"If you panic during a dip, you are probably overinvested.”
This quote was the soundtrack to my life after taking a $135K crypto loss. I’m still shaken by the size of the loss and the speed at which money can vanish.
At first, I wanted to bury this in the darkest crevices of my memory, but then I’d be committing two sins: losing money and not learning from the experience. I refuse to err twice, so this is my attempt at turning loss into learning.
Breakdown of losses
As of this writing, we are living in a sea of red. The market is down by a lot; sadly, the loss I’m talking about has no chance of recovery.
Here’s an inventory:
- “Invested” $145K into Terra; sold for $30K, realized loss of $115K
- “Invested” $10K into Olympus; value sits at ~$370; unrealized loss of $9.6K, unlikely to come back
- “Invested” $10K into TIME; not even sure how to sell because the UI has completely changed; unrealized loss of $10K
I put “invested” in quotes because, let’s be real, this was gambling not investing.
Did you DYOR?
I used to think gambling meant hitting the slots in Vegas. I spent nearly a year in Vegas on a consulting project and never gambled once. But as it turns out, I am a gambler because gambling is putting money into anything without DYOR (doing your own research).
If I can’t articulate why something will grow in value in a timeframe that fits my goals, it’s not investing, it’s gambling. And by articulate, I don’t mean punchy tweets or slides or memes or quoting someone smart. I mean writing in my own words and being specific about what’s going on.
It’s easy to get bullish based on charisma, humor, conviction, but when it’s words on a page, there’s nowhere to hide. The thinking is laid bare.
Had I done this, I would’ve quickly exposed my patchy understanding. I would’ve sensed the unknown unknowns preying in the dark. Instead, I got swept up in FOMO, outsourcing my decisions to what other smart people were doing.
DYOR and writing applies to any decision with high switching costs, like joining a new company or starting a new project. Memories can twist the truth, but the written word keeps us accountable. Looking back at where reality departed from our expectations is the single best tool to improve judgement.
Crypto is flooded with memes, acronyms and new words that make it hard to articulate what’s really going on. It’s way more fun to “ape” in than be the stickler who insists on dotting all the i’s and crossing all the t’s.
There’s even a song that teases “scared money don’t make no money”, which is catchy until you’re staring down the barrel of a big loss. Suddenly, it’s impossible to not be scared.
Instead of trying to be a fearless ape, it’s better to understand the pitfalls upfront, and de-risk where possible. This way, when shit hits the fan we can respond with poise, not panic.
Conviction needs to be earned — a concept lost during bull cycles… and thrown off by our modern content diet.
Content, fast and slow
Once upon a time, it took a lot of effort to create and distribute ideas. There were fewer voices, and it took them longer to build an audience. These were the slow-content days.
Since then, eyeballs moved online, and the infinite feed came along to keep us glued. These are the fast-content days. Fast-content runs on dopamine hits, which make us prone to think less and gamble more.
Crypto bulls mastered the short-form storytelling favored in our fast-content diet. It was hard to see their dazzling gains and not feel like you’re missing out on the greatest wealth-creation event. What’s overlooked is how much of this wealth creation is zero-sum: taking money directly from new users to enrich early users.
Here’s a test of whether something is positive-sum: do we benefit from being crystal clear about the offering?
Products that save us time and money are indisputably positive-sum. You only need to improve two dimensions: 1) how to do the job better; 2) how to communicate this to more customers. Financial products often cut the other way. They make more money by being vague, or by being so confusing that customers have to hire “experts” to decipher the fine print.
Crypto, for all its talk around permissionless money, often smells just like traditional finance. It fails the clarity test in many corners.
Don’t tinker on the margins
Most of my loss came from using Terra’s “savings account” which paid 20% interest on UST, a stablecoin meant to stay at $1. Like millions of others, I was seduced into the idea of beating the market while effectively holding the dollar.
Reading this now, I sound crazy. But I did walk away with some lessons I’ll never let myself forget:
- The most fragile investments are the ones that people mistakenly believe are stable. That’s why high interest rates on stablecoins are dicey — they’re positioned as stable and predictable, so even a tiny slip can send the entire house of cards flying
- Stay away from bets with capped upside. When the upside is capped, your bet size has to be bigger to move the needle, which in turn leaves you more exposed in the event of a catastrophe
- Invert the returns: 20% interest rate sounds yummy, but you gotta ask: is there at least a 20% chance of getting wiped out?
Investing well means being paid the right price for risk. Tinkering on the margins is the opposite: it takes on hidden risk for a cheap price.
When learning beats earning
If I peel back the layers that led me here, it started with the belief that I needed to fight the good fight against inflation. In pursuit of higher yields, I lost sight of the most important rule: staying in the game.
I scoffed at making small bets. If it doesn’t move the needle, why bother? Now, humbled by loss, I realize that sizing down bets for learning over earning is sensible. Investing in crypto, or any new market, is the opposite of playing in the tame garden of Vanguard ETFs.
I also lost sight of another rule: making money on what I’m uniquely good at pays better than trying to become an overnight investor. We know it takes years of practice to get good at our day jobs, yet still get tempted by the siren call of beating the market in our free time.
Upside of downturns
“In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.”
Now replace “ideas” with companies, projects, people… and the quote still hits.
The fear index is off the charts right now, but I suspect that this downturn is healthy. When money is more discerning, it quietly raises the bar for quality. When it takes more to survive, it means less noise, more signal, more humility, and more feedback to make us better.
The battle scars from this crypto collapse will hurt for a long time, but they won’t be in vain if we can avoid making the same mistakes again:
- Investing requires writing down what I believe in my own words; otherwise it’s a gamble and should be sized as such
- Beware of fast-content diet of memes, tweets, TikToks: they stoke FOMO and encourage gambling over investing
- Apply the clarity test to any product: do we benefit from being crystal clear about the offering?
- Tinkering on the margins takes on hidden risk for a cheap price
- When you’re new, size bets down for learning over earning
- Upside of market downturns: less noise, more humility, more feedback
Hopefully you weren’t affected in the same way; but if you were, know that you’re not alone. I’m here to commiserate. 🍷
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