropped 40%, surely it can’t go down much more” when they say that, look back to the charts of 2014 & 2018 and think yes, it can go down another 90%. Now you’ve had a dose of reality – don’t resist it.

If you were blinded by hype, don’t double down and again be blinded by hope.

Ideally, you’d already be out, with 90% of your holdings safely in other markets, with a lot of dry powder ready to launch back in when crypto settles down. In the likely case that you didn’t get out as much as you wanted, it’s time for damage control. Protect your downside, cover your backside, HODL is for chumps.

Peak tilt

When you’ve already lost a lot, the temptation is that the numbers don’t matter any more. Thousands, 10,000s and even millions blend into one another.

So many gamblers have lost $200 at the table, and because they’ve peaked out their tilt or negative emotions, they don’t feel any worse when they drop another thousand. Make no mistake, that $1000 will sting bad on the long walk home.

Comedian and former sports gambler Norm MacDonald tells a story where he lost most of his bankroll, and then went on to throw $60k in cash into the ocean. You might think Norm was kidding, but themes he describes are very real. Once you lose a little, you may even want to lose it all, just so you don’t have to worry about losing more.

So be present, empathise with your future self. Protect your downside, cover your backside, HODL is for chumps.

Asset Allocation

When the market has gone down, you don’t necessarily know how much farther it’s going to drop. Nobody has a crystal ball, and nobody’s timing is perfect. That’s why you’ll hear so many guys who are really experienced in the market sound so uncertain – so humble.

We have three ways to become better speculators. Pick better projects, pick better timing, and choose better asset allocation. The first two are really complex, but with just basic asset allocation we have a lot more control over our financial situation.

If you have 5% or even 20% of your portfolio in crypto, you don’t stand to lose a lot. If you have 90% in crypto you do. You have 10%-20%, you can still easily double your entire portfolio within a couple of years, the kind of gains many traditional investors couldn’t have dreamed of 20 years ago. Think about your number, how much do you really want to expose to an extremely volatile market like crypto? How much is going to give you a high chance of excellent gains, and a low chance of losing your shirt?

A Grand Opportunity

Again, my hope is that the gains don’t just go to hedge fund managers and bankers, but to regular people like you. For that to happen you need to be prepared. It’s really possible for you to outmanoeuvre the market, but you have to be a little smarter than the average. This is a market where being 5% smarter means you can gain 5x as much as the average guy loses.

When regular people understand more about hype and market cycles, when they’re a bit more emotionally intelligent and better at recognising scams, and when they stop HODLing, the market won’t be anywhere near as volatile.

Until then, protect your downside, cover your backside, HODL is for chumps.

Thank you

Thanks so much for listening, watching and reading Cryptonomics. Please be a crypto-bro, like, subscribe, have a look in the description and connect on all social media. Most importantly, have a look at the beautiful things around you, and stay grateful.

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Cryptonomics – HODL is for chumps

If you’ve listened to a lot of interviews with successful investors and entrepreneurs, you might notice that a lot of them play poker, and some of them even recommend it as a way of improving financial acumen. There are many reasons: poker is a game of incomplete information, you have to assess risk quickly, be decisive, and emotionally deal with the consequences of a decision, whether it turns out to be good, bad or unknown.

A lot of people tell me that they’re thinking of getting into Bitcoin or crypto assets in general. They’ve got a few $1000 in savings, and they’re going to put it all in.

One question I like to ask them is, have you ever been seated at a card table, with $1000 in front of you, not knowing if you’ll walk out with your pockets full or empty? Most of the time, the answer is no, and I like to point out how that should be a hint for them about how well they’ll be able to handle the swings of the market.

Scroll down to the bottom of the post to watch and listen to the episode. In this episode, I present five key ways in which investing is like a game of poker:

1. Bankroll management/Asset allocation

Managing a bankroll is something that few cardplayers master – it’s common to hear even the best players going bust at some stage in their career. It’s common to find risk-averse gamblers, who stick to playing $2 games online, never wanting to risk too much. It’s also common to find risk-inclined gamblers, putting their rent money on the table in the casino.

Risk-averse investors might put all their money into term deposits, CDs and bonds, and they will lose over time, letting inflation eat away their savings. Risk-inclined investors might take out a mortgage and put the money on a penny stock, and it might pay off – then again, it might not.

What we want to do is seek a balance – risk enough that we stand to get a good return, but not enough that any one decision can send us broke. Don’t gamble more than you can afford to lose – but assess carefully what you can afford to lose. Reading about the Kelly Criterion can give you a more thorough understanding of how much to bet.

2. Sixth street – Being aware of deception

“Sixth street” is a term coined by poker player and writer Tommy Angelo about the events which happen after a hand – posturing, lying, perception management. Some of the best poker players use manipulation techniques such as “strange loops” – statements which, whether you assume they’re true, or assume they’re false, will be equally misleading.

Likewise, in markets we have examples where big players will attempt to manipulate the market under the guise of stating their opinion. One case was where Jamie Dimon, CEO of JP Morgan, opined publicly about how awful Bitcoin was, and how stupid people would get what they deserved if they bought it. Months later, it turned out that JP Morgan was purchasing Bitcoin, and Dimon decided to recant his position, saying there might be something to this crypto thing after all.

The lesson is, don’t trust what people say at the poker table, and don’t trust what big players say in the market.

3. Information asymmetry

A basic card player only has a few data in his mind while deciding whether to call, fold or raise. He knows his cards, the cards on the table, the last action, and whether he likes his hand or not. A solid player, however, has a personality profile of each player at the table, knows their betting habits, has an idea of their emotional state – and his own emotional state. He knows the chance he has to get the last card of his flush, the odds the pot is offering him, and his history with his opponent. This is the reason that a good player will beat a bad player in the long run – he knows more, and he knows how to prioritise the information.

Same idea in the markets – the average investor has heard a rumour, or he likes the logo of the project, or he saw that it went up over the last two weeks. The solid investor can take his time, looking at the commits on GitHub, reading about the history of the team, learning about their vision, and perhaps even talk to the team directly. This is why speculating is a superior form of gambling – you can take your time and literally learn a hundred times more than the average speculator. The more you know, the more likely you are to make money in the long term.

4. Let your stake match your knowledge

This is a simple rule of thumb to help you decide how much to invest. If you’re an absolute beginner at poker, knowing little more than the rules, you wouldn’t walk into a casino and put a month’s salary on the table. It’s the same with markets – it doesn’t make sense to dump thousands of dollars into a project when you only have an hour’s worth of knowledge.

The problem with this rule is, at some point with crypto assets, they could explode in price, and suddenly you’re holding more money than you know what to do with. That’s what is called “a high quality problem”, and that leads to my next point.

5. Plan your hand

It’s common to see bad poker players get into positions where they don’t know what to do, where they’ve put hundreds of dollars in the middle, and now they have hundreds more at risk. They didn’t decide before the hand what they wanted to do against a particular player, and now they’re caught out.

You can read countless stories of lottery winners who hit the big one, and then start spending their money on ridiculous excesses. For many of these people, the lottery might have been their retirement plan – but they never thought about it beyond “Step 1: Win the lottery.” If you have a plan, any kind of plan, of what to do when your investments jump in their rockets and set a course for the moon, that will remove a lot of stress from your life.

Don’t make the mistake of thinking money will solve your problems – it will not. It will only grant you different problems – problems you can start solving ahead of time, today.