1/ Some thoughts on portfolio construction (each section expanded below):
> think in probabilities
> think in risk units
> don't forget about duration
> don't fall in love with positions
> have entry/exit strategy
> don't try to be a hero
2/ Think in probabilities:
Position sizing should be based on probability relative to another asset/theme.
Example: What is the probability Solana surpases Ethereum? Likely not zero or 100%. If probability is x%, then size SOL relative to ETH according to x
3/ Think in risk units:
How many incremental risk units are you taking by investing in x vs. y, where y is inherently lower risk or beta.
Example: investing at the dApp layer is a levered bet on a base protocol. Factor in illiquidity, execution and technical/dependency risk
4/ Don't forget about duration:
Consider mix of public/liquid vs. private/illiquid. The last thing you want is to have to force sell long-term positions because you need cash. Balance your portfolio with cash-generating assets to cover your overhead. Will give you mental clarity
5/ Don't fall in love with positions:
Early-stage investing in categories like crypto requires patience & conviction. But that doesn't mean you should become a maximalist. Be prepared to adapt, update your thesis & not be afraid to chop positions if things are not working out
6/ Have entry/exit strategy:
Common in crypto for narratives to get ahead of fundamentals. Valuation is key to the opportunity/thesis.
A low-quality asset can be attractive at a certain price. A high-quality assets can be a terrible investment at certain price
7/ Don't try to be a hero:
Be patient & stick to what you know. You're not supposed to play every hand in poker - same is true in investing. Your strategy is unique based on your collective experience, financial position, & stage in life. Know your edge and develop that.
GLHF
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1/ Crypto teaches your lessons quickly. I've you've been around for a few years, you've seen compressed - but no less severe - market cycles in a span of months/years that most traditional investors only see once or twice in their careers. A 🧵on some of my crypto lessons 👇
2/ Cutting winners too early & rotating to laggards expecting them to catch up.
This catch up trade typically underperforms. I've made this mistake when my thesis is not sound and/or I don't follow the project as closely. Expect things to move non-linearly and update your model
3/ Example: your bull case has [DeFi protocol] reaching [x TVL] [y volume]. Important to keep tabs of your "exit scenario" but also key to adjust your model if things are working. Admittedly, I wasn't expecting DeFi TVL to grow from <$1 to $80B in 1 year. Lean in & understand why
Investing in crypto for me is the ability to connect w/ founders & a passionate, global community. It requires engagement & collaboration. It can be an intellectually enriching experience and/or a very humbling one. Over the years I’ve questioned why I’m here…
The “why” can be lost in the midst of bull market noise. Bear markets weed out tourists, the wheat from the chaff. But then I realize I wouldn’t want to be doing anything other than crypto. Crypto is not perfect but I believe it’s the most fascinating & important socioeconomic…
Transformation since the Industrial Revolution. It’s changing our relationship w/ money and, moreover, how we coordinate as species. It’s transcending artificial, man-made boundaries & connecting us leveraging the distribution of the Internet & power of open source networks…
Last year was a trial run for DeFi as core money legos were put in place. In spite of the suboptimal user experience (UI/UX, gas fees), DeFi saw a marked YoY increase in adoption & usage across the board (see👇).
L2s come at the right time to support more users & use cases 🧵1/6
Total Value Locked (TVL):
- 75x growth in TVL from $580M to $43.5B
- 4x growth in ETH TVL from 2.5M to 9.8M
Note: 75x growth in TVL is USD denominated so factors underlying asset price appreciation. Therefore, the figure is overstated. Likely closer to ~10-20x in underlying
Active Users:
DEXs are among the most popular DeFi protocols & saw a ~20x growth in 24H active users from ~3k to ~67k
1/ A few thoughts on algo stablecoins. Touching on DSD, ESD, Frax, BAC & Fei.
These systems rely heavily on game theory. The most important thing to monitor is sentiment
Seeing these algos in the wild leads me to believe some game theory is good. Only game theory is not enough
2/ On coupons:
Been running thru various scenarios and second-order effects of coupons expiring OTM. Judging by secondary market prices of DSD coupons, it seems that probability has been growing. Next 10 days will be key
We have yet to see what happens if coupons expire OTM...
3/ Point of no return:
If coupons expire OTM, then I think it will be a blow of confidence too big to recover from. Theoretically, it benefits non-coupon holders and clearing that debt helps restore the peg. But just evaluating on that basis misses the point...
1/ Crypto is undergoing a critical transition in its evolution of becoming the foundational global settlement layer. I liken it to moving from gas (ideas) > liquid (fluid narratives) to a solid-state
2/ Bitcoin is farthest along in this state transition hardening as a non-sovereign store of value.
Ethereum is second in line moving from liquid to solid w/ a thriving DeFi ecosystem (PMF) & EIP-1559 (soon)
But there are still legacy parts of crypto that must be shed to advance
3/ Perhaps the most critical chokepoint are centralized stablecoins. Tether is the Achilles' heel of crypto
The recent experimentation of algo stablecoins - $ESD $DSD $BAC & $FRAX - are very healthy for the ecosystem I believe. Buyer beware: they're far from stable (for now)...
1/ Investing for me is about applying as much pressure to change inefficient systems saddled with friction. I think we can all agree finance, as it exists today, is a patchwork of outdated and fragile systems. It simply has not caught up with the Internet...
2/ It's hard for me to imagine that our relationship with money/finance will not undergo a profound transformation in the next 5-10 years.
The innovation happening in DeFi is foreshadowing how this relationship may evolve. To understand why start playing with protocols/apps...
3/ After using DeFi apps, perhaps you'll start wondering why your tradFi banks can't do many of these functions. Is DeFi perfect? No. Is it risky? Yes.
There's a long road ahead to realize the full vision/potential of DeFi, but that is what's most exciting here...