2 min read

Expect the unexpected (how to invest in crypto)

How's your relationship with risk? Most people are in one of two camps: either you avoid it at all costs or you gamble without considering the downsides. Avoiding risk guarantees an upper limit on your results--nothing ventured, nothing gained as the saying goes. Betting too much, too quickly without proper due diligence will lead to ruin eventually--luck can only take you so far.

You need a strategy for managing risk whether you're investing in crypto, starting a business, or playing poker. Here's mine.

Establish constraints

Nothing exists in a vacuum. Before you even consider jumping into a new venture, consider your limitations. Maybe you don't have time to do proper research. Maybe you can't afford to lose more than $X. Maybe you don't have enough base knowledge to make an educated decision. Whatever your constraints are, identify them and work with them.

Initial research

When you find new opportunities that seems exciting, don't get carried away. Validate your assumptions. Look into the founding team, read the whitepaper, review tokenomics, and ask the community hard questions. Talk to someone you trust to get their opinion. With crypto in particular, scams are rampant. If something seems off, don't trust it.

You're looking for an excuse not to invest which means you will miss some great opportunities. Don't sweat the missed opportunities--you made the best decision you could with the information you had. Learn from those and move on.

Calculate EV

Look at comparable projects and consider what differentiates this opportunity. How quickly did those other projects grow, and what were their biggest challenges along the way? There's a chance that your investment will do even better, follow a similar path, rise more slowly, or never get off the ground. Worst case, you're buying into a scam and will lose your entire investment.

When calculating the expected value (EV) of your investment, you need to assign a probability to each possible outcome. These probabilities don't have to be rigorous. Just go with your gut, but be as realistic as possible. You'll get better at this the more bets you make. Here's a fictional example:

You want to put $1,000 into a token with a $10M market cap for one year. From your research, you believe there's a 10% chance it goes to zero, a 50% chance it stays flat, a 30% it doubles in value, a 9% chance it will 5x, and a 1% chance it will 10x.

Based on that, the EV can be calculated as...

10% x -$1,000 + 50% x $0 + 30% x $2,000 + 9% x $5,000 + 1% x $10,000

Which comes out to a $1,050 increase on average on your $1,000 investment. If you're right, you should expect to double your money on this bet.

Make a small bet, fast

There's a decent chance you're wrong about something. You've probably only put a day or so into research at this point. Regardless, if it's looking promising, make a small bet. Plan on losing this money mentally so you don't lose more than you can afford. This way you get some exposure to the upside and start to really learn when you're right and wrong. Feeling the results in your wallet will help solidify the lessons and improve your research process faster than if you don't do this.

Further due diligence

Keep digging in. Iterate through these steps and pay attention the projects you've invested in. If your probabilities change as you learn more, recalculate the EV. Use that number to decide whether you should pull out or double down.


P.S. These ideas aren't new. I've cobbled together this approach by listening to smarter people. Two notable influences are Billy Murphy on Expected Value and Cobie on Probabilistic Thinking, though I'm sure I could dig up a few relevant books I've read on the topic if you're interested.