Weekly Nugget of Wisdom #22

Welcome to another Nugget of Wisdom! A free weekly post I send out every Thursday. These are designed to be short and sweet, a quick read to (hopefully) impart some sort of wisdom, or at the very least to get you thinking about something interesting.

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Something people are always talking about in crypto is conviction. I use the word a lot myself and am always harping on about selling off your low conviction positions and doubling down on your high conviction ones.

But how do you determine what to have low or medium or high conviction in?

It’s not an easy thing to do, or even to teach someone else to do. I think a tonne of it comes with experience and getting burned over and over and over again. God knows there’s a graveyard of dead tokens that I once had absolutely maximum conviction in (RIP OHM), and similarly, plenty of ones that I scoffed at which have left me with egg on my face (XRP anyone?)

That said, I had a think about it, and wrote out a few thoughts or questions I ask myself whenever I am trying to determine my conviction levels, and think these are all pretty good things to be looking at. It’s not an exact science, and this is all certainly far more art than science, but these will hopefully help lead you in the right direction.

Kinda funny to be starting right off the bat with what do other people think? But if I am being brutally honest, it’s absolutely one of the most significant indicators for me. I have never really been the type of investor to find things at miraculously low market-caps. I am content being slightly later and waiting for a bit of confluence and then jumping in at a higher valuation, knowing that I am not alone in my conviction.

Be in this space long enough and you’ll start to get an idea for the people who are good traders and investors and have a good eye for things, and those who are blatantly shilling garbage. Sometimes the former get it wrong, and sometimes the latter hit a winner (a broken clock is still right twice a day), but on average, you’ll do well to align yourself with the smarter and better investors in the space.

Whether I am investing in a utility coin, meme coin, NFT project, or angel investing in a company, the team and people behind it are always the thing that matters the most to me. By “team and people” I am also including the community, fans, users, and anyone who might be incentivized for the token or company or product to do well.

A god-awful idea can still be executed to perfection by a stellar team, and can soar to a ridiculously overpriced valuation that defies all logic by a rabid community.

The best idea in the world is useless with a lazy and stupid founder, or with an apathetic community.

Narrative is one of the most important things to look at when determining whether a token is going to do well or not, but not all narratives are created equal.

There are some that will burn bright and fast and play out within a week, or less, and you don’t want to be holding longer than that. Others might take a lot longer, and you’ll need to make sure your conviction level is aligned with the appropriate hold duration.

Two examples on opposite ends of the spectrum:

1. Buying a meme coin because Elon or Trump or whoever tweeted something and it’s going semi viral. Yeah you can make money on these, and sometimes the narratives are great, but in 99.9% of cases you will not want to be holding the bag too long. You can have a lot of conviction at the time of buying, but your conviction ought to have an expiry date of tomorrow.

2. Buying historical and culturally relevant NFTs because you think they might one day end up in a museum or be highly sought after by future collectors. Many collections have a strong case to be made and you can have a lot of conviction in buying these things, but if you’re buying with this type of thesis in mind, you better hope you can retain your level of conviction for years. If you’re just going to capitulate in six months time because you need liquidity, then check your head and don’t buy in the first place (nothing wrong with this either, it’s all about opportunity cost after all).

As the great (late) Charlie Munger always said: Invert, always invert!

If you want something to succeed, don’t ask yourself what needs to happen in order for it to be successful. Ask yourself what needs to happen in order for it to fail, and then avoid doing those things.

In the case of tokens, it’s one thing to look for reasons to buy and for reasons the price might pump. But it’s even more powerful to look for reasons the price might crash.

Are they building a product? Could the product be terrible?

Might the founder crashout and give up? Cash in and check out?

Is their customer support awful?

Are there legal issues that might ruin them?

Could a competitor flick a switch and destroy their business model?

Could OpenAI flick a switch and destroy their business model?

And so on and so forth.

The fewer things there are that could make the token crash in price, the more conviction I generally have.

Using my favourite token of the year as an example, $REKT, whenever I talk about it I basically tell people it is hard for me to imagine the token price crashing unless the whole market crashes. If BTC drops 30%, ETH is down 50%, then yes, it and almost every other alt is almost certainly going to be down way more than that.

But if that’s the only real threat, it’s a pretty damn appealing thing to be holding as a high-risk high-reward bet.

Last but surely not least, trust your freaking gut. The older I get, the more I believe in this. Not in some voodoo woo-woo yaa-yaa kinda way — rather, realizing that your “gut” is simply the culmination of your life experiences giving you some sort of intuition about what might happen. Is it always going to be right? Of course not.

Is it right way more often than it feels like it should be? Hell yes.

This applies well beyond crypto and trading and finance, but in basically every area of life.

Oftentimes we know what we should be doing, but it’s hard to execute. That’s basically your gut going “hey, idiot, sell the stupid tokens you’ve been holding for years just praying that they’ll bounce back and put them in something better”. Yet we often still don’t do that, cause it sucks to take a big loss, and we have the monumental fear that we’ll sell and then 2 days later the token will skyrocket.

Listen to your gut, trust your gut.

Trust me, it’s trustworthy.

Thanks for reading! In case you missed it, check out Monday’s post below 👇

Letter 74: DeFi & Yield Farming (Part 2)

Last week I wrote an overview of the basics of DeFi and yield farming, today we’re going to take a deeper dive and look at some of the more advanced strategies you can employ to earn yield.