Crypto Assets and the Innovative Investor
History shows that as asset classes emerge, new types of investors arrive to take advantage of unprecedented market dynamics. We are now entering an era of Crypto Assets and the associated Innovative Investor.
Crypto Assets and the Innovative Investor
Crypto Assets require a unique knowledge set if one wants to avoid common pitfalls. These assets are inherently hyper volatile due to many factors that include instant liquidity upon creation and market information asymmetries which compound the emotions of market participants. The only way to avoid being sucked into the vicious FOMO and FUD cycle is to form yourself into an innovative investor. This will allow you to look at crypto-assets with a more holistic view instead of just focusing on the name, price and emotionally driven narratives.
While each innovative investor has their own specialty, they typically have a base knowledge of Computer Science, Investing/Trading, Economics, Politics, Game Theory, and Cryptography (among others).
This multi-disciplinary approach to investing allows the innovative investor to avoid common pitfalls that can occur when viewing this asset class through a single lens. I will outline a few theoretical examples which would crush the average investor but not the well studied innovative investor.
Example #1: Cryptography and Computer Science Knowledge
This investor was smart enough to call Bitcoin a clear bubble at $20,000 based on his technical analysis and understanding of market sentiment. He waited for the heavy drawdown and started accumulating Bitcoin in the $6,000 range and Ethereum in the $250 range. He wanted to practice proper risk management and remove some of his coins from custody since they do not provide any insurance. Unfortunately, due to a lack of understanding of the basics of Cryptography and Operational Security, his private keys were compromised on his Evernote pad and all of his Bitcoin was stolen.
Example #2: Economics and Investor/Trading Knowledge
This investor started out not even being interested in buying crypto assets, but simply being a builder. He learned about Ethereum in March 2017 and immediately started learning Solidity to build groundbreaking decentralized applications. He didn’t pay much attention to the price until November 2017 when he started seeing his local meetups get much more crowded. He learned that Ether (ETH) — the native asset of Ethereum had gone from $40 to over $400 since he started building and had no signs of stopping anytime soon. He started buying two weeks later when he got his paycheck but ETH was already at $700 and climbing fast. Flash forward 16 months and ETH is at $100. While he still loves the technology, he decided that investing wasn’t for him so he decided to sell at a major loss.
Example #3: Political and Historical Knowledge
This investor loved Bitcoin and believed it was truly a computer science breakthrough. He loved to trade and when things lined up correctly, he would sell some of his BTC to buy back cheaper. At one point in time, he saw that the RSI was insanely over-bought on multiple time frames, the Fear and Greed index was near all-time high and Bitcoin Maximalists were stating that “everything except Bitcoin is a scam!”. He sold half of his Bitcoin knowing that it was the perfect moment to sell and buy back cheaper. Unfortunately after he went to sleep, Xi Jinping the President of China announced that they planned to become the leader in Blockchain Technology. This caused the market to shoot up nearly 35% by the time he woke up. Fearing that this could spark another large speculative bubble, he bought back even higher than where he sold. Five days later China banned Bitcoin for the 14th time and the price dropped 20%, the investor did not know about the history of China banning Bitcoin and decided to exit his position due to fear, uncertainty, and doubt.
Example #4: Game Theory Knowledge
This investor thought that Smart Contracts and Decentralized Applications were the future. He was invested in Ethereum due to it being the leading smart contract platform but after the Crypto Kitties mishap, he thought there could be better options out there. In late 2018 he learned about EOS, which promised thousands of transactions per second (TPS). He did some research and while he still had some questions unanswered, he thought that TPS was all that was needed for global adoption. Unfortunately, since he did not understand how consensus mechanisms work, he did not see that the Delegated Proof of Stake system would eventually be ran by a colluding cartel, which invalidates the whole point of using a blockchain in the first place.
Achieving a Complete View
The innovative investor takes a more complete view of the market, considering not only the disciplines listed but blockchain native terms as well that may require combinations of different knowledge areas in order to fully understand. This includes On Chain Data Analysis, Sentiment Analysis, Network Effects, Developer Moats, Smart Contract Risks, Composability, Oracles and more.
The innovative investors are able to step above the short term narratives, biases and extreme noise that plague the crypto-asset market in order to make sound decisions for allocating capital for more medium/long term positions that will outlast the shorter-term trends.
Constant Evolution, Constant Studying
The innovative investor knows that their job is never complete. This market is at the bleeding edge of innovation and requires near-constant study just to keep track of industry updates that occur every single day.
Special thanks to Chris Burniske for coining both terms “Crypto Assets” and “The Innovative Investor” in his amazing book.
About the Author
Anthony Bertolino is dedicated to educating the world about Ethereum and the future of finance. He studied Blockchain Technology at U.C. Berkeley and currently lives in Los Angeles, California. If you want to learn more or have any questions, reach out to him on Twitter.