Author: Crypto, Distilled
Compiled by: TechFlow
A hypothetical: It is now Q4 2024, the price of Bitcoin has reached $80,000, and the altcoin season has finally arrived. You might rely on your intuition and try to time the market's peak. But is there a better way?
“Failure to prepare is preparation for failure.”
The pitfalls of price prediction
It is a common mistake to manage investments solely based on price targets. These targets are often subjective, driven by emotions or influenced by social media. It is extremely difficult to accurately predict prices and time their changes.
Tactical Advantages of Mentality
Every time the market goes down and up, it becomes more difficult to think rationally. Your investment goals will keep changing, and you will be more likely to focus only on information that supports your views and ignore other important signals, leading to increased confirmation bias. At the same time, your ability to maintain discipline in the investment process will gradually weaken. This is a battle with yourself, and this inner struggle will become more and more difficult as the amount of money invested and the risk increases.
The power of thematic investing
When investing, what strategies are there besides simply relying on price and sentiment? There are many to choose from: market sentiment, technical indicators, or on-chain analysis. However, strategies centered around a clear investment theme or investment logic tend to be the most reliable.
Create an investment theme
An investment thesis is a well-reasoned analysis and argument for a project's potential over a specific time period. This theme can be made up of a variety of factors and does not necessarily rely solely on price. A good investment theme should be testable so that investors can manage their investments with precision and flexibility through testing and adjustment.
The rationale for thematic investment
Thematic investing has several significant advantages:
Scalable with your growing portfolio
Eliminate the influence of emotions and market sentiment
Provide clear validation and rejection criteria
Eliminate the distraction of short-term price fluctuations
Example 1
Let’s say you are bullish on a particular layer 1 blockchain (L1). Instead of targeting its past ATH, you can focus on the following metrics:
Total locked value (TVL)
Trading volume
Number of active wallets
Going a step further, you can focus on relative metrics, such as market share or awareness.
Verification and denial
Next, set validation criteria based on your chosen key performance indicators (KPIs). This helps check if the L1 is developing along the path you predicted, or if it is deviating. For example, you can use the growth of KPIs over 30 days as a basis for managing your investment thesis.
Example 2
Consider a new project with an AI agent. Instead of focusing on price, you can focus on the following key performance indicators (KPIs):
Number of proxy transactions
Set a benchmark based on your beliefs, such as reaching 1 million on-chain transactions.
Whitepaper vs. Minimum Viable Product (MVP)
When exploring lesser-known and more volatile cryptocurrencies, many projects only have a minimum viable product (MVP) or even no actual product. In these cases, focus on the project’s roadmap nodes or milestones.
Navigation Events
Your investment thesis may be more focused on the execution of events rather than the growth of metrics. As they say, "buy the rumor, sell the news."
Sometimes it is wiser to exit immediately after the date is confirmed rather than waiting for the event to happen. After that, set new indicators and form a new investment thesis.
Other strategies:
Complex thematic investing strategies not for you? Consider these alternatives:
Time-based strategies
Fear and Greed Strategy
Relative excess return strategy
Let’s take a deeper look at each strategy.
Time-based strategies:
Time-based strategies offer a simpler, more reliable approach. Consider selling a small portion of your portfolio on a weekly or monthly basis.
Adjust the timing and amount of your sales based on macro factors, liquidity, and your goals.
Fear and Greed Strategy:
Market sentiment swings like ocean tides, pushing prices higher when greed is high. The key to a fear and greed strategy is to profit when the tide is high. In this strategy, a weighted fixed-investment exit strategy based on the fear and greed index can be considered.
Relative excess return strategy:
Think of the market as a race, and each coin is like a racing car. The key is to identify which car will accelerate faster relative to the others. One way to profit is to sell at a specific MC ranking. For example, sell 10% at market capitalization (MC) ranking 50, sell 20% at 40, and so on.
Summarize
The cryptocurrency market is highly speculative, and investor emotions (such as fear and greed) often influence decision-making. In this case, establishing a risk management system that is independent of price fluctuations can give investors greater peace of mind and not have to worry too much about the impact of short-term market fluctuations.
Successful investors often prioritize investment themes based on in-depth research and analysis rather than short-term speculation. This approach helps them make more rational and sustainable investment decisions.