How to make it in crypto. Part 1
Who is this for?
You see your idiot friend retired by investing in crypto or bought a nice house. How he made it, but you’re not? How, by the time you invested in crypto the market has already tanked and your portfolio with it? You wonder why you even bought this Ponzi scheme and was so late? The main problem is that we have too many unprofitable wanna-be traders building paid telegram channels and YouTube videos about the top 5 hot ICOs.
Such creators are delivering no real value to new people in crypto by just focusing on views and selling laughable trading courses. So the idea for this series of posts was born as a response to these influencers because every bull market I am in awe how many people lose money by following these false prophets and making the stupidest decisions ever.
What practically these posts are about and why we need all of this?
Every couple of months I have my classmates or some friends from previous work asking me about what to invest in crypto and how they can find new Bitcoin or Ethereum, or where they can make 5x in the next 6 months. I’m always trying to help, but it’s hard to answer simply, because if I said them to invest in Ethereum at around $100 in December 2018 (price at what I was re-buying after the hype) in a week they would lose 20%-30%, sell in panic and tell me that I gave them bad advice. Then be furious that they sold the exact bottom when in 2 years Ethereum will grow by 47x.
To invest or even to make a swing trade (buy and sell let’s say in a month) you need to have a thesis on why are you buying this asset, at what price you are willing to sell, and again why?
For this you need to have knowledge about:
- The current narrative around crypto overall
- Investment cycles or simply understand whether is this the right time to invest or not
- How early you are to this particular investment
- Valuation of the project, Investors
- Who are the people behind the development, what their plans are, tech, product, competition
- The overall narrative behind the asset and how does it trade
Yep, it’s a lot, but you will develop skills, learn tools and intuition to see and analyze these parameters fast and make educated investment decisions.
I would emphasize how the community around you is vital for finding just the right bit of information you need, learning new things, and being motivated by the success of your friends. I will even help to find just the right people to follow on Twitter and communities in telegram.
- So let’s talk about the overarching narrative around crypto. Why it even matters? How big can it be? What in practice crypto is right now?
Crypto: the good side. Why it even matters?
The current financial system is ancient, heavily skewed toward elites, and if all the people would really understand how banks work and what they are really doing to their hard-earned money we would be overthrowing the government and burning all the banks the next day.
The only way to understand how the current financial system works is to analyze it with the premise that it was created as a criminal cartel, no joke here. This criminal organization exists only to keep you poor and docile yet motivated enough to work at your desk 10 hours a day while consuming cheap soulless products, never escaping the rat race, and keep enriching the top 0.001%.
Facts about the banks:
1. Your money in a bank does not belong to you, they are loaned out to make money for the bank. Banks have only around 10% of your deposits available to withdraw at any time. Throughout history bankers always were ending up taking deposits they were supposed to be guarding and investing in their own ventures or giving to the government to support wars. So, now they legalized it and called it fractional reserve banking.
2. Central banks or the banks of banks are literally printing money and creating inflation, so every year you need to earn more to sustain the same level of life. Printed money is going firstly to banks and companies close to elites wherever they have any loose ends, for example, when they were recklessly spending money on bonuses for CEOs and private jet flights or invested in blatant Ponzi schemes at the pick of the market cycle.
3. Most people don’t understand the essence of current paper money or fiat money as they called. Fiat money is not backed by anything except the belief that the next person will accept it. It wasn’t always like that, the current iteration of global money was backed by gold until 1971, but the US spent the gold they were supposed to keep (gold of other countries as well, France even sent a warship to bring back its gold from the states), took the gold from their citizens, made it illegal to own physical bars and completely broke the link between gold and dollar. Other countries followed suit because their currencies were linked to the US economy too. It sounds crazy, like some story you would find on a conspiracy YouTube channel whose author is smoking meth daily, but no, you can read it on Wikipedia.
Crypto can change all of this. There was never in the history of humankind the process of establishing a global, internet-native, transparent financial system when no corrupt single entity is in control.
In the current economy, all financial flows are controlled by a few players, mostly corrupt ones. Now we have a new, much more technologically reliable scheme where most of the financial flows will be redirected, and a new and hopefully more fair configuration of the processes and decentralized protocols keeping it all together will emerge. You might even become one of the people who will build these systems and protocols. So it’s without a doubt the single biggest opportunity in our lifetime to make a generational wealth and impact, I do not exaggerate.
If you think crypto can be big, you don’t get it. If you think it will change how money works — you still don’t get it. Crypto will change how all the value flow, change the underlying structure of property rights, separate the state from controlling money as previously the church was separated from the state.
In a hundred years our grandkids will read history books and laugh at how we could bare the inefficiency, unfairness, and recklessness of fiat money and corrupt governments in control of them.
Currently, we have several basic financial primitives, or as many call them money legos we are building on top. All of them take enormous institutions with thousands and sometimes millions of people doing things they do not understand and replace them with elegant pieces of open source code where everyone can see how and what is going on.
Bitcoin — everything started from it. I could write another book about how elegant it is, and how the blockchain underlying bitcoin works, but this post is not for this, you can learn about it in many places, for example here. What you need to understand is that bitcoin was supposed to be the money of the internet. A thing that you buy a coffee with or a store of value and in a way it became all of this. Bitcoin is still the number one crypto, but almost every use case was chipped away by some other protocol, the biggest one is Ethereum.
Our economy is still marching forward, the dollar is the main store of value and medium of exchange. As for speculation we degenerates have a multitude of hyped defi and nfts or literal Ponzi schemes. That’s why I see Bitcoin mainly as digital gold which is better than real gold in every way. Gold was a store of value for millennia, but the main thing it sucks ass in is that it’s really heavy and hard to transport.
I will give you an example, most of you who are reading this in English never experienced it, but sometimes shit hits the fan and you need to take all your belongings and leave your homeland. I happened to be born Russian and now the whole world denied me every financial service and my country is at war, I just can’t sell everything and convert it to dollars or gold. First of all, my government not gonna let me leave with more than $10k. Second, banks outside do not accept my money.
So yeah, the best thing is stablecoins, I can buy them in Russia, leave the country, and cash stables in pretty much any other country.
But soon even this thing will be unavailable to use without showing my passport or process called KYC and I will be again denied because of my nationality. But Bitcoin black market exchanges will be available even after regulators will stop non-KYC stable coins on and off-ramps. If you think this case is not big, consider that such problems touch almost a third of the world and I too thought this will never happen to me, but peaceful times are never lasting.
Besides the apparent usefulness of bitcoin for unbanked people, it became a mature asset for investment banks to speculate, corporate treasures to diversify into and even governments to buy. There are tens of trillions of dollars waiting to be deployed in anything and Bitcoin is looking very attractive in comparison to $2 trillion of negative-yielding government bonds.
Ethereum — is now the main thing in crypto, almost every new financial primitive in defi started on Ethereum. Ethereum is like a simple computer that anyone can program to do whatever they want. I would emphasize that in comparison to Bitcoin, Ethereum was designed specifically for programming anything with relative ease. The catch is that Ethereum is as decentralized and censorship-resistant almost as Bitcoin, so these programs can’t be tampered with. The code you see running on the public blockchain will behave to the letter. So, if some crooked politician will decide to change the rules of the system or freeze your assets, he just will not be able to do that. But there are exceptions in practice, more about it in the next chapter.
Defi — the same as every company is a paper of LLC registration and a stack of rules for employees to do their job, defi protocols are a bunch of coded rules on Ethereum with a specific purpose, for example, to form an asset exchange you can trade on.
These applications will replace most government institutions, banks, and financial providers around the world with unified and transparent programs. Imagine what a step function is Airbnb in comparison to a local paper magazine with an advertisement of local rentals. That’s basically what will happen with finance and property rights overall.
The most exciting thing for us is that all these protocols are created openly right now and you can invest in them or even build one. Opportunities of this magnitude were never possible for the average person not ones in our history. Such a process previously was always done by a small number of elites completely in the dark against all the rules and interests of common people.
Defi protocols are valuable because they take a fee as any other company for the service they provide. Coming back to Ethereum, in its case, every such rule execution by defi protocol takes also a fee or a tax from a user. The good analogy here is as when a government taxes people as a guarantee provider that mutual contract between people and organizations will be honored.
In just the last 3 years there was an explosion of defi applications. For example, decentralized exchanges or DEXs such as Uniswap, where anyone can trade or launch any asset without permission. But for now, on DEXs people are trading mostly tokens of other defi protocols, ethereum and bitcoin.
It again was never possible before, to take your company public is a huge hustle that can take millions of dollars in preparation, now it takes 5 minutes and under $100. The good analogy here will be comparing it to journalism or writing a book before the internet, you needed to be a part of a local newspaper, tv channel or to find a good publisher. But with the internet, anyone can do that in a matter of minutes by posting on Twitter or a telegram channel and reaching the entire world.
Stablecoins — synthetic dollars are the most practical and popular use case for crypto. Stables are dollars that people can transfer instantly anywhere or to anyone in the world without dealing with banks. I would also bring to your attention the fact that half of the world is facing huge inflation in their local currencies and really want to save their money in a stable currency as the dollar. But for most people it’s not possible without stablecoins such as USDC, DAI, or Tether.
Crypto banks and yield aggregators — now you can get a loan which, in practice, will leverage your exposure to crypto without centralized providers. If you have $5000 you can get a loan for $20000 and buy most of the popular tokens on AAVE. Or do the same but with ETH on Maker and as a byproduct of this process create more synthetic dollar called DAI, that I mentioned before. Also, you can even give your dollars to Compound, AAVE, or Yarn and they will generate some nice annual percent on your deposit.
One of the biggest innovation crypto brought to us is borderless digital equity that anyone can buy or sell without centralized exchanges. Equity-like tokens give dividends as an average stock like Apple. It may sound trivial, but it’s not, because crypto now provides a global settlement layer not only for money but also for property rights around engines that are generating money, eg. companies. We now a numerous protocols that generate profits and give them back as dividends to holders of a protocol token.
This evolution from coins working as an incentive for miners 2010–2016 to worthless tokens working as a medium of exchange 2016–2019 to real equity with clear financial metrics in 2020 was my personal fucking nightmare, it took people so long to get here. Crypto in a sense like math was explored, and we created some standards for moving money around and tracking it. Only then we figured out where it will be valuable and have a real demand.
To be honest some people still don’t know what exactly they are buying and trading. For those who are interested to know more about this evolution and why it was so hard to grasp and get to where we are now, I highly recommend my article here.
With these financial primitives already built out and working in practice, I see only one way for crypto — to become a huge industry that will swallow all finance in 10–20 years as the internet did before with communication, entertainment, and commerce.
Crypto: The bad side. How really it works now?
Is this project a good one or a scam? Hmm, probably a scam.
The boring part ended, so I hope you are still reading, we discussed how crypto is cool and will help the world to become a better place. But the main thing I want you to get from this book is a real understanding of things you put your money into, not to be naive and be scammed.
You need to understand that crypto, in reality, is a wild west where everyone is coked out of their mind and will do anything to get this sweet money out of your pocket to buy supercars…
… jets, 3 story home on a coast line, or obnoxious castle.
Crypto was always a tough place to navigate, but only because there is so much risk there is so much opportunity. If someone says they can double your money risk-free — run. I can at least calm you by saying that before it was even worse, everything was a blatant scam except bitcoin, to be honest even bitcoin felt like a Ponzi. It used to be 99.9% of crypto was a scam or just built by stupid people who had no idea what the hell they are doing, now it’s only 90% a scam.
Out of these 10 percent left at least 9 percent are just not gonna work because the product was not good enough, the team behind it got bored and left or they were just out of luck. Only 1% will make you money, that’s the truth. Actually, most of the investments where you can make over 100% a year work like this. For example, startup investing is the same, the only difference is when you invest in startups you probably will never see how the value of your investment goes down because startups just will take your money and spend it, never giving you the ability to sell eg. exit.
One of the nice features of crypto is the ability to buy and sell even really early-stage projects because they launch tokens fast, sometimes even too fast (before they have a functional product or any product whatsoever).
Crypto is fuelled by leverage and debt
I repeat, most of the loud people you perceive on social media as savant traders, nft creators, and god-like devs building a new esoteric protocol are just meth heads hustling to make a shekel. These people need an easy fix to grow their product.
No surprise here but the easiest way to grow any economy is through credit and debt. We have the same problem in the global economy and we have an extreme of it in crypto when it’s hot.
That’s why you need to understand that the whole economy of crypto and especially protocols on top of Ethereum is highly circular.
When the price of Ethereum grows, people want more Ethereum exposure and use leverage, then interest rates for borrowing grow. Because of high-interest rates people are incentivized to bring more dollars to lend into the system so a stable coin’s supply increases.
New stables are then recirculated to defi. This means more Total Value Locked (TVL) in defi, protocols seem to be more profitable, and their prices are going up too. At some point users begin to leverage even Liquidity Provider’s tokens (LP tokens) which means the same tokens counts in two different places, creating more credit and dept in the system again.
The whole pyramid grows and people feel rich. But the thing had no solid foundation and collapsed extremely fast.
Because crypto still has a very small demand from the real economy. You need to be aware of that.
If you need to understand more about some of the uses of bad debt in crypto, look at my thread.
After we understood the basics of the predatory crypto environment, let’s talk about the specifics of keeping your crypto safe.
How to keep your crypto safely.
Buy hardware wallet!
Yes, buy yourself ledger nano and keep your seed phrase somewhere in a secure physical location, and make some copies of it. DO NOT KEEP THEM IN YOUR NOTES ON MACBOOK, EMAIL, OR CLOUD. I prefer to keep them in a coded message on a piece of paper in several locations and encrypted flash drives. If you have a lot of money, buy several ledgers and divide your crypto between them. However, do not overcomplicate things. Make sure that you can recover your seed phrase out of your elaborate hiding schemes, a lot of crypto was just lost because people couldn’t find their hard drives or even forgot the passwords or how to decrypt the message on a piece of paper.
$5 wrench attack
Do not babble about how much crypto you have or even that you have it. If people know you have crypto it’s a problem. Let me introduce you to the “$5 wrench attack”.
Yeah, I know it’s not pleasant to think about, but shit like that happens pretty often. The elevated risk of being crypto-rich in comparison to being fiat rich is when you have money in your bank account if someone kidnaps you and steal your money, you can go to the police and often reverse the money transfer. Not many criminals are stoked about kidnapping rich dudes, risking going to prison, and getting their newly snatched money go back to the dude. In crypto though, all transactions are final. If criminals take your money, in 99% you will not get it back, because there is no one in control of Ethereum, no one can help you.
Smart contracts risks
Besides criminals, there is a huge risk of being hacked. Smart contracts are basically all beta-stage technology at best, they will work exactly as they are programmed, but they are often programmed with errors. So, do not mess around with providing liquidity, staking your crypto, or even touching platforms you don’t know, especially at the beginning of your journey. You can buy tokens of lesser-known protocols on popular DEXs, but buying an asset is not even close to risking your money when you lock your assets in some smart contract. If you want to use a platform to just understand, how it works, use a new address with a small amount of crypto.
Do not keep money on centralised exchange
Keeping big sums of money on centralized exchanges was a really bad idea pretty much always. The risk is quite big that they will lose your money one day.
But we need to recognize that sometimes you need to trade on centralized exchanges, so just make a trade and get your money out. I wouldn’t keep more than 30% on one exchange at any time.
Exchanges that proved to be somewhat trustworthy are Kraken, Coinbase, and Bitfinex. In the case of Binance, I wouldn’t be surprised if they will blow up eventually.
Do not use leverage
Crypto is highly volatile, even majors often can move up or down 30% in a couple of days, while smaller projects can do such moves in a couple of hours. That’s the whole point for many traders like me, there is enough opportunity to make money just by buying and selling tokens without leverage.
If you are using leverage on top of such volatility you will lose all of your money, the history of crypto shows it vividly. Influencers are often pushing a narrative that they are doing great using leverage, 95% of them just pretending, 4% made a lot of money during bull markets and lost it all in a bear market, and only 1% kept riches.
Leverage is the number one reason people lose all of their money in crypto. If your portfolio is not big enough without the leverage to feel something, go find a job and increase your portfolio that way. Do not spend your life chasing crypto moves on leverage, it’s just a waste of precious time and energy.
In the next post here we will discuss in details investment cycles and when is the right time to buy crypto.
