Will your favorite tokens survive?
No one knows how long the bear market’s going to last.
Some people believe we could see a bear market that lasts several years. Inflation’s out of control. The solution? Pain. Raise the interest rates and slow down the money printer.
Others believe we could have a turnaround towards the end of the year. The U.S. has midterm elections towards the end of the year. The democrats are going to be slaughtered if the economy’s still in shambles.
Regardless of what happens, you have to think about the possibility of a multi-year bear market.
Today We’ll Be Covering:
• Protocol survival. Can your bags last several years?
• What I’m buying. Some coins that I’m personally looking at.
Let’s dive in!
Can Your Bags Last the Next Few Years?
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Here’s what I learned from surviving the 2018 bear market.
The Bad News:
Most coins will never reach their All-Time Highs again, or they’ll go to zero. Founders lose interest and abandon projects. Protocols need funds to keep operating. There are going to be new narratives in the next bull cycle. People can’t help but go after the next bright shiny object.
The Good News:
On the other hand, some coins could rebound and hit all-time highs. We saw this for some projects like Ethereum, Cardano, Binance, Vechain and others. When it hits…it hits hard.
You should think about two things:
Which coins in your protocol can survive a multi-year bear cycle? I know some of your coins maybe 70% down (or more). If you don’t think it can survive the bear market, then it might be worth it to salvage what’s left.
Better to salvage the remaining 30% than watch it go down further.
Investment opportunities. Some tokens may bounce back and hit all-time highs again. If you have conviction in certain projects, then this could be the lowest price it’ll ever be again.
It’s hard to tell which is which. Think in terms of probability. Here are some of the clues that I’m looking for.
7 Ways To Tell If A Coin Can Survive A Bear Market
1. Which Protocols are Generating Real Revenue?
Now that the tide’s out, we get to see who was swimming naked. It’s time to see which protocols are generating real revenue.
Ponzinomics and money printing don’t work in an environment where no one’s buying. Let’s see which projects are actually making money.
The easiest way to do this is to use a tool like TokenTerminal or CryptoFees
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You can sort and see how much money each protocol’s making. One metric you can use to help judge is the P/E ratio. The token’s price vs. its earnings per share. (The lower the P/E ratio then the better the value).
2. Cash Reserves / War Chest / Treasury
It costs money to run a protocol: salaries, research & development, marketing, and more. You want to check to see what its runway is and it has enough funds to survive a downturn.
One question to ask is “what’s in the treasury?”.
If it’s 100% based on native tokens, then that’s dangerous.
Today:
X tokens worth $1 each $10,000,000 of X tokens
6 Months Later:
X tokens worth $.03 each $300,000 worth of X Tokens
Having a diversified treasury with stable coins means it’s more robust.
If a protocol’s running low on cash and revenue, it’ll be hard to raising funding in this environment.
3. Utility and Use Case
You’re high on dopamine and emotions when it’s a bull market.
You have a 2nd chance now that the party’s over.
Why does this project exist?
What problem is it solving?
How does it solve the problem better than its competitors?
4. Money Locked Up
One increasingly common Tokenomic tactic is to have tokens locked up for several years.
Some people have locked their tokens up in Curve Finance for up to 4 years.
Others have locked their tokens up in Bastion Protocol (Aurora) as part of the Lockdrop.
This shows confidence in the protocol and lowers potential selling pressure.
5. The Roadmap
What does their roadmap look like? Are they hitting their targets? How’s the developer activity?
You’re checking to see if the builders are still building.
Recommended Reading: How to Judge if a Protocol can Execute its Vision
6. Who is Going to Become a Market Leader?
In some categories, it becomes a winner-takes-all system. It’s hard to see Curve Finance, Opensea, or Chainlink being dethroned right now.
You have to ask yourself, “What’s preventing another protocol from forking them and taking their spot?”
I’d look for moats.
Moats refer to a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share.
Moats in Crypto include brand value, partnerships, switching costs, and more.
7. The Team and its Funding
I love watching Zombie movies. There’s always a scene where you see a ton of cars abandoned on the side of the road.
That’s what it felt like in 2018. So many teams and developers abandoned their projects. You’re going to see that happen this time around.
Why? Bear markets are tough mentally. Not everyone’s built for it. And it’s tempting for an anonymous developer to disappear with their millions, and just come back with a new project in the next cycle. 🤷♂️
What should you look for?
• Investors. Take a look at who their seed investors are. If they’re backed by some big-name VC funds, then they’re less likely to abandon the project.
• Doxxing. A doxxed founder is less likely to abandon a project.
• Communication. Are they still actively communicating?
Watch out for the slow rug. It’s where they keep missing deadlines, make excuses, and slowly stop communication.
Recommendations
Be patient and wait for the dust to settle. I wouldn’t get too excited about a mini rally in a bear market.
I have two pieces of advice:
(1) Dollar-cost average (DCA). You automatically buy your choice of tokens every month.
You can set this up through a centralized exchange.
Most people should DCA into BTC or Ethereum and call it a day. But if you’re like me, you’re looking to outperform.
(2) Buy in Ratios. Let’s say you’re putting in $1000 worth of fiat every month.
You could try:
• $400 BTC
• $400 ETH
• $200 Whatever coin you want.
You’re buying blue chips, and you get to scratch your stock-picking itch.
“Edgy, what coins are you thinking about buying during the bear market?”
Well, BTC and ETH obviously.
Here are some coins that I’m looking at acquiring.
FXS (Frax). This passes my bear market vibe test. Frax should be gaining more market share overtime with the UST collapse. Confidence is important in a stablecoin. They maintained their $1 peg throughout this chaotic month. From a business perspective, they are developing quite a few moats through their partnerships. Great team and value accrual to the token.
The price is attractive. It was oversold because of the fear of it being partially algorithmic, but Frax is 90% collateralized.
Decentralized Derivatives. They’re generating real revenue and will only keep growing. The problem is that the space is quite competitive at the moment with GMX, DYDX, Perpetual Protocol, etc.
I have some other projects that I’m looking at, but I have a “wait and see” approach.
I’m at the poker table right now, and I’m waiting patiently for a good hand.
Anyways, not financial advice or shilling my bags. I hate articles that are too theoretical at times, and wanted to share some projects that fit my personal criteria for investing.
Recommended Finds
📚 Books: I’m starting a Book club on Twitter to keep our minds engaged during Goblin town. This month’s book is “Trading in the Zone” by Mark Douglas.
💰Stablecoin Yields. If you want to see where the best stablecoin yields are, check out CoinDix.
📊 Onchain Data. I’m always comparing different ecosystems using onchain data. I enjoy using the UniWhales tool (it’s free).
📰 Macro Analysis. “Shut it down!” A new article from Arthur Hayes.
🏦 9.62% guaranteed? If you’re American, consider investing in an I bond via the Government. It pays 9.62% (adjusts every 6 months based on inflation numbers). $10k max per social security number per year. It’s one of the best deals out there
I’m going to start monetizing The DeFi Edge brand soon, and I want to be 100% transparent.
There was a lot of interest in me launching a “premium” newsletter. It’s not something that I’m too interested in doing – I’d rather keep the information free and help as many people as possible.
So I’ve decided to open The DeFi Edge newsletter to a few select advertisers for sponsorships.
Here are my rules:
- Everything’s labeled. If someone’s paying for an ad, then it’ll be clearly labeled. I’m playing by the FTC’s guidelines.
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Sound good?
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