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Overplaying my hand?

gray monkey under sunny sky

Thoughts on over-diversification, taking profits, and doubting oneself.

We’ve been playing a lot of Santa Cookie Elf Candy Snowman, a Christmas-themed version of Taco Cat Goat Cheese Pizza. It’s a card game that involves a lot of hand-slapping, and I’m frankly pretty terrible at it. Elder loves it, and I even played a game with Younger earlier, even though she’s really to young to really play it.

I mention it cause I’ve been making a lot of moves lately, and have a bit of nagging self-doubt about whether I’m making the right ones.

Voyager

First up, Yoyager Digital. I’ve been very vocal about how this has been the trade of the year for me. Back in November, when I was still very disciplined about trade planning and capital preservation, I stumbled across them via BitcoinTreasuries.org, and immediately aped in. Up until that point I was putting positions in my value average algorithm, and slowly scaling into my 2% risk positions over the course of thirty or ninety days. Not with these guys. I have a very strong conviction on exchange plays, namely that the house always wins, so I threw the full capital allocation at it, about four thousand dollars.

Since then my position is up over three thousand percent, and is worth six figures. It would have been more amazing if the rest of my portfolio hadn’t gone 4x during that same time period, but Voyager is nearly tied with GBTC for my largest holding.

I’d been looking for an exit, so I was waiting for the Coinbase S1 to be released so that I could get a look at the financials and try to make a comparison. These came out last week, but had the 20Q4 numbers, so it was really hard to make a direct comparison to the current valuations between Coinbase and Voyager. Coinbase is rumoured to have a $100b valuation, while Voyager has a $2.5b market cap. Still, looking at the revenues and profits, I’m not sure I can make a direct comparison. Basically I’m looking to see if Voyager seems over or undervalued in comparison to Coinbase, and I still don’t think I can make a solid call on that.

What I can say is that I haven’t used Coinbase much over the last couple years. I’d been relying on Gemini for the most part, and used Kraken for a while to play with leverage. I like Voyager though because they were offering interest on deposited tokens, so they were comparable to BlockFi, but without the withdrawal limitations. Of course Gemini and others are offering these yield opportunities, but Voyager became my go to for all my normie friends.

That said, given my current goal to move out of brokerage equities into self-custodied crypto, I felt the need to take some profits on my position last week. I sold a sixth of my position, about $20k, and made it all back yesterday when BTC shot up and all my cryptoequities made 20-50% gains. Totally insane. I’m not really sure how much more Voyager can run, but I expect I’ll continue taking these small exits over the next few months as the bull run continues, at least until the Coinbase IPO comes out. I don’t really know how to value these two, but I’m worried that Voyager is still extremely overvalue. I’m also worried that I’m extremely overvaluing it, and that selling here is a mistake on par with selling my Netflix stock in 2008 to buy a used BMW. No looking back, I guess.

Digg/Badger

I wrote about my DIGG strategy yesterday, but I had a bit of doubt earlier today after looking on the forums. These seigniorage tokens like Basis Cash and Klondike have been getting hammered lately, and my “return to peg” thesis might not be as sound as I suspected. I actually talked one of my friends into coming along with me for the ride, and after the price continued to decline I finally decided to go into a lesson on risk management and trade planning. Whoops. I actually did a post-trade trade plan on this public TV chart, so hopefully that will help get us on track.

So the actual reason for the Digg dump was because Badger got listed on Binance earlier this morning, and there was a bit of a rotation from a whale that got wind of it and rotated from Digg to Badger. I actually used the opportunity to unload my Badger claims to USDC, and stuck them in BlockFi as preparation for my annual salary/2021 tax payments. There wa a bit of a sell off, so it looks like the timing was good. I’m going to continue to sell of my weekly Badger rewards. I honestly don’t want Badger to run much from here, since I’ve already lost so much in inpermanent loss when I staked at eight dollars. I really need BTC to have the mother of all runs to balance things out so that I can pull my LP out.

My doubt here is that I might actually be better off just leaving my Badger and DIGG rewards unclaimed until they are worth much more, or that I should be selling the DIGG and keeping the Badger. It’s so confusing. I just want to take some profits, and save up some cash.

Unfederal Reserve Token

I don’t think I’ve actually written about $ERSLD here before, I really haven’t done any analysis on it. The only reason I aped in it was because my $$PRIA bro Tres was shilling it, and was buying a lot of Uniswap tokens earlier this winter. I think I threw a total of .1ETH at it, and it happened to do a 4x recently. So I sold everything today. It was only $700 worth of profit, but of course I had to second guess myself and wonder if I’m doing the right thing. This thread does make the project look very strong, so who knows, maybe it’ll come back down and I’ll have an opportunity to re-enter. Or maybe it’ll run up another 4x from here and I’ll curse myself.

The fact of the matter here is that the diversification is killing me. Between my equities and crypto positions, I’ve probably got close to a hundred open positions right now. That’s too much, and I can’t worry about that many. It’s my own damn fault for getting myself here. Spray and pray might have seemed like a good strategy a few months ago, but it’s time to start cutting the weakest links. I already cut all the losers out from my equities positions, but because gas is so high, it’s not even worth cutting loose these Uniswap tokens. I might have to burn gas just to take the tax loss next year.

I’ve been very aggressive about my investments, but now is the time for me to be very aggressive about profit taking. I made and lost a lot of money during the 2017-18 market, and there’s no way I want to repeat that mistake. They say alts are how you make it, and BTC is how you keep it. I spent the last several months setting up my positions, and when they start pumping I am going to reap what I’ve sown.

There’s a lot more that I want to write about the macro environment, especially what’s been going on with bond yields, but that will have to wait until next time.

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Cryptoassets intro for equities traders

I came across a request last week from someone asking for help writing up an intro to crypto for traditional equities investors. I offered to help, thinking that I had already done most of the work, but it soon occured to me that I hadn’t written anything aimed directly at people new to the space. So, let this be a quick introduction to a few things that I think anyone coming over from the space needs to know. This won’t be an explanation of bitcoin or blockchain, or even DeFi, as there are numerous resources out there.

My background is in tech, and I’ve done well over the last twenty years, investing in tech companies for the long haul. I caught all the FAANG plays before it was cool, and have made some missteps over the years, either being wrong with India and China plays, or being to early, like with 3d printing or pot stocks. For of my career, I followed the advice of The Motley Fool, only buying stocks that I was interested in holding for five-plus years. I let that subscription lapse after I went down the crypto rabbit hole about six years ago, but the philosophy sticks with me. I treat crypto more as longer-term play, and find that I do better the less I try to worry about TA and swing trading, and just buy tokens and sit on them. I could brag about picking Ethereum at thirty cents, or getting in on ChainLink right after the ICO, but I’ve held numerous bags to zero over the years, and lost thousands on scams that I thought we’re going to have a big payday. And my biggest returns have been from good old-fashioned dollar cost averaging Bitcoin, every week, every month, for the last three years.

So let’s get to it. I have a couple pieces of interesting advice, and many, many warnings.

Crypto exposure outside of crypto

If you’re like me, you already have a brokerage account opened up, maybe within a tax-advantaged IRA or self-directed 401K. If so, you’ll want to read my post about checkbook LLCs, but in the meantime, there are plenty of ways to gain exposure to Bitcoin, Ethereum, or the broader crypto space inside your traditional account. The standard way to do this is through Grayscale’s Bitcoin and Ethereum trusts, which trade on the OTC markets under $GBTC and $ETHE. There are other Grayscale funds available, but as a novice, I would stay away from these until you understand the inflows to these funds and the premiums associated with them.

Alternatively, there are many companies holding Bitcoin on their balance sheet. BitcoinTreasuries.com has the most comprehensive list, let me just say that my favorites are miners like $MARA and $RIOT, which have been outperforming BTC. Voyager Digital is my personal 2020 favorite, which is an exchange play that has returned over two thousand percent in the last year.

Every crypto transaction is a taxable event

Let me repeat myself: EVERY CRYPTO TRANSACTION IS A TAXABLE EVENT. With the exception of buying spot with fiat, and some instances of wrapping Ethereum (which I won’t explain here), every sale, swap, airdrop, deposit, claim or stake will need to be tracked for cost basis and capital gains. I am also not referring to straight up withdrawals, transfers or deposits between your exchange accounts or wallets that you control.

Crypto tax guidance from the IRS is abysmal, and will hopefully get cleaned up this year, but till then it is an absolute nightmare. Most of the exchanges will prepare your tax documents for you, but once you start getting involved in DeFi, you will want something to help you prepare you tax documents. CoinTracking (reflink) is one I’ve used for years with moderate success, but the new one that I would probably recommend is called TokenTax. They both can track your Ethereum address directly, and import data from most exchanges via an API. There are alternatives, so experiment with a few and find one that works for you. You do not want to skimp on this. They should offer you a choice on how you want to calculate your gains, FIFO, FILO, or whatever, I prefer HIFO, for highest in, first out.

So no, there’s no “like for like” exception for crypto like there is in real estate. If you buy ETH with BTC that you bought on Coinbase, you have to calculate gains on the BTC and record the cost basis of the ETH in fiat terms. Same thing goes if you — god forbid — use your crypto for something useful, like actually buying something. That’s right, you’ll have to track cap gains on that proverbial cup of coffee that you bought with your bitcoin. This may change under the Biden admin with more crypto-friendly officials, but for now that’s the way it is.

The only way to legally avoid all of this is through a tax-advantaged account like an IRA or 401K. Beware though, these “crypto” retirement accounts may be custodial accounts that restrict what you can buy, don’t let you withdrawal your coins, and charge high trading fees or insurance. Again, you can read my post about checkbook LLCs to see how I’m keeping tax-advantage status and controlling my own funds.

Crypto never sleeps

For the most part, equities traders are used to standard NYSE hours, 9:30AM-4:00PM, Monday through Friday, save holidays. Not in crypto. Markets are always open, although the mood can change as traders wake and sleep from the East coast to the West, Asia to Europe. Many times I’ve caught myself getting ready for bed, only to see Bitcoin make some big move that I want to be a part of. It’s easy to lose sleep. Crypto is also immensely addictive, and if you’re like me you may need to take steps, like deleting apps off your phone, if you find yourself checking the price of Bitcoin every five minutes. If you drink or smoke, you might also want to set limits and rules so you don’t FOMO into a stupid position while you’re bent and wake up rekt the following morning.

Exchanges are not your friends

It’s easier than ever to purchase crypto these days, but one of the biggest mantras in the industry is “not your keys, not your coins”. This means you don’t use exchanges as your banks. If you’re dealing with any substantial amount of funds, you HAVE to get a hardware wallet. Trezor and Ledger are the two most common ones, but you should do your research. If you’re dealing with Ethereum you’ll probably wind up dealing with Metamask, but you’ll want to hook this to your hardware wallet as well. Same goes for any other software wallets such as MyEtherWallet, Exodus. Newer tokens might not have support for anything other than an executable that runs on your computer, or just a website that you interact with. Do your research, and never get in a position you can’t afford to lose.

Exchanges get hacked, and most don’t carry any type of insurance, so never keep more on them than you need for a trade. You can use leverage on some exchange as a way to negate this risk (not to trade more than you have!), but for the most part, you’ll want to keep things on your wallet where possible. The rise of DeFi lending and interest bearing accounts which provide yield on deposits are making it very attractive to do the opposite, but beware counterparty risk, and spread your funds if you feel compelled otherwise.

If your Exchange doesn’t allow you to custody or withdraw your funds, i.e. Robinhood or Paypal, then you’re not really buying crypto, you’re buying an IOU. Stay away from them. The major fiat onramps in the space if you’re in the US are be Gemini, Kraken, Voyager (reflink), BinanceUS, and I hate to say it, Coinbase. If you’re using Coinbase, or Gemini, make sure you swap to the “pro” versions with proper limit orders, not the market order only interfaces that they put up for noobs with the three percent fees. These aren’t available on the mobile apps, so use the desktop/web versions to access them.

Speaking of limit orders, no crypto exchanges that I’m aware of have implemented trailing orders, which is a shame. I have my own cynical theories as to why. A few, like Binance and Kraken, have access to leverage and OCO type orders, but for the most part you’ll be dealing only with limit and market orders.

And even after all all these years, the major exchanges haven’t figure out how to stay up during moments of high volatility and activity. In fact, one of the sure signs of a bull run is Coinbase going down.

Beware limit orders and leverage

Just stay away from leverage unless you know what you’re doing. Period. It can be tempting when BTC is posting a huge green candle and you want to go in 5x with everything you got, but you’re playing with whales, and they love to stop hunt. They routinely pump or dump the price to trigger cascading liquidations, so they can buy back up or dump on the market after the carnage has cleared. Sometimes it might even be the exchanges, countertrading against you. Beware.

On the other hand, don’t count on that stop-loss hitting. Exchanges have gone down, during these flash dumps, preventing those orders from closing, and leaving people holding a bag after the carnage has cleared.

And never short Bitcoin in a bull market. Just don’t do it.

Don’t listen to anyone

The trollbox on TradingView can be the absolute worst, most toxic place in the world sometimes, everyone’s an expert and knows exactly what the market is going to do in the next five minutes, believe me. They’ll shill their bags, pump them, and talk them up and up and up. It’s easy to get caught up in it. Same thing goes for Twitter, as well, and I say that as someone who spends an inordinate amount of time on Twitter. Just assume that anyone who is talking up a $cashtag or posting a chart is shilling their bags.

Sure, you can ape along with them, and maybe you’ll do alright, but if you read up on projects after you’ve aped into them, you’ll eventually be able to sort the cream from the crap.

And never, never buy the FOMO on a huge green candle on the five-minute chart, unless you’re prepared to exit your position at a moments notice. Like I said, I don’t trade like that, anymore. I prefer to open a small position, do some research, and scale in over time if I think the project has promise.

Hopefully this advice will be helpful to you. I know much of it seems doom and gloom, but I want you to be warned. In 2017, I saw life-changing riches come in the blink of an eye, and in 2018, I watched it drain away cause I failed to take profits. This year, we’ve seen just the beginnings of the bull market return, and I’ve already seen more than 4x returns in my cryptoequities account in the past six months. And I truly believe we haven’t even seen a tenth of what we should expect before the end of the year.

If this piece is helpful, please drop me a line with some feedback, or your question, as I know I have more to share. As they say, an expert is just one who’s made enough mistakes in a given field, and I can help you avoid the same mistakes, then my day’s work is done.