Partner, DeFiance Capital: How to make more efficient crypto investment decisions?

Disclaimer: This article is intended to convey more market information and does not constitute any investment advice. The article only represents the views of the author and does not represent the official position of Mars Finance.

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Source: Deep Tide TechFlow

Sharpening the Knife

Original author: Wangarian

Original compilation: Deep Tide TechFlow

It's no secret that cryptocurrencies currently represent the forefront of technological innovation. With human and financial capital entering the industry, it would be too optimistic to think that one person can keep up with the development of the entire industry.

12 months ago, the game was relatively simple. Before most people in the market pay attention, find an under-watched DeFi Token on Ethereum and make a profit when the capital finally spins. At that time, the rate of return is high and the opportunity can be effectively identified. Today, we have countless different verticals (DeFi/GameFi/NFTs) blossoming in multiple ecosystems (SOL/AVAX/ETH/LUNA, etc.).

Given the vast amount of information that currently exists, identifying signals from noise is the most important skill to drive returns. While this skill cannot be imparted (one has to experience the trials and tribulations of the market for oneself), I often find it helpful to develop a process that eliminates unnecessary decisions. Here are some lessons learned by someone who has been studying the cryptocurrency market over the past 18 months.

Simplification is key

For 99% of investors, annual results can be attributed to 2-3 specific decisions. Go long SOL or LUNA in January, find Axie at $1, take turns leaving DeFi 1.0 after a big rally in the first quarter of 2020...

If you're a professional fund manager, each of these decisions can make your year easy or earn a 10x net return as a retail investor. While most people are hindsight, the point remains that each investor faces only a few key crossroads, reflecting the vast majority of their gains.

Well, the tricky part is how to identify these intersections in real time. We make countless decisions every day, so it's impossible to be sure when those decisions will come up. However, outstanding investors/traders will eventually grasp this in some form, whether conscious or subconscious.

I've never had the advantage of a crystal ball or differentiation, but I've often found that pruning decision trees helps build a clearer mindset—one that better fulfills opportunities when they arise.

Bet on thinking

At its core, open market investment positions reflect a reverse commitment to a particular idea. They expressed belief that the market was wrong, but over time, the market will reprice assets as investors expect. Each investment has 3 main phases, each with its own set of decision-making methods.

Stage 1: Enter – Is this a good investment? How big are we going to make this position?

Stage 2: Surveillance – Is Investment Theory at Work? Should we change our position based on new information?

Stage 3: Exit – Should I Reduce My Position Because I Was Wrong? Should I reduce my position because I was right and the investment theme had worked? Should we sell the entire position or just a portion?

The easiest way to reduce the number of decisions is to minimize the number of active positions in your portfolio. A good rule of thumb is not to have more than 10 active positions. By doing so, you can force your holdings to be concentrated as well as firmer through factors of scarcity.

Is Token A a better investment than my current top 10 positions?

This direct comparison provides a clearer risk/reward framework for assessing new opportunities. In addition to the number of bets, the size of the stakes is equally important, and a good framework I rely on is the 2/20 rule.

Exploratory: 2% of portfolio

Imagine discovering a promising new Token for the first time and believing it to be the future of finance. You did a little bit of DD (due diligence) to summarize what you knew and what you needed to discover, and overall felt good about the bet.

2% is enough to get you involved (10x = 20% return), but it's also small enough that if you're wrong, it's a bee sting for your overall return.

Balls Deep: 20% of portfolio

After getting excited about your new position, you start working hard to cover all the basics of due diligence. You've developed a clear argument, have an actionable catalyst, and are ready to earn life-changing wealth.

While you can always exceed 20%, 10x results in doubling your combination. If you hit a home run (50-100x), that one bet is enough to get you through the year.

If you're wrong, you'll lose a leg, but you'll live another day – and that's the most important thing, don't get you out of the game because of a bet mistake.

Inhibits impulsivity

The cryptocurrency market is a tricky thing. When looking for dopamine highs all the time, we tend to blind ourselves to the big picture. In addition to constantly battling the PvP market, you are also battling the demons within you– greed and fear.

For me, 24-hour uninterrupted exposure to the market has had undesirable side effects on both mental and physical health. I have found that in order to reach the peak of my abilities, a mental break away from the market is necessary.

Personal experience has taught me that a break of 2-3 days produces the best results. Long enough for the mind to settle down, but short enough so that you don't miss the entire cryptocurrency bull and bear cycle.

As investors, we aim to maximize returns over the long term. That doesn't mean we need to maximize our gains at every waking moment. Mental rest is key to resetting dopamine levels and mood highs/lows, which allows the mind to be clear and disciplined to make the best decisions.

discipline

This is one of the most undervalued aspects of investing. You can have the most detailed plan or the most elaborate framework, but if you can't stick to the plan, it's worthless. It's a problem I'm still grappling with, and I've paid for it lately. The execution of the plan is almost as important as the plan itself. Do you go long something and it has reached your stop loss level? Cut off transactions. The catalyst is over, but the price hasn't risen yet? Termination of Transaction. It's easy to construct a bullish narrative and price targets. If things don't go well, it's hard to develop and implement a retreat plan. Interestingly, this is also the most important process, and it will save you when the market is not working against you.

In the cryptocurrency space, we are often trained to think about what is the to moon scenario? We focus on the potential return on investment (10x?) 50 times? 100 times? Because that's the most exciting thing. However, we must also plan for undesirable outcomes. What if I'm wrong? I noticed that market participants hardly asked this question. Do you have a framework to deal with situations where price movements are not working against you? Can you reliably cut your position when needed? No one really likes to admit their mistakes, but in this game, even the best investors get their mistakes 40% of the time. If you don't plan for 40% of the outcome, you're preparing for the final disaster.

Journey, not result

At the end of the day, you have to remember that investing is a long-term process. The hidden money market often deceives ordinary people by distorting this fact with a significant 1000 times TO DA MOON. Lucky market participants will come and go, but those who focus on methodology, constantly iterating over frameworks, and refining processes will stand out over time. The seeds you sow today will reap several times the harvest in the future.