The Road Forward

It has been rough the past week.

I wanted to learn by listing down some of my lessons and keeping myself accountable with an action plan.

But I did take quite a while to pen down these thoughts, as I kept having new ideas on where I did wrong, and what I could have done better.

If it’s not obvious yet, I had significant parts of my portfolio in the Terra ecosystem, and they have now gone close to zero.

Here’s what I learnt from this experience so far:

Conviction and Echo Chambers

One key part of my investment strategy is to build bigger positions in areas I have conviction in.

Conviction can be built through whitepaper research, overall system and tokenomics research, studying their pros and cons, edge cases and overall probability of success.

However as I built more conviction in Terra, I started to follow ‘influencers’ on Crypto Twitter that shared similar views, and slowly fell into an echo chamber.

This then turned into a self validating space where we started to only consume content that we want to hear, and tuned out other opinions that were in opposition of my beliefs.

In hindsight, this was a recipe for disaster.

I should have been humble and open to alternative views of my investment thesis.

The true mark of conviction should be to take in opposing views, and having a rational argument to counter them.

If there are little rational counter-arguments, that should also signal that my conviction is flawed and there might be possibilities of failure.

Which brings me to the second point.

100X versus Survival

Say that we find a possible risk of the ecosystem. What do we do next?

In the case of Terra, a death spiral was always on the books and a risk I was well aware of.

But my mistake was in my flawed understanding of the scale and extent of this risk.

When we consider the impact of a benefit/risk, it would be logical to think in terms of:

Probability X Scale of benefit/risk = Total positive/negative value

In the case of Terra, it seemed to have a decent chance at becoming the biggest stablecoin in future, which would give it a 10-15X ROI, and an overall pretty positive projected value.

But at the same time, it had a small chance of having a totally devastating risk event (like this one). In this case aggregating after the two, it likely had an equal or even greater projected negative value than its projected positive value.

When taking this into consideration, I should have naturally positioned my portfolio accordingly, or taken out my initial capital at least when Terra was doing well.

I had a tunnel vision towards the positive value, and totally neglected the negative possibilities.

Too Big to Fail

As Terra grew enormous in market capitalisation, and had a strong backing of investors and partners, it seemed that it was too big to fail.

The hypothesis was that these other partners and blockchains and investors would never allow Terra to spiral all the way down.

Another hypothesis was that the key man Do Kwon himself has successfully built so much with Terra. If he has executed so much, naturally he can do so again right?

Well, I was dead wrong.

The takeaway here is clear: Nothing is too big to fail.

This is simply lazy thinking that can be fatal in bear markets like such.

Portfolio Management

“Invest only an amount you are willing to lose.”

This is common advice that most seasoned investors shared. As a relatively new investor, this seemed like straightforward advice.

Basically I should invest only money I am willing to part with, and still allow me to survive thereafter.

But only during these bear markets have I felt the true impact of this statement.

There was always the possibility of a death spiral, but I’ve never considered it that strongly, or at the speed it unravelled. I think that’s what makes the situation in the past 2 days rather surreal to me.

While I knew that there was always the possibility my tokens could go to 0, i didn't consider this fact strongly enough.

Of course, I can survive and live on if all my holdings in crypto go to 0.

But am I also going to feel depressed and lose sleep over it? I think so too.

Perhaps the statement should then be more accurately shared as:

“Invest only an amount that you will not lose sleep over.”

If you are investing sums that you have to worry about, and affects your day-to-day mood, that is a sign that you have already invested too much.

This is likely what happened to me as well.

I have typically been rather risk averse, but perhaps due to the bull market last year, my perceived risk tolerance has increased.

This bear market and crash has helped me to become more self aware - and better understand my risk tolerance levels.

Only during a crash and bear market like this have I gained clarity of my risk tolerance, and I will be rebalancing my overall portfolio accordingly.

“Peak euphoria provides the opportunity for the world to dream about the future. Rock-bottom despair forces practicality and clarity."

Diversification

Again, this is another common advice that I seemed to misunderstand.

During bull markets, it seemed like concentrated bets towards equities and crypto were the best way to go.

Cash was trash, and so were low-risk assets, right?

I positioned my portfolio accordingly too, weighing heavily towards these more speculative assets and it worked, for a while.

But as it turned into a bear market, my allocation strategies should have adapted and diversified more towards lower-risk assets as well. But I didn’t.

Now I have a portfolio skewed heavily towards higher risk assets - which amidst this environment, is not ideal.

Another point on diversification: On the other hand, I might have over diversified into various speculative coins that I have low conviction in.

During this market, it is also wise to consolidate my positions into fewer coins with higher conviction in.

At the same time, I had a rather significant position in one ecosystem. This also puts me at risk of being overly exposed and overly dependent on that one ecosystem.

From an interview with a VC, he suggested a max 20% allocation to high conviction ecosystems each, and a few max 5% allocation for the speculative, higher risk ecosystems.

In hindsight, this is a rather sound allocation that I should have taken reference from.

What I’m going to do

Naturally I was hurt from this recent crash, but the only way forward is to learn and grow from this experience.

Here’s my action plan:

1. I will be liquidating my low conviction tokens and converting them into stables/high conviction coins.

2. Even for my stables, I will start diversifying the type of stablecoins I have and keep them in different platforms, be it DeFi or CEXs.

3. I will also start investing more into highest conviction bluechips (BTC, ETH), with the hopes of keeping my crypto portfolio simple and lower risk.

4. I will also start allocating more of my overall portfolio outside of crypto, into lower-risk (non-crypto) assets, for better portfolio management.

Closing thoughts

There are always risks and volatility in any investments, but this one did hurt more due to the conviction I had.

This has also humbled me and provided many takeaways that ill be carrying over to future investments.

Portfolio risk management. Positioning to survive. Conviction with humility.

This has been tough. But I'm down but not out. I’ve been through worse.

I’m actually much more motivated and ready to learn the fundamentals again, to tear apart all my crypto investments theses and rebuild.

To anyone facing a similar situation, feel free to chat on Twitter anytime.

This episode has taught me some lessons, and I hope you can take away some insights from my mistakes as well.