Over the years I have been introducing crypto to family and friends, in particular as a decent asset class to invest into. Some of them made money, some of them lost money, while most of them stayed sidelined. This post contains some of the lessons I learned along the way, and serves as a guide that I will be sending to people when they ask me about investing into crypto.
Recommendations below are targeted towards a person who has heard about crypto, thinks that its interesting, but doesn’t really know where to start. Also, they have an income or life-savings in fiat that they are willing to invest long-term into crypto.
Goal: buy crypto, hold crypto, sell crypto ⇒ profit.
Steps:
- Pick the cryptocurrency that will appreciate ⇒ ETH
- It should be not overpriced ⇒ buy around bottoms of cycles
- High volatility shouldn’t affect you ⇒ hold for years ⇒ have conviction (study and use crypto, make sure you believe in it) ⇒ size your investment correctly (be ready to see -50% drawdowns)
- Do not subject yourself to one particular pricepoint ⇒ buy via the DCA (dollar cost average) method
- Sell at some point ⇒ make a plan in the beginning: either take profits, or have stop losses
Below I expand on each of these steps.
1. What crypto to buy?
More than 95% of coins is either a scam or a money grab. As a result, it is hard to pick a good cryptocurrency. As of January 2023, by a long margin the largest and most influential crypto project is Ethereum. The corresponding crypto asset, ETH, is an ideal investment for all beginners, and nothing comes even close. To save space and time, I will not be justifying these strong opinions, but instead suggest you consume the following content:
- The best video describing Bitcoin
- My own article describing Bitcoin (also goes into coordination, which is the motivation behind Bitcoin and other blockchains)
- Ethereum whitepaper (still the best introduction to Ethereum)
- My own deep dive into Ethereum (also goes into apps built on top of Ethereum)
- The best thesis for ETH as an investment (see pdf at the end of this post, if the medium article is deleted / not accessible)
After reading/watching the above, feel free to text me @artofkot in telegram, if you have any questions or if you simply want to talk crypto.
In short summary, even though moving in cycles, ETH has appreciated so far. Rising demand for the blockspace is one reason (see the links above for understanding why blockspace is valuable). Usage of ETH as money in the ecosystem and beyond is the second reason. At last, let me conclude with the fact that we are at the beginning/middle of the adoption curve, as the number of users in crypto is in tens of millions.
2. When to buy?
First, a couple of links:
If you take a look at the price graph of BTC or ETH, it will be clear to you that the price action is highly cyclical, with the largest cycles happening roughly every 3-4 years, with many lower timeframe cycles along the way. The reason for these cycles is greed and fear: when people are excited they tend to overbuy things, and when people are scared they tend to oversell things. Here is the best video that explains a “credit cycle”, phenomenon that is very closely related (some will say it is identical) to crypto market cycles.
I have made a mistake of generally recommending crypto, regardless of where in the cycle we are. As a result, some people have bought crypto when it was overpriced. It is now clear to me that one should aim to buy crypto around bottoms of the cycle (unless one is able to hold for 10 years, in which case it might not matter).
How to identify the bottom of a cycle? Well, it is impossible. But there are ways to understand if we are around the bottom.
First way is by looking at drawdowns: generally speaking when BTC and ETH is down about 70% to 80%, this is a signal that the bottom is close. This last cycle (ended in 2022), ETH has crashed -81%, from 4800$ to 900$.
Second, and the best, way is by gauging the sentiment with those who are in the industry. For example, today, in January 2023, there is a consensus in the industry that we either bottomed at 900$ per ETH, or the bottom is very close to that. Therefore, at 1500$ today, we are in the “close to the bottom” zone ⇒ it is a decent time to start accumulating ETH.
Quick aside, where to hold: for you, as a beginner, it is best to hold you crypto on a reputable crypto exchange (the same place where you buy it), that is proved itself secure by withstanding the test of time. Coinbase and Kraken are the two in the US; do not make the mistake of holding your coins on Robinhood or some other new/small exchange, as it can fail quite easily. After buying ETH make sure you turn on the 2FA via google authentificator (not the sms 2FA!). The reason why I do not recommend moving ETH to your own wallet (e.g. metamask or some other alternative) and custody it by yourself is because then you will be dealing with the headache of securing your private keys, which is quite hard. I recommend coming back to this point after you send a small amount of ETH to metamask and play around with DeFi on arbitrum or optimism (use uniswap, aave, etc) - at that point you will be ready to secure your private kets. (Alternatively, you can also dig into new generation of wallets like @rainbowdotme-@argentHQ-@CasaHODL-@ZenGo, but I haven’t done it myself, and do not recommend it, to be honest.)
3. How to deal with the volatility.
This step is the trickiest. A quick look at the price graph reveals that crypto is insanely volatile: 30-50% short timeframe corrections are very frequent. The underlying reason is that crypto is a very risky asset and a nascent technology.
As a result, people are very easily shaken out of their positions: think of someone who buys today at 1500$, then ETH goes to 1000$, they think “oh my god, this is all a scam / it will go to zero / I cannot take it anymore”, and get out of the position having lost 33%. This is a very common story, and the goal here is to avoid this scenario. Solution is threefold:
- The ETH position has to be held for years, so that all the 30% volatility doesn’t matter, because the resulting appreciation is in multiples, i.e. 200% at least. This is the most important point in the whole blogpost: it is much easier to invest in crypto long-term rather than trade it short/medium term, and that is why I highly recommend holding for years.
- In order to be able to withstand the 30% volatility and not sell, one needs to have conviction during drawdowns, i.e. believe that the investment will eventually go up. For this you need to study crypto: see the five educational links in the beginning. I also encourage you to use crypto, and convince yourself that it is indeed the future of finance: setup metamask, google and study its security model, send your ETH from coinbase to metamask, mess around with uniswap, aave and other decentralized finance protocols; try to do it on arbitrum or optimism. Also, feel free to text me @artofkot in telegram for more guidance on this.
- Another component is to eliminate worries during the drawdowns as much as possible. Thus it is best to size the investment in such a way that:
- Your investment does not affect your everyday life in any way.
- You are ready to see the -50% drawdown in your investment, and hold through that.
4. How exactly to execute buy orders.
If you lump sum your fiat into ETH, then you subject yourself to one particular price point, which could have been an outlier in the accumulation period. For example, currently ETH is at 1500$, but maybe the majority of time in 2023 ETH will spend below 1300$, and if one buys now then its a suboptimal buy. Same goes the other way, you might be able to buy at a lower than average price.
In order to somewhat eliminate this risk / headache, a reasonable approach is to DCA (dollar cost average) into ETH. Essentially, you divide their fiat investment into say 10 parts, and then buys ETH each week in 10 tranches. This way you average your entry price over time.
There are approaches to tweak this: if price is high, make your buys smaller, if price is low, make your buys larger. But the idea is the same. I would recommend equal parts and regular frequent buys, this way you will remove the headache altogether, while the price will average itself.
Let me say that this step is not superimportant, I think. You can also just lump sum it in a goodlooking entry point around the bottom. In two-three years this will likely not matter.
5. How to sell.
Frequently someone invests into crypto, then it goes up, and then the greed comes into play: the person holds onto their crypto, doubting that the cycle will play out as usual, and they watch their investment lose the majority of gains. They are still up multiples, if they entered around the bottom of the previous cycle. They are usually flat if they entered near the top of the previous cycle
Almost everyone in crypto has gone through this, myself included. In order to avoid this, you need a plan for selling. I know two decent ways:
- You can predecide the levels where you will be taking profits, for example “I will sell half of my stack when my ETH is up 3x from my entry”. You have to come up with the exact strategy by yourself. But just to give you an idea for what to expect, a very important price level is the previous all time high (ATH = 4900$ for ETH currently). Once ETH crosses that, usually the most mania part of the cycle starts, external people pile in, and the price usually does some low multiple of that. Last time it did 3x (from 1500$ to 4500$), this time it might do 2x (which would set ETH at 10000$ at the top of next cycle) or even lower, we do not know. 10000$ is also a common price target among Ethereum die hards, so it will most certainly be an important milestone, if we get there.
- You can also try to sell near or after the top. I don’t know how to effectively do it, because the drawdowns inside the cycle usually look just like normal -30% corrections, and I usually think we will go higher. But here are some of the interesting ways the top may be identified:
- When the amount of scams is unbelievable: this is very good indicator of mania in place.
- When certain crypto assets are obviously overpriced (like tokens trading with P/E larger than 1000, or pictures of monkeys going for millions)
- Long drawdowns: last two cycles the drawdowns after the top were much longer than the corrections preceeding them. Here an 60day average price indicator might help.
- Large drawdown: assuming the hype cycle is in place (price breaks through the previous ATH, for example), if ETH is down -60% at some point after that, then it is likely that the cycle is either over, or it is one of the tops (in case there is a double top in this cycle, as it was in 2018-2022 cycle).
- When certain cold headed people with track record call for too much froth. https://twitter.com/cburniske, https://twitter.com/GCRClassic, https://twitter.com/VitalikButerin are some accounts I pay attention to. Sometimes they serve as a sort of schelling point for traders and investors.
- If your hairdresser and uber driver are eager to talk crypto, it is likely the top is close.
Also, it might be all hopium, and we never cross 4900$ ETH again, due to some sort of a black swan event, or because some other blockchain turns out to be much better. I estimate the probabilities for these events to be low, but they are nonzero, and I can also make mistakes.
Let me also say that at some point some of the promises of crypto may deliver (ETH becomes money, people send each other dollars via stablecoins on rollups, decentralized finance expands 10x, NFTs are integrated in rl, etc), and in this case the price may go up simply as a reflection of fundamentals. Knowing the degenerate traders, though, my guess is that the price will lead the fundamentals…
In general, selling is the hardest part. I have found that selling only part of the stack is easier, because you leave some ETH just in case it goes even higher, and this helps you to battle FOMO (fear of missing out). But I haven’t found a great way of doing it. For example, it is very hard to identify the top via sentiment for me: either you gauge the sentiment by reading crypto twitter, in which case you become too excited and never feel when the cycle is at the top, or you don’t gauge the sentiment, and in this case you also do not know where the cycle is in its development.
A word of caution.
The adoption of crypto is happening, and more and more money is chasing ETH. As a result, volatility is decreasing, and the magnitude of cycles is decreasing as well. I am pretty confident we will see another cycle, but I am not 100%. At some point, crypto cycles will merge with general market cycles, and one has to be ready for that. Especially given the fact that the economy worldwide is currently weak, with quite large debt/gdp ratios.
Another remark is that if you become a true crypto-believer, it is not strictly necessary to sell the tops of the cycles: one can just chill and hold for 10 years plus. Or one can still try to sell the top, but buy back in when the price is lower — this is what I am trying to do.
Lastly, keep in mind the taxes: they can quietly ruin your portfolio, if you only remember about them in Aprils.