It’s been a rough start to the year for anyone with a portfolio and a pulse.
The Federal Reserve Bank’s recent hints of an impending rate hike alongside a decision to pull the brakes on pandemic aid asset purchases sent both analog and digital assets into a nosedive.
In the realm of cryptos, Bitcoin dropped below 40k for the first time since last August while Ethereum now wades in the same waters it swam in around July 2021. With all coins and tokens considered, January blasted through more than USD 500 billion from the industry’s global market cap based on CoinGecko data.
Trading volumes also took a hit with diamond hands scurrying to cash out their wins before their luck peters out. And who could blame them?
A tale as old as time
For retail novices that got their start on WallStreetBets last month was the first, and worst, bloodbath they had ever suffered. Seeing half of your hard earned gains evaporate in a blink of an eye is a coming-of-age tradition that most of us would rather miss, but here we are. Welcome to the show, class of 2022.
The start of a new lunar year is as opportune of a moment as any for portfolio readjustment and introspection. Noting that all bull markets come to an end one day, most of us would benefit from having better contingency plans for the next meltdown the crypto-market will inevitably go through.
The best place to get started is Benjamin Graham’s Security Analysis and The Intelligent Investor. Graham is among the most widely read experts on deriving sustained value from the markets for good reason, and I strongly recommend adding his tomes to your Kindle backlog if you have missed out thus far.
Even though they were written well before the internet, Graham’s works still have intellectual appeal today. In fact, the astute reader will find three particularly applicable tips for surviving the crypto-winter should things go truly nuclear.
Rule 1: Speculate intelligently
Graham was among the first authors to make the connection between introspection and performance, and his stroke of genius was to insist that all of us need to know whether on a fundamental level were investors or speculators.
For Graham, the difference between the two was simple: investors commit to the business while speculators chase gains without attributing any intrinsic value to the asset at hand.
Instead of dismissing speculation forthright, Graham noted that speculation can be done intelligently. His secret to intelligent speculation could be summarized in the following three terms: fiscal responsibility, forward planning and consistency.
First, speculative assets, such as most cryptos without intrinsic use cases, should be kept separate from investments. Graham sagely recommended running different budgets for speculative assets, and he expounded on the importance of ensuring that emotions do not take the place of careful analysis.
Keeping emotions at bay might be difficult to do when the teenagers next door are riding a rocket to the moon with assets that didn’t even exist a week before, but channeling our inner Graham and keeping our wits – and analytical tools – with us on the rollercoaster would serve us all well.
Rule 2: Invest instead of speculate whenever you have the chance
A quick glance at Reddit shows how many have gone all in with increasingly complex parlays in search of the golden ticket or in last-ditch efforts to cover up sour bets.
Big speculative moves that leave little room for error should things go south are all well and fine when coupled with youth and deep pockets. The rest of us would be better off heeding Graham’s advice on making sure we choose investing over speculating whenever we have the chance.
Regardless of what crypto-pessimists might tell you, the market has matured enough for there to be actual real life honest-to-goodness investments with reasonably reliable long-term returns to be made.
With real-life sovereign nations starting to put their central banks behind Bitcoin, and Ethereum’s list of use-cases growing by the day, it’s becoming increasingly hard to argue that there are no good apples in the tree.
Identifying the right positions to be in is never easy in efficient markets, and picking investment-grade cryptos in particular is more art than science. However, don’t let the volatility and meme-coins fool you into thinking that there are no smart choices to be made.
Do your homework, run the regressions and train you algos. Invest, where others speculate.
Rule 3: Get out of your own way
The final and most important piece of advice Graham bestowed upon us is that sometimes we are our own worst enemies.
Consistent performance comes from diligence and self-control, and regardless of whether you are investing or speculating intelligently, it will all come to naught if you don’t follow through to execution each and every day.
We’re all aware of how emotions can take over the reins both when the market is hot or suddenly choking up, and the worst mistakes both investors and speculators tend to make are committed in the heat of the moment.
I for one will forever remember the lesson Canopy Growth taught me in January 2020 when I bought in at the peak of the latest hype cycle only to see my shares drop by half within a few weeks of purchasing. The sale I made then washed my hands clean of a mistake that the market would have corrected for me two-fold had I only stuck to my guns and initial analysis.
When markets are crashing, there are only a handful of ways to make sure your best and most rational self remains on the driver’s seat apart from going on an impromptu yoga retreat on the Himalayas beyond the reach of 5G networks.
Graham’s advice was to do your best to commit yourself to whatever strategy you have chosen in a way that puts guardrails on your bowling lane when you need them the most.
Announce your strategies publicly to leverage social pressure and stash your logins with your significant other or trading partners at times when you know you are too weak to resist the Siren’s calling you to buy or sell. Put timers on your Robinhood or E-Trade apps and stop worrying about where the spot market.
Instead, keep true to the reason why you entered the market to begin with and maintain an intellectually curious approach to both wins and losses as the come.
As long as you’re in the market for the right reasons, you’ll find yourself on the winning the war even after losing the early battles more often than not.