May 18 • 10M

Ep 49. Built different🍄

Market volatility. Tail events. Terra Luna collapse.

 
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Some say Crypto is a scam. Others swear it's a breakthrough technology. But which is it? Join us, as we explore Crypto in real life (IRL).
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Hey y’all!

Did you hear the remarkable story of how an inexperienced passenger safely landed a plane when the pilot became incapacitated? Here’s some background:

I listened to the recording of the passenger calmly explaining the situation to the air traffic controller multiple times. I listened intently as the air traffic controller steadily guided the passenger to land the plane. And he did it! He safely landed the plane.

I was struck by how calm and measured the passenger was. He had a pregnant wife at home. This was a potentially fatal situation. His whole life was at stake! One might have expected to hear the terror, fear, and shock in his voice. There was none. I guess he is ‘built different’.

God forbid, if I were in a similar situation, I hope I can be as calm and measured as he was. How do you react when your world is turned upside down? Well, the crypto and stock markets have taken us on a downward heading rollercoaster these past few weeks. How have you dealt with it? Are you ‘built different’ too?

Thoughts on ‘Built different’

I am often intrigued by how multiple people could have the same experience but polar reactions to it. For instance, we have all experienced the recent plunge in the stock and crypto market, some folks have been writhing in pain and selling off assets while others have been pleasantly buying up investments at ‘bargain’ prices. There’s also a group of people who are steadily executing their investment strategy, unfazed by the market turbulence. I’m in the last group but I’m fixin’ to go bargain shopping.

In management consulting, we often heard the refrain “manage expectations”. It is key because disappointment occurs when our expectations fall short of reality. Increasing a company’s profitability by 20% within 1 year is neither good nor bad. It’s only when you factor in expectations that one is able to define the performance. If the company’s CEO was expecting a 30% increase in profitability, then 20% suddenly looks like a shoddy disappointment. However, if the CEO was expecting a 10% increase, then the 20% result is an impressive feat worth celebrating with bonuses and promotions. Managing expectations is key.

If you are a long-term subscriber, you’ll know that I’ve been waiting for “crypto winter” since the end of Q3 2021. You might also know that I’ll be unsurprised if the price of Bitcoin fell back to the $10k level or lower but then surge to new highs, dare I say six figures, in the next bull run in a couple of years. This is not based on any technical analysis. Rather, I have glanced at the historical performance of Bitcoin (a proxy for the wider crypto market) and recognized that large price swings are part of the process but over the long term, the price tends to go up. I’m managing expectations I’m in this for the long haul. Over the past seven Mays (2016-2022), the value of the S&P 500 stock market has increased 2x while Bitcoin price has increased 67x. Zooming out can provide a helpful perspective.

Tail events and a flight to quality

I recently read “Tails you win”, an article by Morgan Housel. He reminds us that most results are due to tail events.

For instance, out of 21,000 VC investments between 2004 and 2014, 65% lost money, 2.5% made 10-20x, 1% achieved more than 20x returns. Incredibly, only about 0.5% or 100 companies achieved the glamorized 50x returns. The vast majority of the industry returns are due to a tiny fraction of investments. We glamorize and idolize these investments and some of us even aspire to make similar 50x returns too. But the odds are not in our favor. Morgan’s analysis on the VC market was not shocking but I had not fully considered what he said next: that tail events drive the vast majority of results is a truism of nature and other disciplines.

Each human is a miracle. Just one sperm out of the millions deposited, gets to fertilize the egg and develop into a baby. Or consider that in 2020, just 5 companies (Amazon, Apple, Meta, Microsfot and Tesla) accounted for a whopping 37% of the S&P 500’s total market returns. [S&P 500 consists of 500 publicly traded companies]. Warren Buffett famously said that he has owned 400-500 stocks during his life but he made most of his fortune from just 10 of them….despite painstaking research and analysis on all of them.

So what does this mean for crypto? Well, extending the analogy would suggest that the just a handful of crypto tokens will stand the test of time and generate the lion share of returns. Looking back at snapshots in time between Dec 2016 and today, indicates that only 3 tokens: Bitcoin, Ethereum and Ripple, have consistently made the top 10 list. This is not say that other projects will not stand the test of time. But if you are looking to build and sustain long-term value, these might be a helpful place to start. Of course, do your own research as I’m not a financial adviser.

Top 10 crypto tokens by market cap, data sourced from Coin Marketcap

Warren Buffet also famously said that “you should be fearful when others are greedy but greedy when others are fearful”. Fortunes are made in downturns. There may be attractive opportunities to acquire high-quality crypto and stocks at “bargain” prices.

The reality is that it takes a lot of discipline to execute on this strategy. Plus no one knows if the prices will drop further. Personally, I have focused on dollar-cost-averaging i.e. consistently investing in cryptos and stocks on a weekly or monthly schedule irrespective of market conditions. It’s all automated.


The Terra-sized elephant in the room

The biggest story in crypto has been the Terra Luna collapse. It might rank in the top 5 most catastrophic events in crypto. Terra was an algorithmic stablecoin. I did not have any exposure to it although I have friends and cousins who did. Many other people more knowledgeable than me have touched on this topic. If you are interested, check out this Twitter thread


Speaking

I recently participated in an industry panel for the Black Professionals in Tech Network (BPTN) on blockchain. It was great fun. I really enjoyed the audience questions and engaging with other panelists and the event sponsor CIBC.

Next up, I’ll be leading a company-wide lunch and learn on “Global perspectives in crypto” at Cross River (~800 people). My goal is to bring stories of how people are using crypto around the world to solve problems in their lives. Wish me luck!


That’s all folks! I hope you have a great week. Get outside and enjoy the sun!

Ciao

Afo