Hello Bubble Riders!
I have a book draft due to my editor next week. So, I thought I’d do a mini-lesson.
In my coaching sessions, part of what I do is review portfolios and discuss ways to optimize them. Often, we start with a chat about shifting the emphasis of a portfolio. Without changing any of the fundamental bets, you can usually get 2x returns.
The approach might be called the “Down Chain Strategy.” I’ll explain that to you all for free.
Obviously, coaching clients get tailored attention to their accounts and subscribers of various levels get to see exactly how I’m distributing my own tokens and stocks. But since it’s an implication of Lesson #4 from The Art of The Bubble, it’s worth spelling out for everyone.
The Down Chain Strategy
A key feature of bubble trading is learning to identify lead indicators and then picking the coins or stocks that will bounce more when that indicator takes off. It’s why being late pays more.
Here’s an example, with Bitcoin in blue and Ethereum in black. This is just after the March 2020 crash.
You’ll notice that before the crash, Ethereum was soaring above BTC, and then crashed (in percent terms) more than BTC too. After the bottom in March, though, Ethereum again shot up even more and went on to make well more than BTC over the next 12 months.
The nice thing about that trade is that BTC (if you zoom in on the time frame) always moved first. So, you could watch BTC’s movements and then by trading ETH you got a few days advanced warning.
The Down Chain Strategy simply develops this thought further.
Here’s an image of Ethereum and Uniswap, the coin for the primary decentralized exchange on the Ethereum blockchain. ETH is the main trend line (with the red and green candles) while UNI is the black line.
You’ll notice the same pattern. UNI move after ETH and made a much larger move up. In terms of percents, it also crashed more.
So, UNI is basically a 2x-3x bet on Ethereum. If you like Ethereum, then, you’re already conceptually committed to the success of the main coins on the Ethereum blockchain. Might as well own those too.
I’m not saying you should buy in the same proportion, but it’s worth considering these “down chain” coins since they’re crucial to the ecosystem of the main platform token anyway.
Here is an example for the primary decentralized coins on Ethereum.
- ETH = platform coin
- UNI & SUSHI = main decentralized exchange coins
- AAVE, MKR, Compound = main lending protocols
- SNX = main synthetic asset protocol
- YFI = main yield farm aggregator
You could simplify your buys here, of course, just getting the DPI on indexcoop.io/dpi. That way you get all the main defi coins on Ethereum with just one buy.
And you can extend this kind of logic to each of the three main use cases for cryptocurrencies: decentralized finance, non-fungible tokens (NFTs), and Web 3.0 technology.
If you do that, you’ll not only increase your returns, you can make sure you’ll benefit from the growth of each primary sector. And, heck, you’re already committed to the main projects if you buy the platform coin. Why not make more money with that same fundamental bet?
Notably, I’m not saying that it makes sense to buy the down chain coins instead of the main platform coin. There is always more certainty of success with the main platform coin.
But if you selectively pick some of those down chain coins–the main ones–you’re not changing your fundamental bet while exposing yourself to more upside potential.
Now, you’d be right to think that this would give you more downside potential too. I think that, on average, it’s not much more. Look at that UNI and ETH chart. UNI is still outperforming ETH even after the crash, dips and SEC notices. It’s usually just more upside potential.
But to even out that downside possibility, I think that yield farming makes sense. Basically, if you have a portion of your portfolio that makes constant returns, then you are limiting your overall downside.
The down chain strategy then maximizes your upside potential. Combined, you’ll just have better risk-adjusted returns. That’s the brilliance of a risk-parity portfolio. And that’s what my coaching clients look at developing.
I wrote some pieces on Quora this week that explain develop these points in related ways, so they might be worth reading.
That’s it for this week. Happy Trading!!
General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.