Crypto Portfolio Strategy and Vision Going Forward

What is the optimal portfolio strategy?

There isn't a direct answer to this question, and there isn't an optimal strategy. Investors are individuals with their preferences. Some have a tendency for low-risk strategies, others for high-risk. Some investors have a longer time frame than others. Some invest for ten years, and others invest for 10 minutes. There are so many variables when it comes to investing, but there are some variables that all investors/traders must consider.

Expected Value (EV)

If you need to know the expected value, here is a quick explanation. Expected value is a way to describe the average outcome of a random event or experiment. You can think of it like the "average" result you would expect to see if you repeated the event many times. For example, if you bet on a flip and win 1 dollar for every head and lose 1 dollar for every tail, the expected value of your winnings is 0 since, on average, you'll win as many times as you lose. To an investor, EV is essential to understand and theorize about. As an investor, you must understand the probability of making money on this investment and how much you can make. So let's take a look at a specific situation.

Jim is a speculator. He is looking at the price of Bitcoin and understands that the current Macro situation is worsening. The current price of Bitcoin is $17.400. From Jim's perspective, there is a 75% chance that the price of Bitcoin will be $100 higher. Based on this, he buys 1 Bitcoin and will sell it if it drops $100. His expected value = (0.75 x $100) + (0.25 x -$100)= $50. If he is correct in his speculation, Jim is expected to make 50 dollars. Well, Jim is wrong, and he loses $100. Just because he lost does not mean that it was a bad investment. If we extrapolate this over 1000 tries, Jim is expected to have made money 750 times and lose money 250. If, over these 1000 times, he does not make more money than he has lost, then Jim has assigned the wrong probability and needs to go back to the drawing board.

Time and Frequency.

Investors have different time horizons for their investments. Some look for the next ten years, and others look for the next 10 minutes. Most people are looking for the next ten years. Well, crypto investors are not most people. You are not maximizing your returns if you invest in a coin like Polkadot for the next ten years. Because there is so much innovation, tying yourself to a specific coin will leave so many gains on the table. Being a crypto investor takes a lot of work. There are so many coins, leading to an over-flux of data and making decision-making much more difficult. The frequency and time spent holding crypto coins should be short. I never see a situation where you should invest in crypto coins for the next five years.

The cryptocurrency market is volatile and unpredictable, where millions can be made or lost in days. One of the critical things to understand about this market is the concept of beta or volatility. Many investors mistakenly believe they can avoid risk by leverage trading. But in reality, everything in the crypto market is leveraged. For example, buying altcoins is a form of leverage because altcoins are heavily correlated to Bitcoins.

One of the biggest appeals of the crypto market is the potential to become rich in a matter of days. In the last two years, many have become millionaires by investing a couple of hundred dollars in meme coins. But, there have also been many who have lost everything buying into a meme coin hype.

The key to success in this market is understanding that fundamentals make little sense. Crypto assets are nothing more than vehicles for volatility and leverage that follow the direction of Bitcoin. If you're willing to accept the high risk of crypto investing, you could make a lot of money. However, it's also essential to remember that the market is highly speculative, and the regulatory landscape constantly changes. And so you have to be cautious and aware that regulators could shut down the market anytime.

In 2018, many investors were caught up in the hype around Bitcoin forks. This bull market was characterized by submitting to the current narrative. For example, Dogecoin soared due to the tweets by Elon Musk, which helped drive the hype.

It is essential to understand the interplay between beta and narrative in the current market to make informed investment decisions. When these two factors intersect, the most significant gains can often be made. For example, during the bull market's peak in October 2021, a narrative emerged around the idea of the metaverse. This increased interest in metaverse-related coins, such as Sand and Gala.

The fundamental strategy in this kind of market is to submit to the narrative and find the highest beta coin that is part of the narrative. By focusing on coins that have a high beta and align with the current popular narratives, you can identify opportunities for significant profits.

Although the crypto market can be highly speculative, narratives/hype can drive the market up, and the prices of a specific coin might increase a lot. It's essential to be aware that the market can be volatile.

To tie everything together, we must understand the macro.

How we define macro: anything that affects an asset that is not within the scope, examples are interest rates, investor sentiment, industry changes, and central bank policies. Understanding how the world is changing (and how it is not changing) will lead one to better evaluate financial markets' potential success. In addition, a thorough outside view will lead to formulating critical trends that provide insight into other market participants and a foundation better to predict the likelihood of an asset's direction.

Research has mentioned that assets reflect expectations about future economic conditions because it shows investors' willingness to buy at a high price level when they expect companies to be profitable. The rise in asset prices indicates that investors expect the economy to proliferate; a decrease in index prices suggests that investors expect an economic slowdown. Whenever assets experience a substantial decline, there is reason to fear that a recession may be around the corner.

Thus, the government and central bank need to pay attention to measuring the efficiency of the stock market and even interfere if necessary. We saw a great example of this when the pandemic hit. As a result, the Federal Reserve of America (FED) decided to print more money and buy government bonds to stimulate economic growth.

Putting it all together

To create the optimal strategy for you crypto portfolio, you need to comprehend the macro environment we are in. 2020-2021 we were in an ideal setting. So the best asset to buy is the highest beta asset, i.e., Crypto. Within Crypto, it was best to follow the different narratives then. In a bull market, there are always narratives floating around, and you must identify one and try to make as much money as possible. You can pick the riskiest narrative within the narrative cycle, but if you do this, you must be extremely quick. This is because the highest beta asset is always the first to be unloaded.

Strategy for my crypto portfolio

The current environment is horrible for investing because people are still determining the macro. There is so much uncertainty about what is happening, and identifying a trend could be better. The macro-environment currently needs to tell us what is next. They are confusing investors with signs of recovery but have we felt any pain? Not crypto pain but worldwide equity pain. I believe we still need to.

My plan for 2023 and beyond is to wait for something to break in traditional markets and sweep up the broken pieces. Why when something breaks? Because these central bankers only know how to fix the economy by printing more money.

Till something breaks, I will continue searching for the new narrative and highest beta.