Trading strategy. Balancing value investing and narrative driven trading

Choosing where to place your Bitcoin is a minefield. There’s clearly a significant amount of choice available to people, and that grows larger by the day. My own approach is not ‘correct’, it's just my strategy for decision making. In short I have two portfolio’s that I manage.

Value portfolio - I see the fundamental value of the token, I understand the business case and see the long term value of the token.

Narrative driven investments - I believe there’s an opportunity to capitalise on the growth and earn more BTC to put into my first portfolio.

Below I’ll detail what makes tokens fall into each of the categories that I invest in.

Value investing

There are few tokens within the crypto space that I would say I have a good understanding of the business case, and fewer I think have a chance of being successful. When I start to evaluate a token for a long term investment, these are the questions that I’m asking:

- Who's going to pay for it?

If the token is going to have value, it’s got to be useful for a target group. It’s important to consider whether that group has any capital to invest in new experimental tech. Targeting industries with low profit margins means you’re likely to have a significant barrier to overcome. That’s fine if you can prove that the tech you’re offering is going to make a huge cost saving. However most can’t prove it, the founders simply say that they’ll be able to do it in future, and may well be overly optimistic.

- What problem is being solved?

With tokenised business models there has to be an inefficiency in the market that the token is addressing, or some significant improvement to existing systems. Peter Thiel describes in his book, ‘Zero to One’, how a product needs to be 10x better than the current solution in order to get people to invest the time, energy, capital in moving over to something new. For anyone that’s tried to start a business, this is painfully true. Acquiring new customers is extremely hard.

- How does the target customer currently solve that problem?

If the target audience doesn’t have a way of attempting to solve the problem, the chances are that the problem isn’t painful enough to have worried about and the new model isn’t really addressing a significant issue. It becomes a solution looking for a problem, which many tokens definitely fall into. Richard Branson talks about there being two types of business models, painkillers and vitamins.

Vitamin business models are preventative interventions where you can’t prove the impact, they sell a good story but you’re never really sure whether these actions have made a difference. They rely on proving a negative (“You took this tablet and you didn’t get sick” - how do you know?)

Painkiller business models are businesses that address a real issue, that can be used and quickly demonstrate that they’ve solved a problem, and that if you were to take it away the pain would come back. (“You’re in pain, take this tablet and you’ll no longer be in pain” - easy to prove).

Needless to say, you want to be investing in painkiller business models, not vitamins.

- What advantages does blockchain have in this situation?

There’s some industries that will clearly benefit, such as supply chain, because of the importance of immutability within an audit trail for products or shipments. However the vast majority of tokens make no sense using blockchain instead of a secure database. It’s really critical to understand how blockchain will improve on either a centralised system, or a private permissioned blockchain like Hyperledger. Most of them don’t.

As a further point, blockchains based on supporting other blockchains isn’t a valuable solution if blockchain tech doesn’t have the level of adoption that many zealots think it will have (see my personal opinions on how blockchain isn’t going to change the world here -https://steemit.com/blockchain/@frequent-nomad/my-starting-perspectives-on-trading-crypto).

- How has the business proven their model?

Most of the crypto space is creating experimental business models on experimental tech. This means they’ve rarely got proven case studies of where they’ve made a difference and have ongoing relationships with customers. In a speculative market, it’s easy for new competitors to come in and say that they’re going to build a better version of something that hasn’t even been built yet.

Let’s take ETH for example, which has delivered a decentralised global smart contract network that is still in its infancy. New networks are being proposed constantly such as EOS and Tezos, all claiming to be bigger and better, yet they’ve not proven this in anyway to date. I think ETH is a safer bet therefore, and would be my personal choice on where to invest. That being said, “when the facts change, so does my opinion”, is a great quote. If these other networks do deliver a major improvement and step forward, then it makes no sense to remain loyal to the old token. Be prepared to evaluate competitors objectively and determine what advantages they offer and whether they can prove they’ve achieve that.

On this point, finally, I really liked Peter Brandt’s tweet (https://twitter.com/PeterLBrandt/status/961027513253224449) recently where one of his points was “Don't worry about catching tops/bottoms. The money is made between the 30-yard lines”. Being one of the earliest in a new token comes with a very high chance of being wrong. It’s far better to be sure and buy into the upward trend and take profits along the way.

Narrative driven investing

The second part of my portfolio I use for short term trading that I use to increase my holdings in the tokens that I hold for the long term.

To explain why I refer to this as ‘narrative driven’, I’ll restate again this is a speculative market. Very few cryptos have delivered anything, and are instead selling the best story possible to the audience (us traders). As a result, if I dismiss the long term value of a token as set out in the first part of this, I’ll still consider tokens as investments if they meet a group of criteria. This is because I feel there is a large amount of people that don’t analyse the business cases, and put their crypto into tokens that superficially look impressive.

- Do they have an attractive website?

I’m not a design oriented person, I’m much more interested in the whitepaper and the business case, however there is no denying that design and aesthetics influence a huge amount of people. Having an impressive website makes a big difference to people’s level of trust in the company. Having a poorly designed website makes an even bigger difference, as it excludes a large number of people who would put crypto into the token.

- Do team members and advisors have work experience in relevant, recognisable industries?

Quick traders are always looking for an immediate vote of confidence to buy the token. Having team members or advisors that say they’ve worked in recognisable businesses delivers that. Of course the reality might have been that person was an unpaid intern whose key responsibility was unjamming the printers. But in this market, as long as a few people have the right names on the team page, people will invest.

- Is the community size in the tens of thousands?

If there’s a large community size, there’s enough people to hype themselves into groupthink every time there’s some positive news. This means that there’ll be enough people to get excited and trade that news. It’s also a prerequisite of getting listed on major exchanges.

- Are they in a sector with other cryptos that are established?

There’s some groups of tokens where people have already decided blockchain is going to change the world. That means that they are already partially convinced in the business proposal. For example, supply chain. There are thousands of token holders in large cap cryptos in this space, new supply chain tokens will be talking to an investor group that’s already decided supply chain could benefit from blockchain, and therefore are far more likely to spread their risk and invest some into the new token. Compare that to a token in an industry without an established crypto token. To get investors on board you have to convince them firstly that the industry would adopt blockchain, and secondly that this token is the one that will deliver this. This creates more barriers to entry for someone to invest in the token, and makes it much higher risk.

- Do they have a market cap outside the top 100?

Bizarrely, it feels that many traders determine the value of a token by comparing it’s position in coinmarketcap. I frequently see “this token is so undervalued, it should be in the top 100” despite the fact that the token economics make absolutely no sense in creating a token that justifies that price (I’m most confused by distributed storage tokens, but that’s another story). However, this is how many people are investing, and you can’t ignore that. So when you’ve got tokens that are at a low coinmarketcap position, many people will call them ‘undervalued’ and that they ‘deserve’ to be in the top 100. This makes no sense, but enough people say it, believe it and trade with this in mind, it presents an opportunity.

- Are they on a large exchange, and did they raise more than $10m at ICO?

Every time a major exchange announcement is made, there’s a flurry of price activity and increase (usually short lived). Because exchanges take payments to get listed, finding tokens with a low market cap, large amount raised at ICO (meaning they have the capital to be able to afford listings), and only available on small exchanges there’s a clear opportunity with these. Buy into them while low, wait for them to pay for a listing, sell at the higher position when it happens.

Finally, this of course isn’t investment advice, it’s just my personal process of evaluating whether I’m going to put some BTC/ETH into a token or not, and what my objective is when doing so. I split my investments 50/50 in these portfolios, and always use stop losses on narrative driven investments.