The End of the 2021/2022 Bull Market — Learnings
Diversified Vs. A Few Concentrated Bets
Both are acceptable strategies. Both have their pros and cons. But both must be followed in a disciplined manner if they are to yield profits.
Where I went wrong — I started with a diversified portfolio, but when a position grew disproportionately large, I didn’t rebalance. I told myself that I should let winner’s run (an acceptable option when the underlying investment strategy is different). However, as crypto is predominantly speculation and hype driven, the prudent action would have been to rebalance.
Price action is not the only risk vector.
Investing in crypto requires assessment of risk beyond that of volatility and price action. Given the asset classes nascency, the soundness of every security where you hold your value must also be vetted.
Where I went wrong — I held a lot of cash in UST (an algorithmic stablecoin). The purpose of the security was to be pegged 1:1 to the USD. However, due to a negative macro backdrop and inherent vulnerabilities in the token design, UST depegged. It is now 0, I got out at ~$0.6.
As a corollary to point 1 and 2, due to the two token design of UST, my collective exposure to one ecosystem was significantly higher than what it should’ve been. Just because it is a different security, doesn’t mean you’re diversified. I should’ve considered my collective exposure to Terra, not UST and Luna in isolation.
Analyzing macro economics is no science, but being aware of it is essential.
It doesn’t matter how unique the crypto market is. It has not become immune to global macro economic factors. The market participants that make up the crypto markets are also present in other markets. Thus, for example, the events and decisions that take place in the equity market can and did have a direct impact on the crypto markets.
Where I went wrong — I put too little weight on the deteriorating macro environment, and believed that this would be bullish for Bitcoin (and thus the entire crypto market as it is strongly correlated to BTC), as the core value prop of BTC is its hard money characteristics. I underestimated the number of market-agnostic traders in BTC and overestimated the actual long term believers. This eventually led to BTC being sold off heavily when all risk assets began their sell offs. I need to be more aware of fundamental economics signals (eg: the Fed meetings, interest rate expectations, inflation, etc.)
You can’t be too big to fail
The two main reasons I heavily invested in the Terra ecosystem were 1) their backers, which includes the investors and builders that were supporting it with their capital and time; and 2) the traction/adoption the Terra platform had received. Not only were 100s of real life businesses using UST to facilitate payments, but also the ecosystem had ~$30B in total value locked — second only to Ethereum.
Where I went wrong — I believed Terra was too big to fail. The thought that there were too many influential stakeholders with Terra exposure, incorrectly led me to believe that the UST peg would be supported if and when any malicious actor wanted to exploit the system’s vulnerabilities. In crypto, no one will bail you out.
Optimism can kill, conservatism can’t
Preserve capital. Take profits. Another bull market will come; but you must live to fight another day to take advantage of it.
Where I went wrong — the idea of entering into the bull market 1 year after it began, with the goal to catch the last upward mania move was naive. It is what it is; hoping for a move won’t make it happen. Even if all historically smart people are in favor of the bullish thesis, it doesn’t eliminate the fact that BTC went up ~4000%+ in the preceding year and a half. I should’ve positioned accordingly. It was smart that I did not lever up, but I should’ve been more conservative with my allocations.
You’re young. Learn to buckle down and wait. You’ve had everything easy in your life, but the world will take its due course. As Buffet (an unequivocal bitcoin bear) says that “the stock market is a mechanism that transfers wealth from the impatient to the patient”. This holds true for crypto as well.
Where I went wrong — while I was never in it to “get rich quick”, the possibility of 10x’ing an investment in a few months was alluring. This led me to deploy capital too aggressively. Greed got the better of me.