VENTURE CAPITAL & PUBLIC EQUITY
How To Intelligently Invest in Crypto as a Retail Investor (from a VC)
You may wonder how applicable my advice is, because I work as a VC, which means early access to information. Well let me tell you that behind the fancy VC veneer, I am a crypto degen. It is how I have made most of my actual money. Spotting these opportunities has almost no correlation with VC investing where your time horizon is 5–10 years out.
I will go through some of my wins, some misses, and sum up the lessons at the end.
1 + 1 = 3
First, working with a friend who is deep in the crypto space is very helpful. 1 + 1 = 3. The space is growing and changing so fast, you need a partner to cover the whole space and spot the best opportunities. I use the term “we” going forward because my success so far has only been possible by having a good thought partner.
Invest Early in the Trend
Invest with the trend, but get in before the trend plays out. You will see cryptocurrencies that do all sorts of things, but only the ones that are part of key trends will rise with the tide, even if they are not the ultimate winners. The non-winners may rise 2–5x. The winner can rise 100x. Matic token did in early 2021. Heads I win, tails I also win.
In December 2020, we sensed the next bull market coming and noted down the key trends like derivative protocols, stablecoins, Layer 1s, Layer 2s, oracles, DEX, and lending. We looked for all the small caps trading at around $10M–300M in market cap in those sectors.
All of this will take work, so be prepared to get your hands dirty. Being a user of these protocols is the single best way to narrow down the potential winners.
Case 1: Apeswap
In January 2021, we were playing around with Binance Smart Chain (BSC), the newly launched layer 1 competitor to Ethereum. It was amazing. Transactions were instant and cost cents, compared to several minutes and $30+/tx on Ethereum. Forget that it was not as decentralized as Ethereum, this actually made yield farming possible (which can require many transactions) without spending literally thousands of dollars just on transaction fees.
We felt this would get big, and wanted to find the next big winner on this chain. Soon after we put in our positions, this happened:
Pancakeswap was the largest decentralized exchange on BSC. We felt a number two would emerge, similar to how Uniswap (#1) and Sushiswap (#2) existed on Ethereum. But there were so many competitors and they all looked the same. For example:
There were literally dozens of them all competing to be the next big DEX on BSC after Pancakeswap. We dove into the Telegram channels, spoke with the developers, and even dove into some of the code. We found out that the leading #2 player at the time, Goose Finance, was routing trades back to Pancakeswap, which meant that their tokens were fundamentally worthless. Yet, clueless influencers were shilling Goose Finance and getting into the hype.
Apeswap, on the other hand, was a very legitimate team pushing out updates fast. The community was stronger than any other DEX. This was a real quality team. But it was a tiny DEX in a sea of DEXs, worth $15M in market cap vs Goose at $100M–200M. We went big on Apeswap knowing it could go to 0, because if our research was right, this would quickly dominate the other swaps.
We had also done a downside analysis. Because we were farming the tokens at 200–300% APR, we had a lot of cushion. In fact, the token initially fell -70%, but even then, my position was up 50% thanks to the farming. At the peak, it was a 10x within 2 months of investment.
With the crypto crash recently where Bitcoin fell from $60k to $30k, Apeswap has also fallen a lot. But the net gain is still sizable because we got in so early while continuing to yield farm at 100%+ APR. Dozens of other swaps went to 0.
Apeswap remains a top 2–3 DEX on BSC. I imagine it will rise significantly in the next bull run, so long as the team continues to ship innovative features.
It is worth mentioning here the importance of concentration. A 10x doesn’t matter if your position is tiny. This seems like obvious advice, but it didn’t truly hit me until it happened with real money and repercussions.
Let’s say you invest $100K and it becomes $1M, while your friend invests $300K and it becomes $3M. What was initially a mere $200K difference quickly became a $2M difference. Sometimes, it’s hard to fathom how sizable a $2M difference is.
So think of it like this. What would you do if I dropped 100 grand into your bank account right now? $2M is twenty of those. Your friend from above now has the same gains as you, plus buy a Tesla model Y, a Porsche Panamera, a million dollar 1-bedroom home in the bay area, pay off $200,000 of student debt (only in America), and still have more than half a million dollars extra over you. All from an initial $200k difference.
Position sizing has much bigger consequences for investments that do multiples compared to ones that do +30% like in stocks. To have significant sizing, you need conviction. To have conviction, you need deep research.
Case 2: Polygon (Matic)
This was a layer 2 that was on our short list in December 2020 trading at $100M market cap. Unfortunately, we decided to wait as we weren’t confident who the big winner would be. It went on to rise 100x within the next few months. Thankfully, we still got in mid-way when we saw the thesis playing out.
If you see the chart above, we got in after missing a 18x increase. It literally felt like buying the top. It is very hard, but you must compartmentalize past price movements from the thesis going forward.
What prompted us to get in after stalling, was when every crypto project I spoke to planned to onboard on Matic’s layer 2. Developers are closest to the action, so you can get valuable insights speaking to them. Despite a 18x run up from when I first considered buying, I could still pull the trigger because I felt that the masses had yet to catch on. It hit a 6x very quickly (But sadly a missed opportunity for a 100x).
It is also good to do fundamental research on the specific landscape. For example, there are optimistic rollups, zk-rollups, and others in the layer 2 space. I will do another writeup on this later, as it is beyond the scope here.
I will pause here. In part 2 of this post (tbd), I will go over two big misses.
Lesson 1: Invest with the trend, but get in early before the trend plays out
Lesson 2: Be a user of the products
- You will only be a user of the products if you are genuinely interested in crypto. To be genuinely interested in crypto, you need to understand why it is an “opportunity bigger than the internet” as my boss Tim Draper would say.
Lesson 3: Put in high conviction, concentrated positions and hold.
- Without a sizable position, a 10x gain means nothing. To have a sizable position, you need to feel secure in your research.
Lesson 4: It helps to talk to crypto developers
- They are the closest to what is happening in the space.
- More on this in part 2.
A short note on exiting your position. If you exit and cash out just 50% of what exiting at the peak would be, you are doing great. It is impossible to exit everything at the peak. Staggering exits is a good method. I don’t have a good explanation of how to sense market peaks; I think it just comes from experience. It is always an educated guess.
Another option is to just buy quality cryptoassets and hold long term. As an old friend and crypto fund manager told me — “It is too hard to time. We tell our LPs that if you invest with us, you are going long crypto whatever the cycle. If you 100x and then ride it down 90%, you’re still up 10x.” He does have a public investing arm that will short tokens too, but for the most part they are long-term holders. He has a couple billion in AUM so it seems to have worked out for them. Just food for thought.
Assets like Bitcoin and Ethereum will continue to take market share from traditional industries for years to come. Just buy and hold for 5–10 years. Long term compounding is how the big money is made.
If everything above was a lot, and you just take one thing away from this, it should be to decide whether you are investing long term (at least three years for me) or doing a trend / momentum play before putting your position on. I always categorize investments into those two buckets. Never mix the two.
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