#87: My Biggest Crypto Mistake of 2022
Lessons from Warren Buffett, Bitcoin Maxis, and Edgy
I thought I was doing it right.
But the “right” way is always nuanced — never black or white.
Please Note: This is not financial advice. I am writing from my own experience and this content is for educational purposes only. Be sure to do your homework before making any investment decision.
“Bitcoin is probably rat poison squared.”
Warren Buffett comes from a lineage of investors, including Charlie Munger, who subscribe to value investing, an investment strategy that consists of the following three principles:
Buy stocks with strong fundamentals
Buy stocks with strong earnings power
Buy stocks with the potential for long-term growth
Would Buffett make for a delightful dinner guest? No, probably not (unless you are willing to listen to an old stuck-in-his-ways white man lecture you about his brilliance), but, in order to come to your own conclusions about cryptocurrency it is important to understand why Buffett said what he said.
The financial writer Morgan Housel puts to words what we already know intuitively:
“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
— Morgan Housel, Psychology of Money
Buffett, just like every other person, holds certain views about money, and makes financial decisions based on his unique life experience. But as the world changes, we also need to change, evolving traditional views into new mindsets that better serve us in the new world.
Evolving into a new mindset requires finding balance between the old and the new. It does not mean completely throwing out traditional views.
Bitcoin maximalists (maxis) are the traditionalists in the cryptocurrency community. These are the folks who believe that bitcoin will be the only digital asset needed in the future.
Like Warren Buffett, bitcoin maxis advocate for a long-term, buy and hold approach to investing called HODL.
HODL is a meme that originated in a 2013 forum post on Bitcointalk. Famously, one of the forum’s members was drunk and misspelled “HOLD” when he wrote a comment advising people to not not sell their bitcoin, despite the price increasing from $190 in April 2013 to $950 in December 2013.
HODLING (the verb of HODL) is an investment strategy that advocates for holding a cryptocurrency despite price fluctuations. If the price goes up, don’t sell; if the price goes down, don’t sell. In other words, keep holding, despite the market conditions.
A HODLERS psychology looks like this:
HODLING Bitcoin and Ethereum
Like many people, I subscribe to value investing for my traditional financial investments (equities). I tend to buy exchange traded funds (ETFs) and index funds, following a “set it and forget it” strategy.
So when I started to invest in cryptocurrencies, I took the same approach of buying and holding cryptocurrencies indefinitely. I was HODLING because I didn’t know how to actively trade, so I took a passive investing approach, following the guidelines of value investing, thinking that buying and holding tokens indefinitely was prudent.
The mistake that I made was treating every token like a value investment, instead of only Bitcoin and Ethereum. I learned that a different approach is needed for tokens.
The Bear Market
Like most people, in this bear market, I watched my crypto portfolio tank. I was tempted to HODL, as I did in previous bear markets, but, instead, I tried something different.
My mindset evolved. Now that I am contributing to DAOs full-time, I spend more time on crypto Twitter and crypto Discord. So I have been paying more attention, noticing more, and thinking about the space differently.
Now that project tokens are also a source of income for me, I need to be pragmatic. Previously, I fell into a common DAO contributor trap: not wanting to sell a project’s token because of an emotional attachment to the team. Selling seemed like a betrayal.
I have since learned that this is not true. Many DAO contributors are pragmatic, with bills to pay and families to feed, so selling a project’s token during a bear market is not only practical, but it is wise.
Once I adopted a mindset of pragmatism, the question became, which tokens do I sell, when do I sell them, and for how much?
Segment and Set Basic Formulas
I like the insights from Edgy-The Defi Edge, a popular Twitter account for DeFi (decentralized finance) education.
As you can see in the screenshot below, Edgy suggests to work backwards: first, segment your portfolio by riskiness, then decide which projects to invest in.
You’ll notice that the sample portfolio categorizes Ethereum, Bitcoin, and Terra (!!) as bluechip stocks (a.k.a HODL). We now know that this is ludicrous (Terra recently collapsed, several months after the Tweet was published), serving as a good reminder that crypto investing is very risky, you must do your own research, and never outsource your trust (no matter how reputable the person or project may seem).
Edgy also suggests to set basic formulas. This is a must because it helps take the emotion out of decision making, where unlike other facets of life, emotions impede good decision making.
In the screenshot below, you can see a sample strategy for when to lock in profits —something that many people struggle with. Instead of trying to time the market, guessing the bottom or the top, follow formulas based on the reality of the token’s performance.
That’s all, friends. Happy investing and stay safe out there in crypto land. ☺️
Cheers to 2023, where we can learn from past mistakes and make better decisions! (investing et al.) 🎉🎉