Cryptogram-20MAY2022

Build a portfolio to first survive, then thrive

20 May 2022

In this issue

Hello folks, As crypto investors pick up the pieces from a disastrous couple of weeks, many are starting to get the feeling that it isn’t the end of the world. It really isn’t. We saw a crash in 2019, and we got up from it.Even so, Indian crypto investors who started out in 2021 are in the red already, and that’s hard to deal with for anyone in their first year of investing. But if you are still here and reading this, all we can say is – congratulations on not quitting.

But no more dreamy-eyed or reckless planning of your portfolio, ok? We are going to take the tough-schoolmaster approach with you now and drill in some good practices! And, for this, we have taken some inputs from a seasoned Indian crypto-investor, who we will call Dheeraj. Dheeraj started in 2018 and despite seeing two crashes already, he is still in the game.The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. Subscribe to the newsletter here, if you haven’t already.Housekeeping: If you got this email in your 'Promotions' tab, then shift it to the 'Primary' tab so this lands in your main inbox! Thank you.

THE BIG STORY

How to build a balanced crypto portfolio

Let’s start with two guiding principles we believe are necessary to build a balanced crypto portfolio which is reasonably safe and can still be profitable: 

  1. Be a long-term investor. Think in years and decades, not days and months.

  2. Keep a significant majority (70-80%) of your crypto investment in Bitcoin and Ethereum, always. 

For instance, Dheeraj’s idea of a balanced portfolio is this:

He keeps 70% of his portfolio in rupee terms always, always in BTC and ETH. Obviously, daily market movements will mess with your balance. In April 2021, when altcoins rallied superbly, Dheeraj’s altcoin share went up drastically and his portfolio looked like this:

So, what do you do when this happens? Rejoice, you just made a killing from altcoins! And then, rebalance. Altcoins carry much higher risk of volatility, so their share in your portfolio must be limited. The way you can rebalance is by either investing new cash into BTC and ETH, or by converting some altcoins into ETH or BTC. If you do this regularly, LUNA-type crashes hurt you less. For Dheeraj, LUNA’s crash was a heart break – he believed in that project and didn’t cash out. But only 4% of his portfolio was in LUNA. So, even when that vanished into thin air, along with a 10-15% drop in the market in general, he survived.Every now and then, you can also balance the allocation between ETH and BTC according to market signals. Analysts expect ETH to bleed against BTC in the near term. So Dheeraj, for instance, has taken a call and converted some of his ETH and other altcoins to BTC. This gives him enough breathing space to follow the market without much mental agony.

Next tip: take some profits out along the way, whenever you can. Whenever your asset gives you massive returns, book profit. For Dheeraj, the number is 100% ROI. Whenever an asset doubles his investment, he takes out 50% of it (the principle) out as profit and leaves the rest on.These are evergreen tips which will help you through all ups and downs. Given the situation right now, here are a few other thoughts to consider for the immediate future.

  • Don’t be in a hurry to invest again, watch out for further drops in the market. Wait for major drops like 20% in a single day to invest further.

  • Safeguard the BTC value of your portfolio. Look at your portfolio in terms of its BTC value, because in the long-term, we can be fairly confident that BTC will grow. If you take this approach, then in the short-term, it is best to convert some ETH and altcoins to BTC till it gains strength. Take a look at how Dheeraj’s portfolio looks today:

  • When BTC gains strength and moves above certain long-term moving averages, ETH and altcoins will be able to outperform BTC. At that point, you can consider reconverting some BTC to ETH to garner higher gains over time.

Ensure that you adapt the above to your goals and risk appetite.Hope for the best, prepare for the worst!Disclaimer: Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.

  THE TOP FIVE 

Stories from this week you cannot miss

1.  Spotify has selected a small group of artists including Steve Aoki and The Wombats to embed and promote NFT galleries on their profiles, while Madonna dropped a non-fungible token collaboration with NFT artist Beeple on SuperRare last week.2. LimeWire has signed major label Universal Music Group to release NFTs on its own Algorand-based marketplace.3. A law firm and a school, both based in Dubai, have announced plans to start accepting crypto payments, highlighting the regulatory and compliance framework devised by the government there.4. Trading platform Robinhood is creating a noncustodial crypto wallet that will be compatible with multiple blockchains.5. Blockchain and crypto solutions provider, Ripple has partnered with FINCI, an online global money transfer provider based in Lithuania for efficient B2B crypto-enabled cross-border payments.

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

There’s a lot of excitement that Ethereum’s shift from “proof-of-work” to “proof-of-stake” is nearing. Many believe that in the long-term ETH will perform better than BTC. But what do “proof-of-work” and “proof-of-stake” mean, exactly? Ethereum is a “decentralized network” – there is no one central ledger where all the information is stored. So, what’s the “consensus mechanism” here? How does everyone in the network come to a consensus on who has how many coins and if a transaction is legitimate?“Proof-of-work” (PoW) is a consensus mechanism. It is an algorithm which allows each user in a network to agree on account balances, validity of transactions etc. It also prevents attacks and manipulation by bad actors. PoW is made possible by a group of people, called miners, who compete with each other to do the job and get rewarded accordingly – it’s a bit like a race to win. Now here’s the problem with PoW – it guzzles energy, and miners need superior hardware to do so. There’s been a lot of criticism against cryptocurrency over the fact that they are energy-inefficient and thus bad for the environment. “Proof-of-stake” (PoS) mechanism comes to rescue here. It is an improvement over PoW in that it is more energy efficient and has reduced hardware requirement. And it does that by distributing the “consensus” process. There are no miners, but only validators. There is no competition, but allocation in an orderly fashion. No race, whoever wants to be a validator “stakes” some cryptocurrency as collateral and is selected randomly. With the new PoS mechanism, Ethereum will become a lot more energy-efficient and transaction costs will go down. You can read more about PoW here, and about PoS here.

Over and out this week, see you next Friday. Sit down with your crypto portfolio this weekend and figure out if it is balanced well!If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.