#14 The Crypto Investing Playbook

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1 Concept 💡

I want to dedicate this week’s newsletter to sharing everything I’ve learned about crypto investing over the past 4+ years. In a similar spirit to our NFT playbook, I’m created a 15 step playbook to help you crush crypto investing. This is primarily intended for long-term investors — please use these opinions as lamp posts to help inform your thinking and portfolio strategy, not rules that must be followed.

The Basics

Rule #0: Always DYOR ⚠️

Nothing contained in this playbook should be taken as investment advice. This playbook offers my opinion from my own experiences. It’s always your responsibility to “do your own research” (DYOR) and understand that crypto, like other investments, carry risk.

Rule #1: Crypto Takes The Elevator Up and The Window Down

Crypto is SUPER volatile. It's not uncommon to see 10-15+% changes up or down in a single day, like we just saw over the past few days.

Make sure you can stomach the swings and not get too swayed (it's hard!) by daily changes. If you can’t and you find it negatively affects your mental health, please don’t invest in crypto. Money isn’t that important. If you can, remember:

Time in the Market > Timing the Market

Rule #2: Start ASAP, even if small

If you’re just getting started or early in your journey in crypto, your natural instinct might be to take your time, learn crypto, and maybe invest down the road.

My take: that’s a mistake — just get started today. We both know that a magical time in the future where you finally have the bandwidth to sit down and explore crypto is probably just wishful thinking. Rather, building skin in the game ASAP (even if small) will force you to dive into the space. Worst case scenario: you learn its not for you and exit, but best case: you get into crypto early.

Rule #3: Concentration Builds Wealth, Diversification Protects It

Being diversified is a great way to protect wealth (you're in enough buckets so one bucket going down won't dramatically affect your net worth) — but not a good way to build it. If you are a crypto believer, put your $$ where your mouth is and bet sizably on your conviction. Don’t bet small (the tweet below is worth reading).

"I like putting all my eggs in one basket and then watching the basket very carefully."
— Stanley Druckenmiller, famed investor

Rule #4: Invest for Years, Not Days

Your outlook in crypto should be multi-year (or ideally multi-decade) in order to compound wealth over the long-term. If you can day-trade and try to time markets, more power to you - but from my experience, having a shorter time horizon left me you unhappy, more stressed, and ultimately poorer. And even tho Charlie Munger is a crypto-hater 👎, his advice here is prescient:

Rule #5: Think of Crypto as an Ecosystem

Investing in crypto shouldn’t be an exercise in ideology where you are a “single coin maximalist” for a certain token, whether its Bitcoin, Ethereum or something else. There’s nothing wrong in picking a team and being an evangelist, but as an investor, your job IMO is to get exposure to the largest surface area possible in this rapidly growing, evolving ecosystem. Being an ideologue might get you more Twitter followers, but it isn’t maximizing your chances of winning. See Rule #7 for how to break down the ecosystem.

Pragmatism > Religion

Investing Philosophy

Rule #6: Know Your Investor Vibes

Which vibe are you?

  • Chillin' 🏖️ - Your goal is for your portfolio to directionally be up and to the right over the long-term, not to necessarily make the most money possible. As much as you like making money, losing money leaves you shook. You tend to value your personal life / maintaining a low stress level over maximizing profits and ideally want to "set it and forget it". You are a believer in crypto, but not an ardent one (bottom 75% of crypto enthusiasts).

  • Low-Key Flexin' 💪🏽 - You consider yourself an ardent believer of crypto (top 25% of crypto enthusiasts) and believe it's the future. You also value a balanced approach to wealth building but are willing to take more risk to crush on long-term wealth if crypto makes it big. You like keeping tabs on the the latest and greatest that's happening in crypto and are OK placing medium-sized bets. But if you're being honest, the day-to-day price action can leave you a bit shook.

  • YOLO 🥳 - Just like gold-rushers back in the 1800s, you see crypto as THE opportunity to make it BIG, and are willing to put your money where your mouth is. You are in the top 10% of crypto enthusiasts. You are in love with the potential and the community, and can rabbit-hole for hours. You are OK losing everything for this potentially once in a lifetime wealth-creation opportunity. The day-to-day price price movement doesn't faze you.

Rule #7: Let’s Break Down the Ecosystem

We talked about viewing crypto as an ecosystem in rule #5, so let’s break it down by category:

  • L1 Blue Chips - These are the OG building blocks that the whole ecosystem is predicated on AKA the FANGG for crypto: Bitcoin ($BTC) and Ethereum ($ETH). BTC and ETH have the most passionate communities and thus the largest network effects, giving them a huge leg-up on the competition.

  • L1 competitors - These Layer 1 protocols are smart contract competitors mainly to Ethereum that typically offer better performance, including Solana ($SOL), Avalanche ($AVAX), Cardano ($ADA) and others. I am personally increasingly bullish on Solana as the platform and community they’ve built over the past few months has been nothing short of spectacular.

  • L2s - Layer 2 protocols sit on top of layer 1s and generally offer more robust performance because they rely on the Layer 1 to provide security + infra. These include Polygon ($MATIC), ImmutableX ($IMX), and Lightning Network.

  • Core Infra - These protocols offer core infrastructure to the ecosystem to make it interoperable and decentralized. For example, ChainLink ($LINK) offers what’s known as a decentralized oracle, which is a way to get factual data (such as a stock ticker price) without relying on centralized services such as Google Finance.

  • DeFi - These protocols sit on top of Layer 1s and power decentralized finance, which is the ability for Internet citizens to bank (borrow, lend, etc) with each other vs. through a bank. These protocols include Uniswap ($UNI), Compound ($COMP), and Maker ($MKR).

  • Utility + Social Token - These haven’t become big yet, but you will start seeing more tokens that offer social utility, whether it’s access to IRL perks or more say in social communities.

  • Meme - Everything in crypto is a meme, but then there are cryptos that fully ride on the meme such as $DOGE or $SHIB.

  • DAOs - Decentralized Autonomous Organizations (DAOs) are in many ways crypto-enabled LLCs, such as Friends with Benefit ($FWB), Ethereum Name Service ($ENS), and Gitcoin ($GTC). Members share a bank account AKA community treasury and vote on future direction. Investing in DAOs is almost akin to early stage startup investing - it’s a way to take outsized bets on the future if you believe in the strength of the community.

  • Public Equities - Finally, let’s not forget public equities (stocks). As Pomp wrote about here, equities that are in and around crypto including Coinbase ($COIN) or Nvidia ($NVDA) can offer a good opportunity if the public markets are not properly pricing in crypto’s potential. IMO, this is a good approach for the Chillin’ vibe, but doesn’t offer the right upside for the more aggro vibes.

Rule #8: Start by Chillin'

It's important to select the investment vibe that matches your goals and doesn't leave you too stressed. If you're just getting started, I recommend you start with the Chillin' vibe. If you are more advanced, reference our allocation recommendations for the other two vibes in Rule #9.

For Chillin', you might consider:

  • Having crypto be ~5% of your overall investment portfolio

  • Within your crypto portfolio, keep it simple and allocate 50% to Bitcoin ($BTC) and 50% to Ethereum ($ETH).

  • Look to gain additional exposure through crypto public equities.

Rule #9: Understand the Power of the Platform

Just like Apple’s AppStore, most value historically accretes to the technology platforms that underpin the ecosystem vs. individual applications. As they say, history doesn’t repeat but often rhymes - so I’d bet that we’ll see something similar to crypto. What does that mean for you? IMO, while L2/meme/social tokens will definitely offer more short-term pop (see DeFi Summer 2020, it’s a safer bet to have your more concentrated bets on L1 and infra.

Rule #10: Consider the Other Vibes

As you learn more about crypto, you should consider the other vibes based on your conviction and risk tolerance.

For Low Key Flexin', you might consider:

  • ~20% allocation of your investment portfolio in crypto

  • 40% BTC, 50% ETH, 10% SOL/L1/DeFi/DAOs/others

This is a great way for you to achieve the strong upside of crypto and take more risk, but keep it simple. BTC is the most reliable asset in crypto so its your "steady" bet (with still huge upside). As you get more advanced, you can still live in this vibe, but make added room for other bets including DeFi, social tokens, and DAOs.

For YOLO, you might consider:

  • 50+% allocation of your liquid investment portfolio in crypto

  • ~25% BTC, ~55% ETH, ~15% SOL, ~4% in L1s/DeFi/DAOs/social tokens, 1% in meme coins

This vibe is all about maximizing upside. IMO, ETH has the biggest upside in crypto ATM (followed closely by SOL), so you would be going heavier there with more pronounced bets in DeFi/DAOs/social tokens.

Rule #11: If you're LK Flexin' or YOLO, Re-Assess Every 3 Months

Since you have a sizable portion of your net worth in crypto, it's critical to re-assess every 3 months. Ask yourself:

  • Has anything fundamentally changed about crypto (technical breakthroughs, bugs, etc)?

  • Based on recent happenings (regulations, new launches, memes, community vibe), do you have less, the same, or more conviction on crypto?

  • Is there generally a lot of fear or greed in the market?

Based on your answers, you should assess if your allocation matches your sentiment and adjust as needed. If there is a lot of fear, you may want to consider adding whereas a lot of greed might offer a good opportunity to take some off the table.

Rule #12: Let Your Winners Ride

If/when crypto goes up in value, you will find that the % of your portfolio allocations to crypto have grown to become outsized. You’ll then have two options:

  1. Rebalance - this means sell some of your crypto to keep your allocations in check

  2. Let Your Winners Ride - keep your crypto and let it ride (even if it means changing your investor vibe).

I believe a core tenet of investing 101 is letting your winners ride. Crypto is no different, assuming something hasn't occurred that has changed your convictions. There is a caveat tho - as/when crypto creeps up to be such a big piece of your portfolio or it becomes life-changing money, you should carefully assess if it might make sense to take some off the table to pay off key expenses (loans, etc) to make your IRL life better — and that you are truly OK with the swings of losing it all.

Rule #13: Automate, Automate, Automate

Crypto prices fluctuate rapidly so you want to automate your investments so you can price average in and avoid FOMO based on price movements. I recommend weekly or at a minimum bi-weekly. Work backwards from what you have available to invest after paying bills, how much you wish to allocate to crypto, and set it and forget it. FYI, Coinbase offers the ability to set up recurring buys (I’m sure other places do too).

Rule #14: Yield

Earning yield on your crypto is a great way to further compound the flywheel of wealth creation.

A couple different ways you can do so:

  1. Stake - There are ways to stake your crypto to support the network. For example, Coinbase allows you to stake your Ethereum to support ETH2 and pays 4.5% APY in native token. You can also use services like Lido or Marinade.Finance to stake your ETH and SOL.

  2. Lend - Earn native yield on your crypto (use services like BlockFi, Voyager, Gemini, etc or DeFi protocols such as Compound, Maker, etc directly). The thread below by @FiftySat offers a great explanation (although the rate %s are likely outdated).

Rule #15: Enjoy the Ride

Keep in mind that investing is about building wealth so you can enjoy life, not about stressing every single day and constantly refreshing your account. Enjoy the fruits of your investing by doing the things you love. If you are up nights and weekends stressing about your portfolio, you need to change your investor vibe.

Disclosure: Karthik is an investor in many of the above tokens, including $BTC, $ETH, $LINK, $SOL, $DOGE, $COIN, $NVDA, $GTC, $ENS and others.

Side note: Thanks for all the shares last week - I’d appreciate it if you could share with atleast 1 other person who might like this!


2 Things On Our Mind 🤔 

1. It’s been a bumpy week in the crypto world price-wise as most cryptos have lost 10-15% of their value in less than a week. As we’ve talked about before, my advice is to re-assess if anything has changed about the broader ecosystem or your conviction. If not, stay calm and you may want to consider adding here at a discount from last week. Of course, who knows if we go further down or up from here, but keep your eyes on the long-term.

2. We’re going to buy the Constitution 📜,📜?! Last week, a group of Internet citizens organized to buy one of the 11 physical copies of the Constitution which is being auctioned today at Sotheby’s. In just over a week, the group has raised $35MM by offering governance tokens to all contributors, enabling the community to vote on things like where should we store it, if/when should we sell it, etc. The meme + community is the true power of the Internet and web3 is unlocking it in real time.

Until next week, always be learning