Two Strategies for Long Term Investing

Trading is flashy as hell but when you look at the numbers, the wealthiest financier on the planet is a value investor. Warren Buffets buys assets he believes to be under priced and he holds them for years or decades. This is how he grew Berkshire Hathaway into the powerhouse it now is.

Interestingly, unlike trading, I generally believed there was only one approach to investing. You’re holding onto stuff for years, what is there to know? But it turns out there are actually two different ways to look to approach your investing. Each strategy has its own strengths and weaknesses. Let’s have a look.

Trend Investing

Trend investing is a strategy whereby an investor places his capital into a market that is clearly uptrending. Then, on the other side, he waits to sell until the market is clearly downtrending. A few thoughts on this. The first is that this investor purposefully misses both the bottom and the top of the market. He’s leaving money on the table! Well, yes, but not really. Not really because he’s only deploying his capital into a market that he expects to reward him quickly. When you think about a value investor buying the bottom, he may catch it perfectly, the asset may be ludicrously undervalued, but the market might go sideways for years! Those are years when he could have put his money to work in some other market.

People love to call bottoms and tops but in reality, nobody knows a damn thing. So with trend investing, since you’re not trying to sell the top, you will stay in and the market might go a hell of a lot higher than what anybody expected. And you will benefit whereas the value investor might have already sold because he believed the top was in.

The downside of course is that sometimes markets don’t under or over perform. Sometimes they do what people believe they will and in this case, by not buying near the bottom and selling near the top, the value investor leaves a good chunk of change on the table.

Pros 

  • Less risk, since you’re buying into a market that is clearly trending up
  • If a market over performs you gain exposure to it
  • In a bear market if an asset under performs and goes lower than anybody expected, you’re not bought into it

Cons 

  • Potentially leaving money on the table as you’re only capturing the middle part of the price movement, not the top and bottom

Value Investing

The other approach is value investing. That is, buying an asset which is clearly undervalued. In this situation the investor does not care so much whether it trends lower, he is simply placing his money into something which he believes, rationally, must go up in the future. He may try to time bottoms and tops or he may hold his assets for the long term, through multiple market cycles. Although I am unfamiliar with the stock market, I know that PE ratios are used along with a host of other tools to determine what assets are undervalued. In crypto there is no standard valuation model so it’s more difficult. Value investing is what most hodlers do, whether they realize it or not. It’s a fine strategy and it created the world’s wealthiest man, for a while.

Pros 

  • More potential upside as bottoms can be bought and tops sold. Or, at least, an investor can try to time those correctly
  • Dead simple. No debating about exactly what an uptrending market is, when the reversal has happened, etc.

Cons 

  • Riskier. You can buy an undervalued asset and find out that it can still go quite a bit lower and the market can go on for quite a bit longer

Fin

Anyways, that’s just a brief overview of the types of investing. Obviously there’s not much info here but hopefully it at least gives you an idea of what’s out there in terms of strategy. Now you can go learn more about it from more experienced people than myself. Good luck!

How to Not Get Hacked: The 80/20 Rule in Crypto

It’s been around for more than a hundred years, it’s the 80/20 rule. I’ll assume you’re familiar with it. If you’re not you don’t read enough. So how can we apply it to crypto? It’s simple, just do these two things and there’s an overwhelming chance you’ll never lose any of your coins. Even if you don’t use 2FA, your email gets hacked, your SIM card gets ported, whatever. It won’t matter if you just…

Never Leave Your Coins on an Exchange

Don’t be this guy. Ouch! Here’s a man who supposedly knows his way around crypto, he’s a fucking engineering manager at a custodianship company, yet he loses a tenth of a million because he kept it on an exchange. For what possible reason? If you are investing and holding onto your coins for years at a time, keeping them on an exchange is like going to a cigar convention with kerosene soaked clothes. Even if it doesn’t get hacked, check this out. Just a few days ago a guy lost $1,000 on Bittrex because they blocked withdrawals for all New York residents. He had to write it off as a loss. What about Quadriga? or Binance? The list could go on for an hour…

Use a Hardware Wallet

Seriously, so simple. A Nano Ledger S costs $70 after shipping. If you have more than $70 worth of crypto it’s worth buying one. They’re dead simple to set up and they make your life easy. Since they can hold dozens, hundreds, of currencies, you only have to remember a single seed phrase for backup purposes. That’s so much easier than trying to keep track of seed phrases and private keys for a dozen different wallets. Plus, these things are unhackable. Send your crypto there and forget it. One note though, NEVER store your seed phrase on a computer. People have lost their stacks when they uploaded pictures of their seed phrase to their Google Drive and a hacker gained access. Write the seed phrase down on paper and keep it somewhere safe. That’s really it.

If you just do these two super simple things your odds of losing your coins must be less than 1%, if that high. Yet people are people and as long as they ignore this stuff, funds will not be safu. That’s unfortunate for them but it doesn’t have to be you.

The State of Crypto & Thoughts on Investing

The damnedest thing about investing in crypto, and I suppose any market, is that nobody knows what the hell is going to happen next. When I wrote this post Bitcoin was floating around $8,700. Now, editing it two days later, it’s down to $8,000. A week ago it hit $9,100. Not many people expected any of this. At the beginning of the year, when it wasn’t clear that we’d exited the bear market, many felt that a healthy expectation for EOY 2019 would be $8,000. That would have been reasonable yet here we are, beginning of June and we’ve already hit $9,000. Just a month ago the analysts were saying to expect massive resistance around $6,000 but when we got there we sliced through it like cooked fat. The market didn’t even hesitate.

What to Make of it

Don’t listen to people. Except for me. Listen to me long enough to realize that you shouldn’t listen to anybody, then stop listening to me. People, so called experts, claim that Bitcoin is going to retrace back to $6,000. Others say $10,000 is imminent. I’ve even heard a few that think new all time lows are on the horizon. It’s wild and it can give you a conniption if you pay too much attention to it.

More than the conniption, the problem is that when you start to take people seriously you are liable to make rash and regrettable decisions. I have no personal experience, every single investment decision I’ve ever made has been flawless, but I’ve heard that other people sometimes make mistakes. I get that. It’s easy to become convinced that something is going to happen. Maybe you’re watching a lot of YouTube commentators and you start to think that Bitcoin is going to $6,000. It makes sense. We’re overbought, the rise since April has been parabolic, no way the price can keep going up like this. So you sell and plan to rebuy later at a lower price. Increase your bags by 20%. Eight hours after you pull the trigger Bitcoin goes to $11,000 and you have to buy back in at $10,000. You just lost money on a sure thing by listening to people.

Learning this, learning how people influence me and my decisions, has been one of the most fascinating lessons to come out of investing. It’s a simple understanding: nobody can predict where this thing is headed in the short term and if you take action because people say certain things, you tend to lose out. Yet the impulse to listen to others is not easily tamed.

The Exception

The exception I’ve found that has proven reliably useful are the guys calling macro trends. One to five year movements. A few months after the parabolic run to $20,000 I listened to Marc De Mesel who, when maybe 90% of the experts were calling for new highs, cautioned about a multi-year bear market. He was right. Now I listen to Bob Loukas who talks about the four year market cycles and where we could be headed in 2020 and 2021.

These instructions I find useful as they provide a framework for investing long term. That’s an important distinction too, investing versus trading. If you’re going to trade, then trade. But if your plan is to invest, for the love of all that’s holy, don’t fall into the trap of trading. There’s about a post a week on /r/cryptocurrency talking about some poor schmuck who thought he was investing, ended up trading, and lost it all. Don’t be that guy.

So that’s the crypto market and how I’m looking at it. We could go to $6,000 or we could hit $11,000 and neither would surprise me. Nobody freaking knows anything and Bitcoin makes a mockery of those calling for prices. Long term investing, however, doesn’t depend much on short term price action. Done right it’s a way to get some money from the market without having to predict prices perfectly. The Warren Buffet approach, he’s done alright I think.

Two Unique Ways to Look at Bitcoin

You can think of Bitcoin as a currency, a way to pay for things, which it definitely is. But it’s more than that too. Bitcoin is the first digital creation that cannot be copied. Let that sink in. Until Bitcoin was invented even the best copyright protection software could be cracked. You can go, you could go, on Pirate Bay and download anything. Bitcoin was the first time when we saw a digital asset that had the same properties as a bar of gold a car or your Xbox controller, it couldn’t be duplicated. Pretty cool right?

Another way of looking at Bitcoin, and perhaps even more so Ethereum, is as a decentralized consensus mechanism. A protocol that will make a decision in a consistent known and fair way, each and every time, and is incapable of being influenced by a malicious actor. That’s big! Traditionally decisions are made by humans but what if you have an idea that would require twenty six decisions a minute, every minute, twenty four hours a day. That’s a problem for a program, not a person.

I’m sure there are even more ways of looking at these protocols besides the two properties I just mentioned. If you want to leave a comment below about some ideas I’ve missed I’d love that. But the main point is, don’t make the mistake of thinking that cryptocurrency is money and nothing else. There are a whole host of unique features that are going to shape the world for decades to come.

Everything Wrong with Cryptocurrency

Cryptocurrency is going to change the world. Just kidding, cryptocurrency is a total fucking shitshow with more obstacles to overcome than a paraplegic at the playground. 

I thought I’d write this up because of something I just read. A piece mentioned Charlie Munger and Charlie Munger mentioned that in order to have an opinion you ought to be able to state the opposing side’s view as well as your own. Well I think Charlie is a smart guy so let’s give it a go. 

My opinion, crypto is going to change the world. 

Opposing opinion, no it’s not.

1 – Crypto is insanely unstable 

If you bought some Bitcoin at the all time high in 2017 then your investment is worth just 20% of what it once was. We can go even more extreme, say you’re the poor fool who bought into Zcash at the top. If you bought $1 of it, you now have $0.02 and prices could go even lower. Who could blame someone for not parking their money in crypto? 

2 – Crypto is insanely unstable Pt. 2 

The flipside is the hodlers who believe that crypto is going to be worth more in the future. That’s great, except it means they’re not actually using the currency. People tend to not spend things which they believe will be worth more later. So we have a bunch of people hoarding this stuff and not using it. Where is the value in that? 

3 – Crypto is hard to use 

On a scale of opening a pickle jar to wrestling a polar bear, figuring out how to use crypto without losing it is somewhere around programming a VCR, if they still existed. Can you name someone who you would never trust to program a VCR? I can. A couple even. As crypto exists now it’s cumbersome, tough to understand and very easy to lose if you don’t know what you’re doing. And once it’s lost it stays lost. And once a person loses some they’re probably going to also lose a lot of enthusiasm for ever getting more. 

4 – Transactions can be taxed 

Some countries are better than others but as it stands now crypto transactions are taxed in a lot of places. So if you actually want to use Bitcoin to, you know, buy something… Then you have to pay a tax on that transaction which is obviously completely fucking absurd and a heavy discouragement on its use. Of course plenty of people ignore the taxes and figure the IRS won’t come after them for a $50 purchase and they’re probably right. But there are still a lot of people who will never begin to use something if they have to break a law, no matter how minor. 

5 – It’s illegal / grey area in a lot of places 

Bitcoin is, at the moment, illegal in India and Egypt and other countries that I don’t know about. In other places there is no clear legislation on it. Thankfully it seems to be fairly well accepted in most Western countries but is that always going to be the case? What about coins like Monero? It seems incredibly unlikely that something that allows completely anonymous transactions, and is possibly a viable tax haven, is going to be allowed to exist. Who would want to buy an asset which may be declared illegal in a year or two? 

6 – It doesn’t work very well 

If a person has only heard of one cryptocurrency then they’ve heard of Bitcoin. What’s so unfortunate about that is that technologically Bitcoin is a freaking Model T. It’s slow it’s expensive and when a lot of people use it the system breaks down. We have crypto projects which are Lamborghinis and Mercedes but people have not heard of them and even if they have they might not understand them. Or, let’s say you have heard of something great like Nano and you’ve figured out how to use the wallet, which is very intuitive and a great example of how to do crypto right. That’s fantastic but you can’t actually spend it anywhere! Oh yeah, and if you bought it at the top it’s lost 97% of its value as of today. 

7 – It doesn’t solve enough hair on fire problems 

You could argue this all day, and I’d love to. But I’m writing it so I get to say whatever I want and my opinion is that the largest hair on fire problem that crypto is solving / will solve on an infinitely larger scale in the future, is cross border remittance. What takes days or weeks now and costs an exorbitant amount of money can be done with crypto instantly and for free. That’s fantastic and in the not so distant future it’s going to completely disrupt a multi-billion dollar industry. 

However, apart from that, I find it hard to see where there is a massive pressing demand for something that crypto currently offers. Smart contracts are good but are they good enough to change the world, at present? It doesn’t look like it. Decentralized exchanges will be huge but they’re not huge yet. Security Token Offering may very well be the largest lasting legacy of crypto but again, they are in their infancy. In terms of things that exist right here and right now, it can be tough to find a working project with massive demand especially for the average citizen of a country like the USA or Germany or the UK. 

8 – It’s unregulated 

The crypto community largely considers this a plus, and it is cool to work in the wild west of technology. However, it’s not going to work for worldwide adoption. Businesses are not going to devote millions or billions of dollars to blockchain projects if there is some chance that they will be regulated in a weird way or even declared illegal in the future. For better or worse we need consistent regulation so that people/companies know what they’re working with, know what to expect and know that all their projects won’t be fucked up by some new crazy law in nine months. 

9 – It uses a bunch of electricity 

Honestly I just threw this in because a list with nine things sounds better than a list with eight things. But I suppose it is a valid point that Bitcoin mining uses more energy than the country of Denmark. However, I don’t think this is as insurmountable a problem as something like the price volatility. A lot of newer coins are Proof of Stake or like NEO they use some form of DBFT consensus algorithm which uses so little electricity it’s negligible. Nonetheless, the current energy demands are troublesome. 

Conclusion

So that’s that, nine reasons why crypto is a fantastic fuckup that no sane person would touch with a ten-thousand foot pole. Unless you really believed that this stuff is going to change the future and alter the way we live our lives.

Which is something I happen to believe.

Because even though it’s riddled with problems, there are also some incredibly exciting things happening. The more I learn the more I continue to be amazed and hopefully in ten years we’ll look back and laugh at the pessimism. 

Why Does Decentralization Even Matter?

If you’re in the crypto community then you’re probably so sick of the world decentralization you’d like to smack me for even saying it. I get that but I also have a question. Something that I think a lot of people struggle with but are not willing to admit. Why does decentralization matter? 

It’s an honest question, I want to know. Of course there is the obvious stuff. 

  • A government or other powerful actor cannot (or will find it very difficult to) shut down a decentralized entity like Bitcoin.
  • A decentralized entity is (in theory) not under the control of something like the Fed which sets interest rates. Bitcoin’s inflation is set and will always be set. 
  • Transactions cannot be censored. If you build a smart contract on Ethereum it’s going to execute as it’s programmed to do whether a government likes it or hates it. 
  • Etc, I’m sure I’m missing some obvious ones.

These aspects of decentralization are great but I feel like it’s only scratching the surface. I think that if you can dig deeper there are even more radical benefits that either we don’t fully understand yet, or, only a small group of people understand. 

I’d like to understand these benefits, I’d like to understand how decentralization can benefit a group of people even if they’re not worried about the government censoring their transactions or shutting down their blockchain. If you read this and you have insight it it, please, tell me. I’d like to hear it. 

A Beginner’s Guide to Cryptocurrency

Hey gents, a few people have asked me about cryptocurrency lately. As it’s something I’ve spent a couple of hundred hours studying I think I can offer some insights. I’m no Vitalik or Satoshi and I cannot read code but maybe that’s a good thing, it means I’ll keep things nice and simple. For this first article I’m going to lay the groundwork for understanding crypto. To that end I’ve chosen five words / ideas / whatevers that you will come across in the cryptosphere again and again. If you can wrap your head around these you’ll have a much better idea what the hell everyone is talking about.

1. Mining

If you’ve heard about Bitcoin you’ve heard about mining. Bitmain, the largest Bitcoin mining company in the world, just opened an office in Silicon Valley and they’re looking to go public at some insane evaluation that’s probably billions more than they’re worth… But what is mining?

In the simplest terms mining secures a cryptocurrency, it’s what prevents hackers from stealing funds or otherwise screwing up the network. The basic idea is that a bunch of different people (or, as it has worked out in practice, a small group of very powerful wealthy people) devote an obscene number of computer processors (ASICs) to doing complex math problems. These miners, ostensibly the “good guys”, secure the network. If a hacker wanted to steal some Bitcoin he would need to control more than half of the computer processors doing this math. Given that there are literally dozens of football sized warehouses filled from floor to ceiling with processors, that would be prohibitively expensive.

If you’ve heard about miners getting paid it’s because they do. Their reward for buying all these processors and paying for electricity is a steady stream of sweet, sweet coin. The largest miners make tens of millions of dollars a month. In the early days of Bitcoin the average guy with a computer could mine but that’s the case no longer.

2 – Proof of Work / Proof of Stake

Proof of Stake, POS, is a newer system that doesn’t require miners. Instead of doing a bunch of pointless math and burning rainforests to generate electricity, a person “stakes” their coin and earns a reward. If a bad actor attempts to make a fraudulent transaction, they lose the coins they’ve staked. Let’s simplify it with an example.

Five people are playing a game and each person puts in $1,000. As long as they play by the rules, they get $5 every hour they play. It’s not a bad deal and people are incentived to play. However, in our example player three decides to cheat. He wants to influence the game so that he gets $25 and everyone else gets nothing. Well, the other players are pretty smart and they catch player three and he gets kicked out of the game and doesn’t get his $1,000 back. Damn. So that’s proof of stake, everyone puts up some coin and if someone tries to cheat the network they lose their investment. It’s an environmentally friendly solution to Proof of Work (POW). Transactions are validated by coin in an escrow account, instead of by electricity and pointless math.

3 – Node

I have to be honest, trying to pin down a good definition of a node is difficult for me. Maybe I don’t understand it backwards and front but let’s have a shot anyways. A node is a computer which carries a full copy of the blockchain. Depending on the blockchain this could be smallish or largish. Bitcoin’s blockchain is 173 GB and Monero’s is 57 GB. Why would anyone want to “spin-up” a node? A couple of reasons. The first is that it helps to decentralize the network. Bitcoin is resilient because a copy of the ledger (the blockchain) is stored on thousands of (five-thousand something at present) computers all around the world. No country can shut it down just as it’s impossible to eradicate those pesky torrents.

Another advantage of running a node is that, depending on the coin, you may get some kind of voting rights (big caveat that running a node is often not enough to get voting rights, you also have to own a (significant) amount of coin). And finally, if you run a node you can self-validate a transaction. However, this isn’t a big deal for about 99% of people and by the time you understand the advantage of running a full node you won’t be reading this article. For now, you can think of a node as a water cooler in the office. It’s a place to take in and give out information, the social hub of a blockchain network.

4 – Permissioned / Permissionless Blockchain

There are two types of blockchains, one that anyone can participate in and another which is a closed environment. Ethereum, Monero and Bitcoin are permissionless blockchains (among many others). Anybody can run a full node and anybody can mine, they are as decentralized as a blockchain can be. On the other hand, you have cryptocurrencies like NEO and XRP. These are permissioned blockchains where only approved computers / servers can run a full node. Security, that’s why any of this matters and it comes in two forms.

  1. Security – State actor (government) shutting down a blockchain.
  2. Security – Bad actor (hacker / huckster / fraudulent dudes) trying to defraud others.

XRP and NEO* (and any other permissioned blockchain) can, theoretically, be shut down (point #1). They have a limited number of nodes and if you take those offline the blockchain dies (whereas Bitcoin, Ethereum and any other cryptocurrency with thousands of nodes across the world are virtually impossible to shut down). So why have a permissioned blockchain if it can be shut down?

A couple of advantages, the first is speed. If you select the nodes that can participate on the network then you don’t have to worry so much about security (point #2). If you don’t have to worry about security then you can speed everything up. The fewer nodes, the more trusted they are, the easier it is for them to vote to approve transactions. Thus you see XRP confirming transaction in a matter of seconds and NEO claiming 10,000 TPS (Transaction Per Second). Bitcoin can do 4 to 7 TPS and it takes 10 or 20 or 30 minutes to confirm a transaction. Permissioned blockchains are way, way faster and way, way more susceptible to being shut down.

*NEO and XRP are two cryptocurrencies which seek government approval and regulatory conformity. In other words, the opposite of Bitcoin. They are not worried about government intervention because they work with regulators.

5 – Confirmations

In the last section I mentioned confirmations, let’s have a look at that. A confirmation is proof that a transaction is valid. On the Bitcoin network a confirmation happens every ten minutes and most websites / exchanges / merchants require several confirmations before they credit funds to your account. In a nutshell, once you have a couple of confirmations everybody knows that you’re not a scammer, your funds are valid and you actually have the coin that you claim to. Figuring out how long it takes to confirm your funds is easy. Just look at the number of required transactions multiplied by the time to confirm a block. In the Bitcoin network a block is confirmed every 10 minutes and most websites require 2 to 4 confirmations. That means you’ll wait about 20 to 40 minutes before you can access your funds.

Some coins like Bitcoin Cash (more about them in another post) urge merchants to accept 0 confirmation transactions for small orders like coffee or dinner (not Lambos). If a merchant chooses to accepts 0 confirmations, a payment will settle within several seconds (although there is a small risk of fraud, again, discussed in a later post).

Still, no matter how you look at it, 0 confirmations with a risk of fraud or 2 to 4 transactions with waiting thirty minutes is not as good as a blockchain like XRP which fully settles with no chance of fraud within 3 to 10 seconds. So why the hell doesn’t everyone just use a permissioned blockchain? That’s a question for another post (we obviously have quite a few posts coming). Suffice to say for now, people claim permissioned blockchains are the devil’s minions and stand for everything that crypto hopes to defeat. Today though, we’ll stick with the basics. Hopefully you now have a better idea of some key terms in crypto. If you have any questions please feel free to leave a comment below, I’ll answer it!