The Complete Investor’s Approach to Bear Markets

Lessons From a Crypto Grandad —  Part Two

Article by Paul Hoffman Edited by Hiro Kennelly & Miss Katrina Cover Art by Cosmic Clancy


Crypto Grandad is Back

Welcome back! Lesson From a Crypto Grandad Part 1: The Importance of Self-Discovery and Other Practical Advice to Become a Complete Investor functioned as an introduction to the crypto-economic system, the concept of a ‘complete investor’, and touched on some important life lessons.


Lessons From a Crypto Grandad Part 2: The Complete Investor’s Approach to Bear Markets will focus on the all-important 2018–2019 era, during which crypto experienced a deep and prolonged bear market. A bear market serves a purpose, and for any complete investor it’s important to understand how to think about and manage this scenario.

Lesson learned:

Fortunes aren’t made during a bear market; they are prepared.

Source: https://crypto.com/fftb

It is important to understand that as time progresses, our space matures. This is reflected in the approach I take to crypto. Short-term speculation is gradually replaced by long-term strategies. Legislative institutions, politics, and legal structures start to play a role, and I increasingly look outward to the influence of the macro environment when developing a thesis or idea.

I am convinced that the crypto space and its participants have been through a maturing phase. And that’s good. I mean, crypto should never lose the lambo-moon-meme culture or its rebellious nature  —  that’s what makes it so unique to begin with! But we do have to understand that as this space continues to grow, we will have to engage with legislation, overcome stigma, and start to speak the language of governors, bankers, influencers, and the masses.

This maturation demonstrates that we have arrived, and crypto is fundamentally here to stay. But how did we get here? I’ll share my experiences and the lessons I learned in the 2018–2019 bear market  —  a period, I must say, in which crypto didn’t look as great and the community wasn’t so optimistic. On the other hand, it was a period that crypto needed in order to get to the stage it is at today. It was certainly a period that I needed.

Returning to where we left off in Part 1: December 2017, two days before Christmas. I had sold virtually all my crypto assets and made some serious dough. Santa came early, but Santa didn’t stick around …

2018–2019: Crashing and #BUIDLing

Not only my life, but the lives of many people changed as a result of the meteoric rise of crypto. For me, this came somewhat unexpectedly. In fact, it didn’t seem real until the day the transfers came through and the ‘cold hard cash’ landed in my bank account.

Taxes

One of the first things that occurred to me is that I would have to pay taxes. I requested the necessary documentation  —  and not wanting to dwell on this much longer  —  filed the paperwork and happily closed this chapter. Done and dusted.

Lesson learned: Pay your taxes! Do everything by the book; hire a tax advisor if you must. Governments really don’t like it when you don’t pay your taxes. It will help you sleep easy.

The Tax Optimizerrrrr is here to help

How to Destroy Wealth

The psychological impact of large sums of money being deposited into your bank account cannot be overstated. I did not grow up wealthy and always fantasized about lavishly spending. So when I finally had the ability to do so, I could not help myself but spend. And spend I did, like water!

The one thing that became apparent during this time is that if life-changing money appears and you’re not prepared for it, that money will leave you just as fast as it came. This effect is not only present in people who sell crypto at a massive profit, but is also found in lottery winners, who on average declare bankruptcy within three to five years.

In a sense that happened to me too. Expensive restaurants, clothes, watches, fitness equipment, a car, traveling, upgrades to my living space  —  it was so easy to spend money. Within six months, I had spent almost half of what I made in crypto and reinvested virtually nothing.

Money comes crawling and leaves sprinting.

- Crypto Grandad

Lesson learned: Money comes crawling and leaves sprinting. If you make life-changing money, be mentally prepared for it. That money can continue changing your life if you work it wisely.

Reinvesting is obviously one of the ways you can use that money to continue making your life better. But also, consider paying off debt, buying a house so that you don’t have to rent anymore, or switch from leasing a car to buying one outright. Do what you can to shrink your monthly expenses. This way you can guarantee your future self a better quality of life.

If you have money left to spare after that, or you feel especially generous, improve the lives of people (or animals) around you. This is good karma that will come back to you when you need it most.

On the other hand, and this is going to sound so boring, but if you want to spend your hard-earned cash on a lavish lifestyle, at least give yourself a budget. The last thing you want to do is end up in the same financial condition as you started. Or worse!

In summary: spend now to lower monthly expenses moving forward and to improve the lives of others around you, but spend on a clearly defined budget.

Bear Market Builders

During 2018, my crypto conviction never wavered. In fact, it made me quite happy that the craziness was over. The crypto community had, for all intents and purposes, reverted to the good old pre-2017 times. Gone were the moon posts on Reddit, and the contemporary media was ever so keen on letting everyone know that crypto had cratered; it was over.

For another group of people, however, it was far from over. This group of people, I call them the believer-builders, remained very active in the space. These builders were the ones who understood the true value and potential of public blockchain technology and were willing to continue building regardless of the perceived economic value of individual tokens.

In the silence of 2018, building mostly centered around Ethereum. The core community remained intact and committed to launching new, innovative tech. It was during this time that the foundations of DeFi were poured and research into rollups began.

Outside the direct Ethereum ecosystem, OpenSea  —  the now well-respected NFT platform, saw its alpha launch. This was also the period in which the whitepaper for Solana was written and Binance committed to launching their own blockchain and decentralized exchange.

NEO, NEM, TRON, ICON and the like became ghost chains, echoes of the bull market. The wheat had separated from the chaff.

Buidl — Korea’s largest technical blockchain event in 2018 (Source)

Lesson learned: building continues, even in a deep bear market. Don’t let the price of crypto dictate how much energy you put into your research. The quality of projects built during a bear market are arguably much better than during a euphoric market because only the most dedicated, passionate, and intrinsically motivated builders remain.

Bear markets root out poor quality.

- Crypto Grandad

Bear markets also serve a purpose: to root out poor quality. It’s like shaking a tree and seeing all the weak branches break off and dead leaves fall to the ground. The deeper the bear market, the rougher the shaking. What’s left afterwards is of superior quality. It therefore serves to ask yourself, would my (potential) investment survive a deep bear market?

Frameworks

As 2018 rolled into 2019, I began taking positions in crypto again. Although the market wasn’t particularly favorable, I managed to make some healthy returns trading initial coin offerings on Binance. Regardless of minor wins, it began to dawn on me that my lifestyle, accompanied by a lackluster crypto market, meant that I was going to soon run out of money. This may seem like a trivial revelation, but it fundamentally changed my attitude.

This attitude change didn’t come out of nowhere. Throughout this period I had continued to educate myself on building, maintaining, and growing wealth. My preferred method of learning remains reading, and throughout 2018 I spent a lot of time reading and rereading books like Think and Grow Rich (Napoleon Hill), Rich Dad, Poor Dad (Robert Kawasaki), Titan: The Life of John D. Rockefeller, Sr. (Ron Chernow), The Dao of Capital (Mark Spitsnagel). and Ray Dalio’s Principles for Navigating Big Debt Crises..

Although I will never get to speak to the writer, I owe him a debt of gratitude. This piece of literature fundamentally changed my attitude towards investing and life in general.

A byproduct of this reading frenzy was that I began to understand money and investing as a kind of game. A game with rules, good players, and bad players, but a game you can actually become really skilled at if you spend enough time playing.

Lesson learned: I chose the words ‘game’ and ‘playing’ here carefully. The reason is that I’ve been a gamer for pretty much as long as I can remember and framing the world in the context of a video game makes sense to me. From that same experience I also learned that when I take a game too seriously, and I stop playing, my performance actually drops. I need to play in order to succeed.

The books I mentioned above all have a unique understanding, a framework with which they make sense of the world. Rich dads and poor dads, manifesting, macroeconomics, the cyclical nature of human-economic behavior: these are all frameworks of understanding.

In order to be successful at anything, you have to develop your own framework of understanding.

- Crypto Grandad

The key takeaway is that in order to be successful at anything, you have to develop your own framework of understanding. This can be a combination of other frameworks, a framework entirely unique to you, or an adaptation of another’s framework that makes sense to you.

My framework for understanding is ‘the game’, a topic I’ll write on in the future. But for now, consider your own framework of understanding. Identify it, work on it, hone it, perfect it, and let it become your most useful asset for making sense of the world. There are no shortcuts here. It’ll take consistent hard work over time, but reading about how other people view and understand the world through their frameworks will help you develop a framework of your own.

An Unexpected Transition

With this newly developing framework of understanding, it occurred to me that if I wanted to be successful and retire early (this is what I consider the end game), I couldn’t just live off my early crypto gains, I had to continue to grow them.

This is when I decided to apply to the Air Force to become a military officer. This may seem like an odd twist, but I reasoned that if crypto took another four to five years to turn from bearish to bullish, I would need a steady source of income to supplement my crypto earnings.

Another line of reasoning was that, as a military officer, you have a leadership role from day one. This is reflected in officer training, a type of training that emphasizes character development, discipline, and leadership skills above all else. These are life skills that I consider invaluable and can only truly be developed through doing.

Air Force Officer training certainly had some elements of this…

Although the officer training would take up a lot of time, I reasoned that if I used my time effectively, I would be able to hone two skill paradigms simultaneously, theory and practice, hard and soft skills. Understanding crypto, investing, and economics could be done in my off time, mostly through reading and learning (theory, hard skills). People and interpersonal skills would be honed during my military training (practice, soft skills). This combined setup would allow me to work on two things at once  —  a solid foundation for the end game.

Lesson learned: there are certain skill sets outside investing that are (in)directly beneficial to becoming a complete investor. Most of these are soft skills, people skills, like the ability to communicate, function in a group, or even lead.

Although these are typically not considered investing skills, my conviction is that if you want to become a successful investor, you have to develop these soft skills. Consider that very few people become successful in isolation and that the most valuable information is oftentimes shared in private groups of friendly professionals.

$WAGMI

Returning to the topic of crypto, the 2018–2019 period remained relatively uneventful, at least in a monetary sense. Something did stand out during this period, however, and that is that some projects, even though they have terrible leadership, almost zero end-users or applications built on top of them, can (temporarily) go to the moon. This is something that continues to this very day.

This caught me by surprise and it took me some time to make sense of. I won’t name any projects in particular, but I’ll just refer to these protocols and applications collectively as $WAGMI (‘We’re All Gonna Make It’ —  I love the meme).

What sets $WAGMI apart from blue chips (qualitatively superior projects with a proven track record) is that regardless of the underlying metrics  —  ecosystem size, total value locked, treasury allocation, developer, user and dApp numbers, or poor leadership  —  $WAGMI can experience temporary lift-off.

In turn, $WAGMI token holders become like militants, defending their bags with a vehement passion and point to a rising price as a way to legitimize their respective projects.

This makes sense. A rising valuation makes a strong case for a successful project. But there are problems with this line of reasoning. First, as we’ve learned from Crypto Grandad Part 1: developer, user, and ecosystem size matter, especially over the longer term as they will sustain price. Second, the type of investors who strictly adhere to price are forever enticed to find luck elsewhere. Third, poor leadership will continuously make poor strategic choices. This is not good for $WAGMI bagholders.

The typical $WAGMI post, an NFT example

The $WAGMI lifecycle can be identified in the crypto ecosystem time and time again. In short, the $WAGMI project attracts a relatively small but extremely vocal following. This attracts other speculators looking for quick gains, which leads to increased demand for the token and subsequently increases the token’s price. This starts an effective, albeit temporary, flywheel effect that generates positive price momentum.

This is all well and good until the price stops going up, bagholders become disgruntled, the magic shine of $WAGMI disappears, and the value of $WAGMI comes crashing down. Consequently, the positive flywheel halts and reverts to a negative flywheel causing strong downward price momentum.

What sets $WAGMI apart from coins like Shiba Inu and Dogecoin is that $WAGMI project heads will lead bagholders to believe that their bags are valuable and that the $WAGMI platform, dApp, or blockchain will see adoption in the future. At the top of every $WAGMI is a small group of individuals (generally the leadership) who work towards creating hype and belief. This hype will increase the demand for the token, which the small group of individuals will abuse to offload their bags on the community. This group will eventually disappear, taking their profits with them.

Lesson learned: I put the blame of this lifecycle squarely at the feet of the leadership of $WAGMI-style projects. Their empty promises play into the wants and desires of consumers. ‘You can be rich and early too’ is a sales pitch all too effective in crypto. Especially in a bear market!

You can identify good leadership fairly easily. Good leaders will actively participate in the community, on Discord, forums, or through frequent community-oriented AMAs, and be willing to engage with difficult or confronting questions. They will openly admit to not knowing something or take responsibility for mistakes and they are respected by other good leaders (Here is one example and DC Investor speaking on the matter). Herein actions speak louder than words.

YOU CAN IDENTIFY GOOD LEADERSHIP FAIRLY EASILY.

- Crypto Grandad

Bad leadership, on the other hand, will hide in an ivory tower and speak to the community through indirect means such as youtube videos, infrequent twitter posts, and content that announces announcements. They will react with hostility towards criticism and in some cases have a questionable past.

Remember that you can also identify $WAGMI projects by the lack of developer and end-user numbers (as opposed to speculators). This cannot be stressed enough. Especially in the long run. Without some form of adoption, any project, no matter how enticing, will eventually run out of steam and the price will reflect that.

Without some form of adoption, any project, no matter how enticing, will eventually run out of steam and the price will reflect that.

Crypto Grandad

Crypto Pot-Committed

It is generally very difficult to stay committed to crypto when times get tough. The ecstatic feeling of increased prices is no longer there, the communities are less active, and there generally seems to be less going on. As it turns out, however, this is exactly the time that it pays off to be active and engaged!

My reasoning is that there is a real importance to bear markets. First, they serve to root out the projects of poor quality. There is nothing as effective as a deep bear market in demotivating the leadership at money-grabbing projects.

Conversely, the projects that are built during this phase of the market tend to be high quality. This is because the builders who continue building regardless of the perceived value in dollar terms are intrinsically motivated to build something of value to the crypto space.

Lesson learned: There is a lot to be excited about even when the price is down.

To touch on a lesson learned from Crypto Grandad Part 1 —  that consistency over time is the most important component in developing any skill  —  stepping away during a bear market is never the right answer. Instead, reaffirm your commitment by working on your framework and get a better understanding of what’s happening around you. This will prepare you for the eventual bull market and guarantee that the odds of being successful during the next phase of the market are stacked in your favor.

Crypto Grandad Part 3 will focus on 2020 and parts of 2021, a period I look back to fondly, and will contain some lessons learned that I cannot wait to share with you.

Until next time!

Further reading: 

Extreme Ownership: How U.S. Navy SEALs Lead and Win by Jocko Willink

Metcalfe’s Law


Author Bio

Paul Hoffman is an officer in the Royal Dutch Air Force, and a part-time crypto analyst and researcher.


BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.


Disclaimer: this isn’t investment advice. This article has been written for informational and educational purposes only and it reflects my personal experience and current views, which are subject to change.


Bankless Publishing is always accepting submissions for publication. We’d love to read your work, so please submit your article here!


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