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The world of cryptocurrency and other high-volatility asset markets represents a potential gold mine of profit. 💰
Averaging an appreciation of 150% per year, crypto outpaces traditional investment avenues by a significant margin. 📈
However, most people end up losing money in crypto. How can that be possible with an asset that increases 150% per year? 🤦
This discrepancy stems from several key factors including greed, lack of understanding, susceptibility to FOMO (Fear of Missing Out), excessive use of leverage, risky yield farming, inadequate security measures, and improper market timing.
At Web3 Academy, we're focused on building and creating a better future for everyone, but we still want to capitalize on the upside.That’s why we are teaching about investing. 🚀
In a way… You could say this is us:
Except rather than “degening”, we invest with a smart framework to protect our investments and ensure we capitalize on the incredible upside of web3. 💪
So.. In today’s report, we want to equip you with a robust framework for investing in volatile assets, turning potential pitfalls into opportunities for sustained financial growth. 🤑
Here’s our agenda:
Why do investors lose money in volatile markets ❓
What are we investing in and how do markets work? 📊
Secular vs cyclical trends 🔄
Time in vs timing the markets ⏰
Setting up your portfolio for long-term success 🎯
By the way, this report is a summary from a live event we held in our Discord on Tuesday. Thanks for those who turned up, the feedback from you was amazing!
For those that had issues joining the call, we’re sorry! Discord was limiting us to 25 people. We’ve figured out a solution for our future events and will be hosting more soon! So keep your eyes peeled and join the Discord here if you haven’t already!
FYI free members can attend the sessions, however only PRO members get to join the exclusive AMA session afterwards.
One more thing before get into today’s report. We’re building a Web3 Investing Course, and this report is the intro of that course. Now, we really want to build a resource that solves your problems and ensures you capitalize on the opportunity.
So, please reply to this email with:
Yes or No – If a course about investing across web3 is something you are interested in.
Questions you want us to answer inside the course.
This will really help us design this resource for YOU (because that’s the whole point anyway). 🫵
Okay… Enough babbling. Let’s get into today’s report ⏬
Why Do Investors Lose Money in Volatile Markets ❓
Most experienced traditional investors can achieve returns around 10% a year, with top-tier investors like Warren Buffet hitting around 15%.
If you only invest in the S&P 500, that gives you around 10%/year (the average over the past 50 years).
Yet, crypto, a high-volatility asset class, yields much higher, 150%/year on average.
This remarkable profitability, however, comes hand-in-hand with significant price fluctuations, making the troughs just as dramatic as the peaks (as you can see on the chart above).
Therefore, understanding market dynamics AND the multitude of factors, which often lead to investors losing money in these markets is crucial for investors navigating the turbulent waters of crypto.
So let’s start with understanding the reasons why investors lose money in crypto:
Greed: The prospect of astronomical returns often leads investors to gamble on assets they don't understand, including 'memecoins' and 'shitcoins.' They are driven more by the potential of significant profits rather than informed decision-making.
Chasing Trends: Investors often follow market hype, whether fueled by social media channels like Twitter, YouTube, or Reddit. This leads them to buy assets when they're peaking and then panic sell when the price drops, a trend often known as 'chasing pumps.'
Using Leverage: Leverage can magnify gains but can equally amplify losses, particularly in a volatile market. Some investors employ excessive leverage, exposing themselves to outsized risks.
Farming Risky Yield: In an attempt to boost returns, some investors engage in yield farming with risky assets. The potential reward often doesn't justify the substantial risk involved, including the possibility of getting hacked or losing assets.
Security Lapses: Cryptocurrencies require self-custody of assets. Investors who fail to take adequate security precautions risk losing their investments to hacking or phishing.
Not Being in The Market: Some investors keep their money in FIAT, waiting for a market dip that never comes. The volatile nature of these markets means that major moves can occur rapidly, and being out of the market means missing out on significant potential gains.
These pitfalls showcase the need for a solid investment framework, especially for volatile and emerging markets.
A sound strategy can help you avoid these common mistakes, positioning you to take advantage of the high potential returns these markets offer.
So… I’ll spend the rest of this report telling you how to form a strategy and how to execute it to make the most of being in crypto this early!
But first…
What Are We Investing In And How Do Markets Work? 📊
Primarily, we’re investing in 3 categories across web3. These are:
Currencies: These are native to specific blockchains or networks, functioning like the US dollar does in the US. Examples include $BTC for Bitcoin, $ETH for Ethereum, and $SOL for Solana. Generally considered the least risky digital assets due to their technological moat (aka being the deepest in the tech stack).
Application Tokens: Tokens linked to applications or communities on digital networks, providing benefits like equity, governance, access, and profit sharing. They're versatile and programmable. Examples are Uniswap, Aave, and Axie Infinity. They're riskier than currencies due to their wider classification.
Non-Fungible Tokens (NFTs): These represent assets like artwork, membership passes, or gaming assets. They can be misunderstood and risky due to their novelty and diverse applications.
Here’s a visual that will perhaps help you:
What these (and all assets/products) have in common is that they obey the principle of supply and demand.
For example, the price of Bitcoin is affected by its capped supply of 21 million coins, as well as its demand, which can be influenced by its utility in the world.
What this really means is that if there are more buyers than sellers of an asset, the asset will go up in price. If there are more sellers than buyers, it goes down.
The basics of all markets.
In terms of risk, cryptocurrencies are often seen as less risky due to their established infrastructure and user base.
Application tokens are generally riskier due to the variety and potential volatility of the applications they're associated with. NFTs are the riskiest, because they’re so new and lack an established valuation model.
To determine the least risky assets, you need to ask a few questions:
Is the tech battle tested?
Is the use case of the product battle tested?
What’s the user activity onchain?
Is there any real competition?
When posing these questions, we understand that Bitcoin and Ethereum are the least risky assets on the spectrum.
They have the longest longevity, their use cases are the most relevant, they have the most user activity and there’s no real competition (yet).
What’s incredible about the crypto asset class is that the least risky crypto asset ($BTC) appreciates 150%/year on avg!
So how on earth can you lose money investing in this asset class??? It seems impossible when you look at it this way.
But remember what we talked about in the previous section. Those are usually the traps that most investors fall into.
The main reason people fall into the traps above is that they have a short-term view on investing.Taking a long-term time horizon to investing in web3 almost guarantees your success. And that right there is the key.
Here’s why… Most people that enter the space believe that the least risky assets (BTC and ETH) have no upside left and they are too late to profit from them. So instead they seek more risky assets to try and “Catch up”.
This couldn’t be more wrong. It’s also the same mistake most investors made on the largest tech companies over the last 30 years (Apple, Google, Amazon, Microsoft, etc.). What most people are missing is that these network based technologies and their value are driven by Metcalfe’s Law.
In simple terms, Metcalfe’s Law states that the value of a network is proportional to the square of the number of its users.
In other words, as more people join a network, the value of being connected to that network goes up exponentially. This is because the number of potential connections between users increases with each new member.
For example, if a social network has 10 users, there are 45 potential connections. But if it has 100 users, there are 4,950 potential connections.
So, the value and utility of the network increases much more dramatically than the increase in users.
This means that as long as the network continues to gain adoption, it will continue to grow in value. We can see this by looking at the charts of Apple and Google. However, it’s hard to understand when looking at these charts on a linear scale (1, 2, 3, 4, 5) as they tend to look like a bubble.
Here’s how Apple & Google stocks look on a linear scale:
Instead, if we flip the chart to a logarithmic scale (1, 10, 100, 1000, 10000), the price trend becomes much more clear.
Here’s Apple and Google stocks on a logarithmic scale:
Metcalfe's law means exponential adoption, so we must look at price appreciation in exponential terms as well.
This same trend is true for digital networks like Bitcoin and ETH, here are the logarithmic charts of both:
As you can see from the charts above, there is plenty of upside left in both Bitcoin and Ethereum as long as the network effects continue to hold strong.
Meaning, so long as adoption occurs in this space, these two assets will grow along this chart.
To make your investing strategy even easier to understand, what this also means is that if any of the application tokens of NFTs succeed on top of these platforms, that further pushes network adoption of these assets.
Rather than try to guess which app or NFT will succeed, you can just hold ETH and its a proxy on all of them.
Of course, you’ll probably miss those 100x gains. But you’ll still have a 150%/year growth in your portfolio. And most importantly, you’ll keep 100% of that money, instead of losing it on shitcoins like $PEPE that go to 0.
Secular vs Cyclical Trends🔄
In markets, there are cyclical trends which are driven by external factors like the business cycle and then there are secular trends, which are long term trends, like technological adoption or demographics.
You can see the comparison in this picture below:
The secular trend line is what we are witnessing when we use a log scale for these network based technologies. The cyclical trends are just noise when you invest for the long-term.
Though there are varying reasons as to why these cyclical trends occur in crypto, the “for sure” trend that we can track is network adoption, which is why it makes so much more sense to invest a large part of your portfolio in the secular trend that guarantees at least a 150%/year upside, rather then try to time these short term, volatile cycles.
But how do we know if the secular trend is still intact? Simple! Answer the following questions:
Is the user base expanding?
Are more developers building on this network?
Is the number of applications developed on the network increasing?
Are there emerging use cases for the network?
Affirmative answers to these questions suggest that the network has solid investment potential.
This approach aligns with Metcalfe's law, emphasizing the power of network effects for investment success.
Time In vs Timing The Markets⏰
Investing is a skill that involves strategic planning, and the strategy that often outshines others, especially if you are investing in a secular trend, is 'time in the market' rather than 'timing the market.'
Engaging in daily or hourly trading can be a time-consuming endeavor, and even attempting to trade market cycles poses substantial risk.
Unless you're a professional dedicating substantial resources to constant research, trying to time the market is likely to lead to disappointing outcomes.
Not to mention if you do win it might get you a few extra % in returns, which isn’t really worth it when you are already guaranteeing a 150%/year return just by being in the market.
The risk/reward makes 0 sense!
For instance, the US equity market demonstrates the high-risk nature of trying to 'time the market.'
Missing out on just a few of the best-performing days over the course of 36 years can drastically reduce overall returns.
This emphasizes the importance of long-term involvement rather than attempting to cherry-pick investment days, as you can see here:
While trading can be profitable, most of the time it’ll turn out not to be. Even the best struggle with this high-risk endeavor (think 3AC in 2022, the largest investment firm in crypto went belly up trying to trade these assets… do you really think you can do better than them?).
Besides, long-term investments such as Bitcoin return 150%/year just by holding onto it. So why take the risk?
Now… I want you to think about the emotions driving your decisions when Bitcoin was soaring and everyone seemed to be striking it rich back in 2021.
A bunch of people who attended our event the other day said they were feeling FOMO and were buying at the top. Also, while some of them were still buying the bottom (after the FTX crash), they were actually buying less than during the top.
Were you a victim of this too? If yes, it’s okay!
It's easy to be swayed by FOMO (Fear Of Missing Out) and invest heavily during such euphoric phases, which, unfortunately, often coincide with periods of high financial risk.
Conversely, when the market is low, like after a crash, fear can inhibit investments, even though these are the most financially sound moments to buy.
To visualize this, see the chart below on the cycle of emotions.
To not get caught up in the hype cycle (euphoria phase) and to not miss out on the best buying opportunities (depression phase), you need a strategy!
And because you’re a PRO, we’ll help you develop that strategy and ensure that you capitalize on the opportunity.
Let’s get into it 👇
Dollar Cost Averaging (DCA) vs Trading
Instead of wrestling with the emotional turmoil and high risk of trying to time the market, consider the strategy of Dollar Cost Averaging (DCA).
This involves regularly investing a fixed sum of money into a specific asset, irrespective of its price, thereby smoothing out the impact of market volatility over time.
This method requires minimal effort, eliminates the need to time the market, and guarantees exposure to the market's upside while mitigating stress.
Importantly, DCA allows you to focus on generating additional income streams (building a business or working longer hours), thus increasing your investing power.
Relying solely on investments for income is a difficult proposition even for seasoned investors. It's generally more profitable to work on enhancing your revenue streams so that the amount you invest every month through DCA increases.
Consequently, your results will multiply over time due to the compounding effect.
If you don’t know how to start DCAing, let me simplify it for you:
Decide the amount of $$$ you can afford to put aside (after covering your bills, food, rent/mortgage, vacations etc…)
Set a calendar event on a specific date every month. This is when you’ll transfer your money from your bank account to the crypto exchange you’re using
Buy the asset(s) that you’ve set out to buy
Transfer those assets to cold storage (like Trezor or Ledger)
Alternatively, you can simply deposit your $$$ into an exchange like Binance and set up auto-investing. Web3 Academy’s twetoooor, Raul, has set up auto-investing on Binance. Daily, at 11PM, there’s a transaction that converts Raul’s hard-earned money into 80% $BTC and 20% $ETH. Then, at the end of every month, Raul takes out the BTC and ETH that has accrued and deposits that into his Ledger.
Using a centralized exchange is a good way to get your $$$ into crypto. It’s often the fastest, easiest and cheapest way. However, we strongly suggest you transfer your long-term assets to cold storage!
To conclude, to win at the investment game in the long run, stay in the game and invest consistently. Doing so allows you to participate in the market's growth over time, ensuring a beneficial outcome.
But what should you invest in? Let’s talk about that too.
Setting Up Your Portfolio For Long-Term Success🎯
Alright, let's wrap this up with a solid game plan you can use right now. We're looking to make your crypto portfolio rock solid and set for the long haul.
1. Go Big on Ethereum (ETH) and Bitcoin (BTC):
Stick at least 80% (maybe even all 100%) of your crypto investments into ETH and Bitcoin. These guys are the big dogs of the crypto world - less risky and more reliable. If you're super busy, lean more towards 100%. Got a bit more time and don't mind a bit of a gamble? 80% should do it.
2. Take a Risk... But Not Too Much:
Put the leftover 1% to 20% into other cryptocurrencies (if you want to or have time). Think of this bit as a trip to the casino - assume you're not seeing it again. It keeps you from biting off more than you can chew.
3. Take Profits:
Let's say the other cryptos do well and mess up your neat ETH/BTC ratio of 80/20 - it's time to grab some profits. Cash in a bit and shift it back into ETH or Bitcoin.
4. Consistent Buying (Dollar-Cost Averaging):
Pick a slice of your paycheck each month (you choose how much) and buy ETH and Bitcoin with it. It's a simple way to balance out the highs and lows of the market.
5. Save More, Earn More:
Try to cut back on spending or find ways to earn more money. Why? More money means you can buy more ETH and Bitcoin each month. It's a simple way to speed up your growth. Remember, everything you put in ETH or BTC will appreciate 150%/year over time!
6. Stay Away from Leverage:
Don't be tempted to use leverage unless you really know what you're doing. It's a risky move that could leave you empty-handed.
7. Stake for "Safe" Yield:
Consider staking your tokens on their home turf for some extra cash. It's like earning interest without going out of your way to take on more risk.
8. Self-Custody is King:
Keep your long-term investment tokens out of centralized exchanges. Pop them in a hardware wallet, and treat it like a digital safe for your tokens.
9. Use Hardware Wallets Wisely:
Never use your hardware wallets to interact with dApps or other internet apps. The only action should be moving tokens to or from another wallet.
10. Secure Your Seed Phrases:
Keep the seed phrase for your hardware wallet safe and sound, and offline. Write it down and stash it somewhere safe.
Remember, this is your plan for setting up a long-term winning portfolio. But also remember, crypto is risky. So, only play with money you can afford to lose and do your homework before you jump in.
Alright, folks, let's wrap this up.
What we've discussed here is just the beginning of your crypto investing journey. Once you've set up your investment foundation with ETH and BTC, then you can start exploring other avenues like application tokens.
But first things first: Establish that solid base—you don't want to miss the significant upside potential in this foundational step.
Investing in the wider web3 space is an entirely different beast. It's packed with a wide array of opportunities and, equally, complexities.
But don't sweat it! We're here to guide you through this exciting and, sometimes, puzzling terrain.
This is exactly why we're crafting a comprehensive Web3 Investing Course for you. We want to ensure that we provide answers to all your burning questions.
So please, reply to this email with any inquiries you have regarding investing.
It'll help us tailor the upcoming course to your needs. Let's make your crypto investing journey a success story together.
Onwards and upwards! 🚀
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
