I have never written any blog or publicly available article before, much less on my own accord, and I expect this won’t start very well. However, in an attempt to articulate and refine my investment process, document how it changes over time, and connect with the DeFi community more, I will be using this as a platform to share my latest thinking. I am by all means a complete amateur in the space, having only started early-December 2021, and most of what you read here (if anyone is reading this) will likely be wrong. I am conscious that I am extremely likely to lose money and completely ok with it.
Most of what you will read here will be from the eyes of a TradFi value investor. I am still very early in my career, but everything I have ever known about investing has been from the viewpoint of a margin of safety-seeking, capital preservation-focused, Seth Klarman, Ben Graham, and Howard Marks follower. I have little to no experience in the tech sector and much less in crypto, and my brain is hard-wired to think about downside, worst-case scenarios and finding bargains. My investing has always focused on the ‘risk’ portion of the risk:reward equation, trying to minimize loss to seek outsized return. This contrasts with most investors in both TradFi and crypto, who seek outsized return with a more limited focus on risk and capital preservation.
I do believe getting involved in DeFi means I must evolve my thinking — looking at only risk will not achieve outsized return for the markets we have today. However, capital preservation and a risk-focus will remain a integral part of my approach now and into the future.
Why Crypto and DeFi Now
For years I was anti-crypto as an investment— I saw it as a deeply speculative non-productive asset, and my background had taught me that valuable investments were inherently in productive assets with identifiable cash flow. It is basic finance — the value of an asset is the value of all its cash flows discounted back to the present. The value investor viewpoint meant I looked at businesses with more guaranteed/lower risk cash flows being intelligently re-invested or returned to investors, and focused less on low cash flow businesses where gains would be derived from valuation multiple appreciation or guessing what earnings would come out to be one particular quarter or one particular year.
Under that framework, pre-DeFi crypto had no potential for cash flow and its value was solely derived from trading dynamics and capital flows into the asset class. This doesn’t mean you can’t or shouldn’t try to make money in these types of investments. Many people got extremely rich identifying the value of blockchain technology and beat me to the curve by years.
However, what made DeFi ‘click’ in my mind was the ability to earn yield on your crypto assets, whether through staking, lending or providing liquidity. Adding a cash flow component, even if most of the gains are still derived from price action, completely changed the game. It allowed me to realize the potential applications of crypto within the finance world I was familiar with. I am embarrassed that I allowed my pre-conceived notions of crypto let me pass up on DeFi through 2020 and 2021. This was also part of my value investing education — crypto DeFi wasn’t innovation, but the latest new set of structured products meant to obfuscate risk, as often happens toward the end of most bull cycles (e.g. CDOs in the 2008 financial crisis). Much of the value investing mantra is to look out for bubbles and valuations that simply don’t make sense, and to stick to your circles of competence to avoid making mistakes. Unfortunately, in this scenario, blindly following that mantra meant losing out on years of participating in markets where revolutionary, disruptive technologies where being adopted.
Ironically, what really sold me on DeFi, was the process of trying to on-ramp for the first time: two days for my asset sales to clear / be available for withdrawal from my brokerage, weeks waiting for my brokerage to allow me to connect my bank account (because it was a new brokerage account), five days for funds to arrive in my bank account, five days for them to be available for withdrawal from Coinbase to Metamask. By the end of the process it took me almost three weeks to move all of my money around where I wanted it (which ended up being a blessing in disguise, as I used the three weeks to learn everything I could about DeFi and to have some idea of where I wanted to allocate my portfolio).
Once I was finally on-chain, I was able to bridge to five different chains, swap all my assets, deposit into money markets, borrow against what I deposited and invest into multiple different farms within just a couple of hours.
Thoughts on Investment Process
My investment process today is in flux. I have somewhat stumbled my way into some nice gains the past month and a half, which I count as a win given how sideways and down markets have been. I can’t really claim the credit here, though, as I have been riding on the coattails of others and mainly following the DeFi Kingdoms euphoria, Aurora chain rotation and TOMB / FTM run-up in price. At this stage, I am trying to generate my own conviction on projects rather than taking the word of others.
I also had a brief spell investing in rebase tokens (1% positions in TIME, SPA, FHM and EMPYR — just because I got into the pre-sale). The idea of buying SPA, with a market cap below RFV, for essentially 50 cents on the dollar, was attractive, but I ultimately sold out of the position when I realized I needed to trust a dev team I didn’t know very well with being able to crystallize the gap between the market cap and RFV (even though it would have been as simple as re-purchasing their tokens — they were taking too long to implement a near-obvious way to 2x the value of their token). I ultimately stopped looking at rebase tokens given the APYs were completely fake and the value add was negligible from fork to fork.
I see myself as having a couple of options on a go-forward basis:
(A) Follow the risk-adjusted yield, investing in what I consider low-medium risk medium market cap assets for attractive yields (this is where most of my assets are parked today), fueling gains from both yield and price appreciation, although capped by IL
(B) Follow the capital flows into low market cap new L1s and ecosystems, without using yield in order to maximize price appreciation; this is the most active approach, and I may be unable to do this until crypto is a full-time endeavour
(C) Let my capital sit in very low-risk or minimal-risk stable / high MC blue-chip farms, earning far above what I would earn in a stock portfolio at today’s valuations
Ultimately, I think I will pursue a combined A + C approach, with a little bit of B when I get the chance to do the research and build some conviction. In the meantime, the yields in A protect some of my downside as I accumulate tokens over time, while C provides some solid, stable passive income and serve as a source of cash for when opportunities arrive (whether that cash comes from borrowing against assets on a MM platform or moving more of my ‘C’ bucket into ‘A’).
My other struggle has been to understand the value of an L1 vs. ecosystem alts. While the altcoins are a great way to get leverage on the success of a new ecosystem or to ride a new dApp, I struggle to see their utility if any. JEWEL is somewhat of an exception where there is a game backing the token (and 70% of Harmony is JEWEL anyway), but there is no reason for other altcoins to exist for the most part. They are not critical to the function of the dApp or protocol. This contrasts with L1s where the token is a critical function of the blockchain and needed for it to work. This is a view I need to refine further as the number of L1s in the market are limited and it is unlikely there will be many more AVAX-like opportunities (after NEAR that is :) ). This tweet from Hsaka does resonate in my early investing / learning, though:
My Current Portfolio
The screenshot below is representative of my current bags (I know it doesn’t add up to 100%). I am considering taking profits in DFK and the Aurora eco, but will get into brief descriptions of each position below.
The DeFi Kingdoms narrative is one of the best I have ever seen — dev team that ships consistently with a detailed project roadmap, highly dedicated community with high expectations for the game, tailwinds with GameFi and NFTs, strong tokenomics with no obvious actions (I spent days trying to figure out whether it was better to harvest my JEWEL or let it sit) and significant catalysts as it expands to other chains and the game continues to get built out. The APRs are also very attractive. My only issue with DeFi Kingdoms is that I struggle to grasp the utility of the token at this valuation — I understand the game aspect, and maybe it will make sense with land coming in, but floor heroes being valued at ~$500+ is atrocious, and makes the game difficult for new players to play. There also isn’t really much of a game yet. The lack of utility means that JEWEL is driven largely by price speculation rather than demand for the token, which is why I’ll be cutting down my position following January 19th, a day before the CRYSTAL airdrop snapshots end (just in case everyone else has the same plan as I do).
My Aurora thesis is a bit more simple — I love using the network. Trisolaris has a solid UI, the 0 gas fees feel great when claiming, and the APRs are solid. It also plays into the Ethereum L2s narrative in 2022 as a solution for Ethereum’s scaling .
With that said, my TRI-NEAR and TRI-USDT pools at this stage have significantly increased in value, and I might trim them somewhat soon to raise some cash.
Hoping to see some price action from ROSE, where I have unfortunately lost ~75% of my invested capital. While it could be a bargain if I was willing to buy at $0.50, the narrative feels like its shifting away from ROSE as devs haven’t shipped anything and Trisolaris announces stableswaps. The NEAR / AURORA ecosystems are moving fast and ROSE is not moving with it.
Astroport / Anchor
Pretty disappointed in Astroport, but I'm locked in for a while here. Just going to ride my LUNA to hopefully some big gains, though I do think LUNA is effectively a levered play on the rest of the market and on UST adoption. Mars Protocol could be a catalyst for LUNA as a whole?
Using this as a way to build a bag of diversified assets, with Battle of the Bands and The Grand Orchestra giving me exposure into all the large L1s — may rotate out of this because gains are priced in (although APY is a nice bonus to holding safe-ish assets).
What I Am Still Working On
My main obstacle at this stage is sourcing ideas and building conviction. It feels like every new opportunity I look at on CT has had a huge run-up already before I look at it, and I have found it very difficult to tell which ones are still worth investing in. I am currently considering METIS, FUSE, AURORA, SCRT and XFT to add as speculative ~5% positions each.
Nothing in this blog constitutes financial advice and are simply the opinions of the writer. Do your own research and be aware of the risks of potentially losing all of your money.