Quarterly reflections of 2021
My first article on Substack was on February, but I didn’t write about crypto until a few months later. Though, I had already started to keep track of my holdings and net worth. Let’s dive in.
Crypto
Making it in crypto is so different than making it in stocks. Just to clarify, I haven’t made it in both. The game is largely a 3x sped up version of equities. The volatility is insane and hype cycles materialize then pop in less than a year.
The metrics and framework are also different, since many of these tokens don’t produce cash flows. If they do (i.e. revenue), price doesn’t usually correlate as well over its lifetime because 2 years is essentially an eternity for protocols and token valuations are influenced by narratives and reflexivity.
It’s fertile ground on which to make life-changing money. Like with all domains requiring mastery, the important point is how YOU respond to each situation or environment, and what lessons you learn from it. It’s the same in equities or in life.
If you want to be good at something, always need to work harder than the rest, and not just by reading or doing more than others, but improving how to think. Mental models are important to the success of such pursuits, especially crypto where projects from 2018 are barely surviving in 2021.
Q1 2021
I haven’t yet talked about my portfolio holdings in Q1 2021, but I was already tracking my holdings and net worth. Here’s a snapshot of my holdings in Q1 (have consolidated them in 1 table to make them fit nicely in the article). Many things have changed and my positions now are completely different.
Prices here refer to marked prices as of end of month. What a shame with SOL at $4.26… Sold my stack and only added higher up which you’ll see later. It feels like I’m frivolous with my portfolio, but I gotta be honest; I won’t know what I know about crypto now had I not done all these buying and rebalancing.
If I had held just BTC and ETH, would I miss out on the SoLunAvax investment thesis? Would I have been more receptive to try out DeFi or just simply hodl in my hardware wallet? Looking back, crypto is perhaps my life’s inflection point. But that is only because I ventured out, like how Bilbo (and Frodo) Baggins ventured out of The Shire in the Lord of The Rings saga.
Luckily, I am still surviving with my crypto portfolio. If there is a lesson from all this adventuring, it is to never put yourself in a position where:
You are a forced seller (e.g. liquidated)
You have a non-zero % risk of ruin (i.e. portfolio going to zero).
Above all, try and experiment with the protocols you’re invested in. It took me $3k in Ethereum gas fees (ok maybe lesser as I positioned before that) before I realised the average crypto retail isn’t going to spend $50+ on each transaction for DeFi and NFTs.
I more than paid for my lesson. If I had held ETH all the way (and not tried using it), would I have become this knowledgeable about crypto? I highly doubt it. Without experimenting it yourself, you would never understand why Solana or Luna or Avalanche are good candidates to outperform Ethereum though ETH 2.0 is on the horizon. So my lesson here (and advice to all) is to try.
Above all, try.
You’ll never know what you’ll find.
Some smaller lessons related to the tokens I held:
Borrowed conviction is no conviction.
Dinosaur coins (i.e. coins from the 2017 craze) are called dinosaur coins for a reason. Just because they survived the bear market doesn’t grant them a pass to Valhalla.
Playing fads/narrative (football team social tokens like $PSG) can be lucrative, but if you don’t know who the greater fool is, it is you. Fads will leave you bag-holding if you aren’t nimble enough.
Q2 2021
My Q2 crypto portfolio below (and their prices)
Prices here refer to marked prices as of end of month. Labels like OXYRAY and STEPUSDC refer to liquidity pool (LP) tokens. They have a price of $1 as I’m treating them as USD. For example, if I have $2000 worth of LP tokens in OXYRAY, that will be 2000 units of OXYRAY (I’ve marked the value as $1). It’s easier to track this way.
Funny how reflexivity works in crypto. Note that Q2 2021 was a brutal euphoria driven rally whose top was marked by Papa Elon going onto Saturday Night Live.
It was an absolute massacre. Then came the chop in Q3 and the birth of the SoLunAvax trade. I remarked somewhere in that quarter that I’ve got no exit plan for crypto. That’s semi true till this day (though I have learnt to be more merciless with my bags), where I will probably rebalance the % stable coins in my portfolio as the tidal wave of narratives ebb and flow.
These are some lessons I’ve learnt, outlined below.
Bubbles = Hype = Cycles
It’s harmless to participate in the crypto version of Gartner’s hype cycle. Crypto in Feb to May was one such cycle. The best way to learn how to ride a bicycle is not to run as fast as the bicycle. It is to ride it. Your lessons come (and they will always come) when you’re rolling backwards on a hill that’s too difficult to pedal upwards, or when you’re losing control as the bicycle’s free-rolling downhill.
When you crash, don’t blame the bicycle. Blame yourself.
Life is a bicycle, right? Your life is determined by how YOU ride it.
Jesus take the wheel?
This lesson is repeated throughout this article. It is not without good reason.
Exit Plan
I was early to the 2019-2020 crypto scene having lurked on CT since 2018. But I think nothing could’ve prepared me for May 2021. Looking back, it’s like 2 years of bear market condensed in 1-2 months. I must’ve aged a good 5% of my mental lifespan in that time period. The amount of damage it caused to my portfolio, while devastating, was… useful.
If I hadn’t experienced this brutal bear market and was lucky enough to escape unscathed (without learning anything), I may have just set myself up to fail (fall) from much higher. From there, the risk of ruin gets from slightly above 0% to maybe 25%.
Crypto mints millionaires fast, but it takes them away just as quickly.
I’m glad I stuck my head down, reflected and learned. What was my exit plan? At my portfolio ATH in end April I had a semi life changing amount of money. I didn’t do anything about it. It crashed and burnt 40% at the end of June. Some points of reflection.
Should I have taken profit for my core positions (back then was ETH BTC SOL)? Should I have consolidated my speculative altcoin positions? Can I be more strict with my allocation? Do I have *any* sort of conviction in any of the coins I own? What is your risk of ruin? Are you at risk of liquidation if price is cut by half?
I didn’t have answers to these questions back then. Even now, a part (albeit smaller) of me will still panic if crypto crashes tomorrow like it did on May 2021. But now, I have cash on the sidelines. I have stronger conviction in my core positions. I have a time horizon. I am selective about the projects I own.
It’s not an exit plan for sure. I am still bag-holding some token ($PMON but due to it being locked via staking for a year + ETH gas fees) but mostly I’ve rid myself of this bad habit. The name of the game is capital preservation. Focus on projects which truly add value (and whose tokens accrue such value). Mercilessly cut tokens that don’t fit the bill. Projects doesn’t know you own it, and it doesn’t care.
For what it’s worth, I also don’t plan on fully exiting crypto. But I do have a better idea what to do when everything moons, or when everything crashes.
Do you?
Only YOU can give two shits about your portfolio. You deserve the returns you get.
Q3 2021
My Q3 portfolio below (and their end-of-month prices):
I think during the depth of the multi-month bear market (cycles happen way faster than you think), I somehow rotated more to the SOL ecosystem. It’s a direct consequence of the huge price appreciation for SOL in September. SOL broke its previous ATH to hit around $240. WTF man.
For me, I bought SOL as early as $1+, then sold all higher, then bought some again (as can be seen in my holdings above). Even then, at $30+, SOL went and did an 8x (!) to hit it’s current ATH. Even after deflating back down to $140, it was still a considerable amount of profits, and the main reason why my SOL is a decent chunk of my net worth.
Then with all the exuberance of the SOL ecosystem, I think I succumbed to the fallacy of house money.
The idea of house money is that when you’ve gotten rich via something or over time, you’re basically sitting on huge profits. Your cost that you’ve contributed into this particular holding has become quite small. Essentially, you’re trying to earn more with your profits. The example quoted in the Substack article linked above is the ease with which we throw our profits at bets without the same diligence and risk management as you do with your cost.
This lesson, of course, wasn’t learned until Q4. With my house money of SOL profits, I became quite liberal with the projects I’m throwing money in.
I thought that the smart money that profited from this SOL bull trend would rotate into the ecosystem dApps (i.e. SRM, RAY, FIDA). Back then, I thought (or so I assumed) the narrative of projects being backed by Sam Bankman-Fried (SBF, founder and CEO of FTX exchange) was still strong. So, I pumped money into it. All is well at first but with benefit of hindsight we now know how badly they performed (both in relative to SOL and absolute terms).
A big part of this lies in the tokenomics of these protocols. Protocols with bad tokenomics make it oh-so-easy to become a loyal bag-holder (not a good thing!) of that project. In bull markets these aren’t as relevant since everything is up only. But in bear markets…
Tokenomics are not a hard science. A great project with bad tokenomics is still investible, but we have to be realistic as to the upside. A pristine example is SOL’s unlock back in Dec 2020, which greatly increased the supply of circulating SOL. As linked in the end of this section below, Cobie talks about how actually there wasn’t much selling pressure in the end because the vested tokens have been traded off the early investors via OTC channels. Hence, the current owners of such tokens (which are about to get unlocked) have not hit their desired exit multiple. The lack of selling pressure resulted in a bullish buying pressure and price went up.
Tokenomics have many components to it but imo the key few are: 1) unlocks and allocation, 2) inflation and 3) value-accrual.
Unlocks and allocation
Projects I see nowadays have linear unlocks after say 12 - 24 months from the project go-live day which goes some way in alleviating some of that excess sell pressure you see. However, there are some projects that have unlocks that spike the circulating supply up a few % at one go. Doesn’t seem healthy does it, with that much selling pressure materializing at once?
Even with unlocks we need to think about how many % is allocated to the early VCs. Generally, the success of the project depends more heavily on early users than VCs. As such, good projects often allocate a healthy % (usually 50% or more) to liquidity mining or staking rewards. Sometimes, a small % is even allocated to public IDOs which everybody can participate in. If a larger-than-usual % is allocated to the influencers, seed and private round investors, then perhaps that raises a few flags.
Inflation
How much emissions will this token have? Is the emissions weighted towards the start of the project, after x years, or a linear emission curve? Example below.
It’s a linear curve representing constant emissions from Aug 2021 onwards. This means that from Aug 2021 to Aug 2027, we can expect the total supply of Serum ($SRM) to 10x. For $SRM to do a 10x in price by Aug 2027, it has to do actually a 100x. (pardon my plebian math skills). WTF?
I mean, I definitely agree that Serum is a wonderful project and that the most of the success of the Solana ecosystem came from Serum’s innovative technology. But being realistic here, it is hard to imagine a 100x from Aug 2021 to Aug 2027 when it was valued at 300M then. It can happen, but the chances of it happening are quite low imo. There isn’t a consistent stream of demand like how Solana is needed for gas on the blockchain. This brings me to the next point.
Value Accrual
Why would you hold a token if the success of the project does not accrue value to your token? For example, $DYDX is a well known decentralized exchange, but there isn’t value accruing to the $DYDX token. You merely enjoy trading fee rebates for holding $DYDX. The more you hold, the more fee rebates you have. You also receive DYDX as rewards for actively participating in the protocol itself.
If 1 billion people trade on DYDX, does the price of DYDX go up? No. Rather, more people will be distributed DYDX as rewards and your rewards will decline proportionally. Notably, FTX’s FTT also is somewhat similar, but they do buy-and-burn of FTT tokens based on the exchange’s revenue. Serum is also similar to FTT. Honestly, good projects, but they don’t pay the bills do they? The harsh reality of tokenomics is reflected in their price chart.
Out of the 3 components, I think value accrual is the most important of all tokenomics. Without value accrual, it just represents ownership (aka governance token) in projects that you participate in, but that’s all, right?
Ownership isn’t worth anything, unless it’s tied to the value-add of that protocol itself.
For some projects with decently-good tokenomics, can check out $JOE, $JEWEL. I’m sure there are more projects out there, but that’s just off the top of my head (my opinion, of course).
For added reading, would encourage you to read this article too. Very insightful (though a few months late) and by a guy well respected by the crypto community.
Q4 2021
Narratives
Again, these are marked to month-end prices. For completeness sake, I recorded almost all of my token holdings, including smaller ones that are sub $100 or sub $1000 in value. As such, each cell is not proportional in value. You can visit my portfolio review as of EOY 2021 here to see the breakdown of my token holdings (in the crypto section).
I think that Q4 was the time I understood the premise and power of narratives. Everything in crypto can largely be tied to a narrative. Whether it’s hot or not depends on social sentiment. There are many narratives out there, but like assessing secular trends/tailwinds in equities, we must also try and measure (gauge) how big the narrative can be, and how early we are.
This does not mean that once the narrative dies down, the underlying assets are un-investible. Narratives often ebb and flow in tandem with other narratives, vying for market attention. These materialize quite efficiently in price charts. From the NFT boom, to the alt L1s (SoLunAvax) and then GameFi, each had their time to shine.
All 3 (to me) are quite investible for the long-run. As such, the key thing here is what we should buy, and how much of it we should buy. It is quite evident from my pic above that I am bullish on alt L1s and GameFi as the primary narrative for 2022. There may be a third narrative (aka ETH L2 scaling solutions) that I’m not well positioned for, but I’ll probably come around to that over the next few weeks. Relevant reading on L2s here.
During this quarter I also had a position in a L1 blockchain that looked promising, Kadena. It was first surfaced to me by someone I followed (though he seemed like a relentless shill). It claimed to be the most scalable PoW blockchain. I thought this narrative had legs and bought a bag of it at $6-ish on Kucoin. The top of this coin was $24, and now it settled at $12. The idea of another competing L1 seems interesting to me, but having seen quite the obvious bubble pop (from $24 to $12), I must question whether this narrative would still be strong or not. What’s more, I don’t have much conviction beyond just surface level research and reading their docs.
What makes narratives investible for the long-term is the underlying fundamentals. Crypto P2E games like DeFi Kingdoms, Axie Infinity and Vulcan Forged onboard a constant stream of people to their platform everyday. The 3 most popular alt L1s, Solana, Luna, Avalanche, all have respectable blockchain activity. This shows resilience in their narratives and strength to tide over this potential crypto bearish consolidation.
Alas, the power of narratives is not set in stone. It’s not even something that can be measured. In life (especially social media) and in the markets, narratives are ever present. We need not consume what is peddled to us. Instead, we need to rigorously evaluate each narrative and mercilessly rebalance. Narratives once dead can leave you a very salty bag-holder, like the ancient XRPArmy.
Which pill do you want to take?
This brings me to the final (short) point of my reflection: Being nimble.
Crypto’s nascent ecosystem means that we can’t evaluate projects based on their 3-5 year outlook. VCs can do that, but not retail investors who buy at perhaps 10-100x of their entry points. Instead, we see remnants of projects trying to stay relevant even just having gone live only 2 years ago.
If you still own $VET or $ICX or any other dinosaur coins, you need to be honest with yourself: How much of it is bagholding and how much of it is truly believing in the project’s success?
The world moves at quite a fast pace for technological innovation. Crypto moves probably 2 - 5x as fast. Even from 2017 to 2019 to 2021 we’ve witnessed the birth of new innovation that threatens to render the old guard obsolete. These projects adapt and lean into their snake-oil marketing skills to assemble a strong cult of fervent hodlers that will just wait for $XRP to go to $589.
There’s a fine line between waiting to see the project execute and being a bagholder. I am skeptical that most retail crypto investors fall into the former category.
In any case, the key point is this:
When facts change, your mind should also change.
Don’t be afraid to cut losses in an investment. Sunk cost fallacy has no place in a crypto investor’s portfolio. Instead, rebalancing and reposition should be part of your investing toolkit. Use it frequently, and use it wisely.
Conclusion
Thank you all for reading thus far. This article is a special edition of my monthly portfolio review as I wanted to document and summarize the learnings and reflect upon my decisions for 2021.
My investment objective is simply to achieve outsized returns over the long-term. Obviously, it’s not that simple to achieve. The key thing is to continuously reiterate and put in effort such that you auto-compound your knowledge and good habits.
In doing so, you multiple the good habits (decisions) by 1.01, and the bad habits (decisions) by 0.99. Over time, one will trend to infinity, and the other to 0. The outcome of your investing should follow proportionately.
You only got one life, folks.
Good things come to those who wait. Great things come to those who hustle.
Cheers,
Joey