Much coins, Much Wow

Part 2

 

Today I want to reflect on the RSC Portfolio Phase 2 and how it relates to my own journey as an investor in this industry. This follows on from the last newsletter where I talked through the likely consolidation into quality and micro trends I expect to see play out in 2019-20.

Portfolio Allocations

This may be preaching to the choir. The allocations you as RSC members added to the Phase 2 RSC community portfolio showed a strong correlation of allocations to the micro trends I discussed in Part 1. These are very much in line with my own perspective and it will be exciting to boil this down further in Phase 3 recently issued. Some observations from digesting Phase 2 data:

I see a consolidation on Cryptocurrency (50-60%) which represent the fundamental reason to decentralise – uncensorable and programmable money led by Bitcoin

I see a moderate degree of speculation on programmability and automation in the world of smart contracts, decentralised/open finance led by the Ethereum Protocol (15-25%)

I see a reasonable focus on Digital Securities infrastructure (10-20%) recognizing that these are the early days and the core infrastructure is being built now for a more efficient tomorrow.

I also see we are all speculative nuts with a high risk tolerance and a vision of a better future with <10% assigned to Precious metals and Other avenues. I dig the conviction!

Figure 3 – RSC Community Portfolio Phase 2 Allocations (as of 14/4/2019)

How many Coins should be in my portfolio?

I want to challenge you all to revisit your portfolio allocation with a ‘cruel to be kind’ mentality and distill it to contain only those coins you truly believe in. As a guide, I want to discuss my own portfolio strategy for 2019 based on my own experience so far. Remember that these are simply my honest opinions and not to be confused with any form of financial advice (we all need a disclaimer from time to time…).

I entered the market like many of you in Jan 2018. I went full multi-coiner and did bugger all research into projects. I watched Youtube shills, I bought into hype and I learned my lesson. What I did find was the RSC channel and a level of quality research and insight not seen anywhere else in the market. It didn’t take long before my information diet consisted solely of Doc and Mav’s commentary and this opened up my previously wasted time to start looking deeper into projects on my own schedule. And now here I am, hoping to assist you all on the same journey.

I look at 2019-20 with a fresh portfolio starting with 100% BTC and then diversifying from there.

As I have mentioned, I have turned full circle into a Bitcoiner which is NOT a maximalist. I believe that the Three Pillars of Crypto, DeFi and Digital Securities represent the greatest opportunity of our lifetime. What I will say is that through becoming a Bitcoiner, I find that a project needs to justify itself BIG TIME before I will spend my bitcoin to invest in it. I am sacrificing what I believe to be a currency with immense future purchasing power so the project had better be offering something extremely compelling. This acts to keep my Bitcoin safe until a true opportunity comes across my desk with sound fundamentals, strong vision and valid reason to exist.

Cryptocurrencies

I will only invest my Bitcoin in a cryptocurrency project that solves a problem Bitcoin doesn’t. An example is Decred which attempts to solve governance, Nano which solves speed and feeless Tx and Elastos which is my cryptocurrency play out of China. Note how they all have fixed supply, defined issuance schedules and a key differentiator to Bitcoin. They all have (relatively) strong decentralisation and security measures at play. They represent the reason money belongs on a DLT – immutability.

Smart Contracts and DeFi

Ethereum remains the strongest contender in my books. It has the most developer capital and the most diverse dAPP ecosystem. No doubt about it, DeFi is hectic! I have my critical questions long term but right now, Ethereum is solving a very different problem to Bitcoin and I believe the two can co-exist. Ethereum is not trying to eat Bitcoin’s lunch of sound money because it knows Bitcoin will just eat it if it does. Bitcoin is Austrian, Ethereum is Keynesian and to ignore that today’s world is Keynesian by design and thus easier to translate to Ethereum would be foolish.

Other smart contract platforms and tokens therefore need to be compelling enough that I spend my Ethereum and diversify into them. Right now, there are very few which tempt me aside from MakerDAO which is the King on Ethereum’s chess board. MKR has voting rights in the DAO and a semi deflationary supply which resembles the main draw card from Bitcoin. MKR is the only token I see in the market which represents the potential future of crypto tokens – a share in a natively digital organization. All others are too close to an unregistered security with a head that can be taken off for my taste and I struggle to justify risking my BTC or ETH on them as investments.

The only exception to this rule is Digitex Futures. I, like many of us, are keen to trade on their exchange. However, I am extremely conscious of their coordinated hype around their ICO and chatter regarding the token price – usually a strong no-no in traditional markets. Look at how quickly Elon Musk was reprimanded for tweeting price sensitive information about Tesla. I fear Digitex have made themselves an easy and centralized target for regulators who have shut down many online gambling circuits in the past and Digitex could easily become a casualty in such an attack. My allocation post exchange launch will be on an “as needed basis” to minimise this risk as far as practicable.

Digital Securities infrastructure opportunities are more limited as it stands today. At the moment, Ravencoin is the primary crypto temptation for me given its similarities to Bitcoin (fixed supply, decentralised and simple use case specific nature) and the likely association with tZERO. I have my skepticism around FLO as noted in a past research report although a speculative set and forget may be acceptable.

The utility tokens like SLT, SWM CHX etc need additional research on my end before I can craft a sound opinion either way. Where I am primarily allocating capital is to the equity space and tokenized VC space. Granted, the options today are even more limited however I expect many of these will open up in the coming years. This is where Mav and I will be like hawks to distill the opportunities for you as members and will be the basis for where we take the RSC fund. Massive opportunities here, stay tuned.

But that’s only seven coins!??

In the end, this does leave me with a (crypto) portfolio of long hold investments with only six coins and one token. It took me a long time and a fat account drawdown to come to this conclusion, that a small and concentrated portfolio is the way I want to go. However, this solves many problems of information overload and excess diversity. It helps justify my investments and manage my risk when a coin has a good or bad day. Rebalancing is easier with fewer coins and I don’t need to stay updated on 50 different projects. My confidence is higher and I now find most other project much less compelling having understood the value of those sitting proud in my portfolio.

My position is one of strong opinions weakly held. I have an allocation of BTC as my “reserve currency” to Cryptocurrency and ETH as my reserve currency for all smart contract and Defi Plays. Any investment project needs to be so compelling that I am willing to spend my BTC or ETH. Using this model helps me control allocations and restricts diversity only where I have fundamental research and conviction around the trade.

So how do I capitalise on the market volatility and high risk coin moon missions?

Swing trades and derivatives

This is where I leverage Doc’s experience. Get in, get your fair share, get out. There is an opportunity to grow my Bitcoin and Ethereum balances by riding hype waves on any coin or token with the right technical patterns and liquidity. This is where I allocate 10-20% of my BTC and/or ETH holdings specifically to play within these markets.

I use swing trades to gain exposure to the more speculative assets on a short term basis. I do not invest in these coins/tokens in the long term but I can still benefit from their volatility. If I am in a swing trade for a period of a few days to a week, the risk of a huge negative piece of news landing to destroy my value is acceptably low.

At the end of the day, it’s the best of both worlds. I can sleep easy knowing that my large holdings have sound fundamentals, a genuine purpose and reason to exist. I can manage my risk across seven coins far better than 50+. At the same time, I grow my reserve currencies BTC and ETH through swing trades and derivatives. I can gain exposure to risky assets whilst not having to worry about my reaction time if the regulators come out swinging.

Concluding remarks

In summary, I want to challenge you to cut off the dead wood. Don’t be tempted easily to spend your precious large caps. Justify every single satoshi and every single gwei because the prediction markets right now favor the survival of BTC and ETH over anything else in this space (especially when you consider #3 coin XRP has question marks around its actual supply being half what is claimed – see here and here).

Stay Vigilant, Be Humble, Stack Sats, Gather Gwei.

However you do it, don’t be afraid to concentrate on quality because the market will eventual and you want to be the smart money who was here first.