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

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Given the amount of information that exists today, identifying signals from noise is the most important skill to drive returns.

Original title: Sharpening the Knife

Originally by Wangarian

Deep Tide TechFlow

It's no secret that cryptocurrencies now represent the cutting edge of technological innovation. With human and financial capital coming into the industry, it is too optimistic to think that one person can keep up with the whole industry.

Twelve months ago, the game was relatively simple. Find underappreciated DeFi tokens on Ethereum before most of the market takes notice, and profit when the capital finally rotates. Returns were high and opportunities could be effectively identified. Today we have an infinite number of different verticals (DeFi/GameFi/NFTs) blossoming in multiple ecosystems (SOL/AVAX/ETH/LUNA, etc.).

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

Simplicity is key

For 99% of investors, annual performance can be attributed to 2-3 specific decisions. Long SOL or LUNA in January, found Axie at $1, took turns leaving DeFi 1.0 after surging in Q1 2020...

If you are a professional fund manager, each of these decisions can make your year easier or make a 10x net return as a retail investor. While most people are wise after the event, the point remains that each investor faces only a few key intersections that reflect the vast majority of their gains.

The tricky part, then, is identifying 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, the great investor/trader will eventually grasp this in some form (consciously or subconsciously).

I've never had a crystal ball or differentiation advantage, but I've often found that pruning decision trees helps establish a clearer mindset -- one that's better at realizing opportunities when they arise.

Devote to think

At its core, public market investment positions reflect a reverse commitment to a particular idea. They say they believe the market is wrong, but over time it will reprice assets in line with investors' expectations. Each investment has three main phases, each with its own set of decision-making methods.

Stage 1: Get in - is it a good investment? How big should we take this position?

Stage 2: Monitoring - Is investment theory working? Should we change our position in light of new information?

Stage 3: Exit - Should I sell out because I was wrong? Should I sell out because I was right and the investment theme worked? Should we sell the whole position or just part of it?

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 to have no more than 10 active positions. By doing so, you can force your holdings to be concentrated and more committed through the scarcity factor.

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

This direct comparison provides a clearer risk/reward framework for evaluating new opportunities. As well as the number of bets, the size of the bet is just as important, and a good framework I rely on is the 2/20 rule.

Exploratory: 2% of the portfolio

Imagine that you discover a promising new Token for the first time and believe it is the future of finance. You do a little DD (due diligence), summarize what you know and what you need to find out, and overall feel pretty good about the bet.

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

Balls Deep : 20% of the portfolio

After you get excited about your new position, you dig deep and cover all the basics of due diligence. You've developed a clear argument, have actionable catalysts, and are ready to earn life-changing wealth.

While you can always go over 20%, a 10x result doubles your portfolio. If you hit a home run (50-100x), that single bet is enough to keep you going for a year.

If you're wrong, you lose a leg but live another day -- and that's all that matters, don't let one bad bet knock you out.

inhibition

The cryptocurrency market is a tricky thing. When we're constantly searching for that dopamine high, we tend to blind ourselves to the big picture. In addition to constantly battling the PvP market, you are also battling your inner demons -- greed and fear.

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

I know from personal experience that a break of 2-3 days produces the best results. Long enough to settle the mind, but short enough so you don't miss the entire cryptocurrency bull and bear cycle.

As investors, our goal is to maximize returns over the long term. That doesn't mean we need to maximize revenue in every waking moment. Mental breaks are key to resetting dopamine levels and mood highs/lows, leading to a clear mind, discipline and optimal decision making.

discipline

This is one of the most underrated 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 question I'm still grappling with, and one I've recently paid the price for. The execution of the plan is almost as important as the plan itself. Something long that has reached your stop loss point? Cut off transactions. The catalyst ends, but prices haven't gone up yet? Terminate the transaction. Constructing bullish narratives and price targets is easy. If the going gets tough, it's hard to make and execute an exit plan. Interestingly, this is also the most important process, which will save you when the market turns against you.

In cryptocurrency, we are often trained TO think about what is the TO MOON scenario? We focus on the potential return on the investment (10x? 50 times? 100 times? "Because it's the most exciting thing. However, we must also plan for less-than-ideal outcomes. What if I'm wrong? I've noticed that market participants rarely ask this question. Do you have a framework to deal with if the price moves against you? Can you reliably cut positions when needed? No one really likes to admit they're wrong, but in this game, even the best investors are wrong 40 percent of the time. If you don't plan for a 40 percent outcome, you're preparing for disaster.

The journey, not the result

At the end of the day, remember that investing is a long-term process. Hidden money markets often trade at a significant factor of 1000. TO DA MOON distorts this fact and deceives ordinary people. Lucky market participants will come and go, but those who focus on methodology, iterating frameworks and refining processes will stand out over time. The seeds you plant today will reap many times over in the future.