Which cryptos should I buy? The asset allocation model.
I often get the question — what cryptos should I buy? Not only at the poker table. But also, at the poker table…
What they really want to know is, which coins will go up. I don’t know, and nobody can tell you that.
What I can say, on the other hand is
Crypto is a growing, but also an established asset class. [This is not 2017.]
Scary government talk aside, crypto isn’t going anywhere. [Too many wealthy people and powerful institutions are invested, for one. It’s popular among a large and enthusiastic slice of the population, for another.]
Most people with wealth are massively under allocated in crypto as an asset class.
Over time, it will be foolish for so many people with wealth to remain no-coiners.
In my circle of friends, people are massively over allocated into crypto. Among tech nerds, nerdy athletes and washed up poker pros, it’s common to hold 50-150% of your liquid/investment assets in crypto.
However in normie gen pop, most people are no-coiners, or hold a trivial amount in crypto, relative to other assets like stocks, real estate, boat shares, golf course memberships, NFL personal seat licenses, electric cars, deposits on rocket trips to space, etc.
Both sides are resistant to re-allocating properly, even by their own internal risk metrics. The no-coiners because they are big mad they could have gotten in at 0.1x and now prefer to either cry sour grapes, to wait for the next “inevitable” 70% dip, or do things like skip past BTC and ETH into newer/more speculative coins offering the possibility of 100x returns. Instead of admitting they might have been wrong, and setting up biweekly buys, for that sweet dollar cost averaging.
The coin-rich, cash poor are reluctant to deleverage, because they know the no-coiners gotta given in at some point. Or, even though they are coin rich, still severe regret from selling $20k of coin to pay a poker debt that’s now worth a quarter milly. Dammit, why did I have to play? Why did I have to pay? How could I miss that combo draw, I had the whole deck!
The truth is we all suck at re-balancing. Sure it’s a bit expensive, but the truth is nobody is crypto rich or poor to a substantial degree because of Coinbase fees. Unless you’re trading in an out, but then that is your problem, not the fees. Coinbase didn’t get you into that alt rug. That was you being greedy, and you know it.
So we hold on, both to our winners, and to our losers. We sell when we have to, not when we should. A few poker G’s managed to de-leverage, at crypto alltime highs. Real American heros. Good for them, and you should think about doing the same if you are seeing your net worth swing 5-10% a day. Especially if you don’t have a j-o-b that pays USD (like I do).
For the rest of you, who don’t already have six plus figures in crypto, or 50%+ of your assets, whichever one is smaller. How would you go about building a sustainable portfolio, which will do all right both in peak times like now, and the inevitable down cycles?
Not investment advice. This is for entertainment purposes only. I work for a hedge fund, but hold no licenses. I am not an investment advisor, and I am 100% not going to talk to you about stocks, currencies, or any of that. If you see someone under my name touting anything, that is an impersonator. Seriously. This is strictly my personal opinion. I’m sharing my crypto stories, or something I overheard at the poker table, and decided to appropriate.
There are three cypto coin categories worth having a view on. Remember, that if you’re not first, you’re last. And if you are a no-coiner, you are effectively short.
It’s fine to have no view if you’re a 55 year old gentleman of means, moderately wealthy from a midwestern car dealership, a suburban bar and grill, or a mall jewelry store that you operated before WalMart and the internet pulled a rug on your margins. Price comparison is a hoot, ain’t it.
However if you’re young (or extremely wealthy), not having a view on crypto actually puts you at risk of missing out. Putting your beer money/avocado toast satoshis into crypto actually adds up, and not doing so risks making you one of those post-depression folks who kept their benjamins in the bank, while their neighbors invested in the US stock market. You’ve all read the stories.
Also when you’re young, the vast majority of your net worth is actually the income stream of future earnings. Those will likely be in USD, and for a graduate, the prospects are still quite good, by and large. You could probably put 100% of your liquid investment capital into crypto, and still not be over-allocated when taking future earnings into account. I’m not saying you should, but you could. Same as losing $2k in online poker sucks when you’re in college and your bank account shows triple zero. But you’re not broke, in the same way that a responsible adult with children would be broke, in the same scenario.
If you’re the kind of person who needs to go broke at some point in your life, I recommend doing so when $2k liquid is all you have, and future prospects are bright. Not that it still doesn’t hurt, of course.
Ok — what cryptos should I buy, man dude bro?
Like I said, there are three coins you want to have a view on:
Alt coins (like Solana — SOL, etc)
Notice I do not say you need to have a view on dog coins. Or on NFTs like Punks and NBA Top Shots. Or on Bitcoin forks. Or on speculative new projects. Or frankly on anything pre-2020 that, while having a substantial market cap… isn’t bigger than BTC or ETH, isn’t used nearly as much at BTC or ETH, and offers no viable path toward competing with those in market dominance. In other words, a rounding error.
Bitcoin is used as a store of value. It’s the first and original crypto coin. It’s also held in custody by every major bank and financial institution. There will only be 21 million BTC ever made. Quite a few are lost, so less than that.
Ethereum is what most of the DeFi, NFTs, and other “work” in crypto is based on. You need ETH to pay gas fees to buy NFTs (expensive JPEGs of apes, cats, toadz and Leos) — which are also priced almost exclusively in ETH. You don’t need to know what all this means to realize the value of being the exchange currency of the metaverse.
Bitcoin and ETH — are the the two coins that dominate the crypto universe. I can not tell you if they will go up in price. But I know that more people will want a participation slice of the crypto future, and these are the two winners everyone will be looking to have “some” of.
Bitcoin and Ethereum do different things. You should probably have some of both. In what ratio? It really doesn’t matter. 50/50, 70/30, 30/70 — it all gets you to the same place, ballpark wise. Once you’re 80/20 and don’t want to be… not that hard to re-balance.
What about the Alts? The problem with Ethereum is that it’s become expensive. As a result, transaction fees have gotten higher. Much “simple” activity has become too expensive for ETH. Imagine playing a game where every action cost a ETH gas fee. Not gonna make it!
Because of this, and other reasons, “Ethereum alts” (alternatives) have popped up, promising faster transactions, variable block sizes, and better programming languages for developer. This stuff matters, and has already been taken up by the crypto developer community.
As the tweet above points out, DeFi went from 100% ETH to 97% ETH to 67% ETH. It isn’t going back to 97%. It is more likely to settle down to 30% of DeFi than to retrace, by any estimate.
This does not mean that ETH will shrink, much less go away. We’re talking of a growing pie. Nothing is “flippening” ETH quite yet, but alternatives are already here, they are useful (in some ways) and they are being used. Not holding a basket of Alts, is shorting this trend. Likely, as usual, out of stubbornness.
And look, I totally get it. I never bought $SOL — still a no-coiner. For this I have many (emotional) reasons
It was funded by a bunch of VC — sad.
The first “native” Solana NFT PFP project featured a series of fat apes with phallic objects in their mouths.
Moreover, you can see some of those VCs laughing and making jokes about their positions, presumably at the expense of future bag holders.
So yeah, Solana is tacky AF. The project was funded by a bunch of jerks from Palo Alto. It is what it is. If their transactions are cheap and lightning fast, that has value in the market. No such thing as bad publicity either, so they say. As Mike McDonald says above, I wish I bought some. At least intellectually. I still don’t like it.
How much SOL do you need to acquire, in relation to ETH? Well if you get in early enough, not all that much.
Consider a historical example, and a hypothetical. How much US paper did you need to hold to thrive in a flippening of Europe to the New World in the late 19th century? Early enough, and a 1% position in New York vs London, you’d be golden. What if someone came to you with an investment based on flippening the world language from English to a new Esperanto. How much should you put in, to hedge your English-based investments? Not very much. Flippening the queen’s tongue should lead to insanely good returns. All you need is a dime invested, and don’t sell on the way up. Also when we’re still watching kids from South Asia crushing the spelling bee in English, you wouldn’t notice the small dip on your balance sheet.
I can’t tell you who will win the ETH Alt wars, but as projects gain adoption in that space, you probably want some exposure. You’re not getting in at insider prices, but nor did you get in on insider prices in BTC or ETH. You don’t need a large position to participate in a chunk of the upside.
Something like 60:30:10 probably makes sense, be that Bitcoin, Ethereum, and Alts like SOL, or flip Bitcoin and ETH since it doesn’t matter. At some point you may want to rebalance. Ideally because your 10% position grew disproportionate to the others. Sure you will be mad you “only bought 10%” because of some entertainment-only advice on the internet, but that’s better than being a no-coiner. And if you keep taking big shots at speculative projects, it’s inevitable that some of them will go to zero — something that should not happen to you, if not using leverage, in a market with a lot of tail wind beta.
Finally, again you do not need to have a view on any of the rest of crypto:
Any OG project that hasn’t out-competed Bitcoin or ETH
Dog coins are truly for entertainment purposes only. Speculating in DOGE and SHIB is pure gamble. I have traders friends who made a fortune on DOGE. But it’s gambling. If you’re a trader — go for it. But it’s not meant to preserve long term value, nor is it used for anything. Other than printing money for Robinhood in fees. (Remember that amateur traders lose both on fees, and on their trades; trading volume is not your fren.)
I love NFTs. I spend my time building machine learning models to price NFTs. (DeepNFTValue — check out the CryptoPunks, organized by top values and attributes.) I think NFTs are a fun, and growing sector. At the same time, the entire CryptoPunks market cap (the biggest NFTs project) is only worth about ~1.7M ETH ≈ $7B USD.
That’s small, and early. There will be other great NFT projects. Some of the best ones five years from now don’t even exist yet, and nobody can tell you which of the current ones will be the sure winners. Until there is an index to bet on NFTs as a whole, you’re better off holding ETH, and perhaps as a hedge some SOL 🤷♂️
Bitcoin forks have their uses… maybe. But no one really uses them. For fast transactions, it’s ETH and the Alts. Nothing new is being based off of the Bitcoin code tbh. You don’t need to understand crypto protocols to see why code written in 2008 might not be the basis for the best new protocols of 2021. It’s a lot easier to fix the “flaws” in Bitcoin by starting a codebase from scratch, than by forking and reaching consensus.
Speaking of which, I don’t think you’re missing out on any BTC or ETH flippening, by ignoring all other older projects pre 2020. As we’ve seen before, and are seeing again, it’s new tech that’s 10x better at something, that is replacing old tech or gaining a seat at the table. Not other old tech that’s somehow falling into favor. I sleep good at night, holding no Ripple.
You really don’t need to have a view on everything. Just the big things. And the things that might flippen the big things — or take significant market share. Avoid being over-levered, and if your positions grow too big relative to you comfort levels, there’s no shame in reducing. It’s really not that complicated. FOMO can not be avoided entirely, but it’s a lot easier to bear when you know you’ve still got a piece of the future. At levels commensurate to your overall investable net worth. Not too high, not too low.
The one person I know who is properly allocated is a wealthy tech friend, late 30s, who has about 15% in crypto. Your own range would depend on many things, especially risk tolerance, and expected future earnings. I would not tell how much that is for you even if I knew, since this is for entertainment purposes only. Figure it out for yourself, and don’t be afraid to start moving in that direction. From an asset allocation standpoint, price volatility, and frankly fees, are not that important. And certainly don’t try to “buy the dip” or otherwise time the market. Even investment professionals, can’t consistently do that consistently. That’s like timing the player/banker in baccarat, or thinking you can find a “lucky” shoe in blackjack. NGMI!
Just figure out where you want to be, what your risk tolerance is, and dollar average into it. It’s almost like taking your paycheck in crypto.