DeFiance Capital Partner: How to Make More Efficient Crypto Investment Decisions?

Written by: Wangarian, Partner at DeFianceCapital

Compiled by: Deep Tide TechFlow

Currently, cryptocurrencies represent the forefront of technological innovation, and this is no secret. With human and financial capital entering the industry, it is overly optimistic to think that one person can keep up with the entire industry's development.

Twelve months ago, the game was relatively simple. Before most people in the market were paying attention, one could find underappreciated DeFi tokens on Ethereum and profit when capital eventually rotated. At that time, the returns were high, and opportunities were effectively identifiable. Today, we have countless different verticals (DeFi / GameFi / NFTs) flourishing across multiple ecosystems (SOL / AVAX / ETH / LUNA, etc.).

Given the vast amount of information currently available, identifying signals from the noise is the most important skill for driving returns. While this skill cannot be taught (one must personally experience the trials and tribulations of the market), I often find that developing a process to eliminate unnecessary decisions is helpful. Below are some lessons summarized by someone who has been studying the cryptocurrency market for the past 18 months.

Simplicity is Key

For 99% of investors, annual performance can be attributed to 2-3 specific decisions. Going long on $SOL or $LUNA in January, discovering Axie at $1, rotating out of DeFi 1.0 after a surge in Q1 2020…

If you are a professional fund manager, each of these decisions can make your year easy, or yield a 10x net return as a retail investor. Although most people are hindsight analysts, the point remains—each investor only faces a few critical crossroads that reflect the vast majority of their returns.

So, the tricky part is how to identify these crossroads in real-time. We make countless decisions every day, so it is impossible to pinpoint when these decisions will arise. However, outstanding investors/traders ultimately grasp this in some form (whether consciously or unconsciously).

I never had a crystal ball or a differentiated advantage, but I often find that pruning the decision tree helps establish a clearer mindset—a mindset that better realizes opportunities when they arise.

Betting Thoughts

At its core, public market investment positions reflect a contrarian commitment to a specific idea. They indicate a belief that the market is wrong, but over time, the market will reprice the asset according to the investor's expectations. Each investment has three main stages, each with its own set of decision-making methods.

First Stage: Entry—Is this a good investment? How large should we size this position?

Second Stage: Monitoring—Is the investment thesis playing out? Should we adjust our position based on new information?

Third Stage: Exit—Should I reduce my position because I was wrong? Should I reduce my position because I was right and the investment thesis has played out? Should we sell the entire position or just part of it?

The simplest way to reduce the number of decisions is to minimize the number of active positions in the portfolio. A good rule of thumb is to not have more than 10 active positions. By doing this, you can force your holdings to concentrate and become more resolute through the factor of scarcity.

Is Token A a better investment than any of my current top 10 positions?

This direct comparison provides a clearer risk/reward framework for evaluating new opportunities. Besides the amount bet, the size of the stake is equally important; a good framework I rely on is the 2/20 rule.

Exploratory: 2% of the Portfolio

Imagine you’ve just discovered a promising new token and believe it is the future of finance. You do a bit of DD (due diligence), summarize what you know and what you need to find out, and overall feel good about this bet.

2% is enough to get you in the game (10x = 20% return), but also small enough that if you are wrong, it’s just a bee sting to your overall returns.

Balls Deep: 20% of the Portfolio

After getting excited about your new position, you start diving deep, covering all the bases of due diligence. You’ve crafted a clear argument, identified actionable catalysts, and are ready to earn life-changing wealth.

While you can always go over 20%, a 10x result is what doubles your portfolio. If you hit a home run (50-100x), this one bet is enough to carry you through the year.

If you are wrong, you’ll lose a leg but can live to fight another day—and that’s what matters most, not getting knocked out by a single bad bet.

Suppressing Impulses

The cryptocurrency market is a tricky thing. When constantly seeking the dopamine high, we often blind ourselves to the bigger picture. Besides battling the PvP market, you are also fighting your inner demons—greed and fear.

For me, being exposed to the market 24/7 has adverse effects on both mental and physical health. I find that taking mental breaks away from the market is necessary to keep my abilities at their peak.

Personal experience tells me that a 2-3 day break yields the best results. It’s long enough to settle the mind but short enough that you don’t miss the entire bull and bear cycles of cryptocurrency.

As investors, our goal is to maximize returns over the long term. This doesn’t mean we need to maximize returns at every waking moment. Mental breaks are key to resetting dopamine levels and emotional highs/lows, allowing for a clear mind and disciplined decision-making.

Discipline

This is one of the most underrated aspects of investing. You can have the most detailed plan or the most thorough framework, but if you can’t stick to the plan, it’s worthless. This is a problem I still struggle with, and I’ve recently paid the price for it. Executing the plan is almost as important as the plan itself. Is something you went long on now at your stop-loss point? Cut the trade. Has the catalyst ended, but the price hasn’t risen? Terminate the trade. Building a bullish narrative and price target is easy. If things go south, it’s hard to formulate and execute an exit plan. Interestingly, this is also the most crucial process; when the market turns against you, it will save you.

In the cryptocurrency space, we are often trained to think about what the TO MOON scenarios are. We focus on the potential returns of investments (10x? 50x? 100x?), as that’s the most exciting thing. However, we must also plan for less-than-ideal outcomes. What if I’m wrong? I notice that market participants rarely ask this question. Do you have a framework to handle situations where the price action goes against you? Can you reliably cut your position when needed? No one really likes to admit they are wrong, but in this game, even the best investors are wrong 40% of the time. If you don’t have a plan for that 40% outcome, you are preparing for eventual disaster.

The Journey, Not the Outcome

At the end of the day, remember that investing is a long-term process. The hidden cryptocurrency market often distorts this fact with significant 1000x TO DA MOON narratives, deceiving the average person. Lucky market participants come and go, but those who focus on methodology, continually iterate their frameworks, and refine their processes will stand out over time. The seeds you plant today will yield multiple harvests in the future.