Crypto Investment Strategies: Part Two – Playing Venture Capitalist
Previously, we discussed crypto investing strategy #1: Buy and hold “blue chips”. Choosing which strategy to adopt depends on an investor’s time constraints, resources, skill level, and personal preference.
While strategy #1 is the easiest and least time intensive, there are many drawbacks. One of the biggest drawbacks is that the upside is fairly limited. It will be extremely difficult to see gains of 10-20X.
This is why my personal preference is crypto investing strategy #2: Playing Venture Capitalist. I’ll be diving into that today.
How venture capitalists make money
Venture capitalists are some of the wealthiest investment managers in the world. You’re likely already familiar with big names like Ben Horowitz from Andreessen Horowitz, Peter Thiel from Founders Fund, and of course Fred Wilson from Union Square Ventures.
Venture capitalists invest in early stage startups when they are still scrappy and young well before they have public appeal as a viable investment. They are investing in the team, their proposed vision, and the hope that they are able to execute on their vision successfully.
Oftentimes, the company already has some early traction and signs of product market fit. Other times, the team has absolutely nothing yet, and VCs are betting on their experience, track record, agility, and overall ability to execute.
Venture capitalists make investments with the understanding that not everything will work out as planned but the team is smart enough to iterate on their product and get through the various challenges that they may come across.
VCs make money when a company goes public or gets acquired. This would be considered a homerun. They are looking for returns of 10-20X. However they know that not every time at bat will result in a home run. They will get some base hits, some doubles, and (of course) they will strike out a few times and their investment will go to zero.
But that is ok, because if you play the game properly then it shouldn’t matter. Let’s say you size your investments properly and you make 10 total investments of equal size in any given year. Then all you need to do is hit one homerun and you have made all your money back, plus some profits—even if all the rest of your investments go to zero.
Using the VC playbook for crypto
In crypto we can adopt a very similar playbook. We look for hidden gems with very low valuations. We call these “small caps.” Generally we look to get into coins that are lower than $10M in market capitalization with explosive growth potential before anyone else notices they are on the market.
There are many advantages when you apply the VC playbook to crypto. One of the main advantages in crypto is that unlike VC investing you can invest very small amounts, $100 to $500, and take a swing for the fences.
Another benefit is that cryptos are semi-publicly traded. So you don’t need to be a famous VC to get access to a deal. You just go to the exchange that the coin is traded on, buy the coin and store it in your wallet. No legal work, no negotiations.
The final, and in my personal opinion, the most interesting aspect about leveraging the VC playbook for crypto investing is the liquidity of the investment. VCs usually have to wait five to ten years for an investment to mature and get acquired or go public.
With crypto, if an investment goes 10X overnight, you can sell out right away and book the profits immediately.
Finding the winners
One of the main differences between crypto investing strategy # 1 (investing in blue chips) and strategy #2 (Playing VC) is the amount of time it takes and the level of work involved.
It takes a lot more time and resources to find the winners when adopting strategy #2. You have to constantly monitor the exchanges for new listings. Then you have to research each new coin to see if it’s a viable candidate.
More often than not the coin/project will be relatively new and still unproven, so many of the metrics we use to evaluate the big coins, like NVT (network value to transactions), adoption, and ecosystem are not there yet.
You will want to talk to the founders and management team and ask questions like:
- Does the team have a track record of success working with blockchain technologies?
- How is the team composition and does it have an even mix of leaders, technologists, business developers and marketers?
- Is the team trustworthy and has a strong reputation they need to protect?
Oftentimes, crypto teams are quite public and are relatively accessible. So jumping into their telegram community and getting a call booked with a senior team member is not impossible. After talking with the team you will also want to talk to some other big investors in the space who have also bought into their vision and get their thoughts on why they invested.
And finally, perhaps most importantly, the most important thing you need to look for is a near term catalyst. A near-term catalyst is any event that can cause the price of the coin to shoot up in a short period of time.
Catalysts may include an upcoming listing on a major exchange, mainnet releases and product launches, unlocking of new features (like staking functionality), and major upcoming partnerships.
You can have your cake and eat it too
As you can see strategy #2 involves significantly more time and resources than strategy #1. However the upside in strategy #2 is MUCH greater and has the poteacntial to change your life.
This is primarily what our research team does at SIMETRI. They are constantly combing the market for exciting new coins, evaluating their market fit, and talking to their teams.
We do all the work and then distill the absolute best opportunity each month in the form of our Pick of the Month report. Our Pick of the Month is generally a small cap coin that has strong fundamentals but also one where we have identified a significant near-term catalyst.
You can learn more about how you can get access to our Pick of the Month here.
This concludes crypto investing strategy #2, Playing Venture Capitalist.
Next, I will share with you, “Strategy #3: The Active Crypto Trader.”
I hope this information has helped. Good luck and invest safely!