Diversification

The importance of diversification cannot be understated. One of the most interesting things about the culture of cryptocurrency markets is that the rules of finance do no apply any longer. The entire history of money & finance rests before our eyes and is easily researched, yet we choose to neglect it.

It's easier to study the past to prepare for the future than to blindly dive into everything without considering the risks involved.

Cryptocurrency combines ignorance and leverage, both of which are vital to the market. However, let's first define the available assets.

Bonds

One of my closest friends has criticized the single US Bond that I hold for a long time, but he holds stable coins as if they are not bonds themselves. They are bonds that we don't even get the yield on. It is why Circle & Tether make so much money. The payment on their coupons is likely to be outrageous.

In Decentralized Finance, Stables are bonds. You can leave 1000 USDC in your wallet for 1000 years and return to find it still there. The lack of growth is a risk you take, as these assets do not appreciate. However, not investing can evade significant losses or missed opportunities during market downturns.

Stable coins, and the yield you might generate from them in protocols, is the safest bet you can make in DeFi.

Blue Chips

There are a handful of Blue Chips in DeFi, and I only look toward Ethereum & Bitcoin. If I need to be conservative, but I do not want to hold stables to have market exposure I will run to the nearest Bitcoin and Ethereum and I will give them a big hug.

These assets are less prone to sudden drops and much more likely to be stable. They are market leaders and have more predictable histories of supply & demand.

DeFi Assets

These assets are the major protocols that make Ethereum the home we know and love. For the sake of interests, I'll leave it to AAVE & Uniswap, but I know that apps like GMX and Maker are also in this category.

These assets can be found on the crypto fees website and you can watch their supply and demand actively. Uniswap and AAVE have been crystallized into the back bones of the ecosystem & their fees are definitely the basis of decentralized finance health.

Degenerate

Lastly we have the more degenerate markets. These are markets based on social & emotional appeal more than any other elements of economics. This does not make them weak, because as many people fail to understand Non-Fungible Tokens they are growing. But it does make them more susceptible to flashes in valuation and price.

This includes your pump and dumps and your newer DeFi projects. This is where you might get rugged.

Apes versus Investors

I do not think it is a bad idea to be an ape. I've aped into a project before, but it is important to be aware of the risk that are associated with these actions.

Consider these projects as shredders from an investor standpoint. Put your currency in the shredder and it's gone! That's what Aping looks like. If you can profit effectively, consider it a blessing, but this should not be your regular lifestyle choice.

Consistency is king in investing, and that is what many investors are, but there is much more to it.

"A small share in several projects is less risky than a large share of a single one. If you toss a coin once, you either win or lose; if you toss a coin thirty times you will have ten or more wins 98% of the time." - John Kay, Other People's Money

Diversification is necessary because it increases the chances of winning while minimizing the potential losses. How would you diversify a portfolio in crypto? Well you have lending markets & swapping markets. You have NFT markets & whole Ecosystems.

Leverage

Cryptocurrency markets are very different from others because of the amount of leverage & risk there is available. Not only can one own these assets but you can deposit them into a protocol in exchange for a liquidity pool token. You can exchange this token for another if you wanted. Thereafter, you might decide to get a loan or two against these assets.

Oh it gets wicked in cryptocurrency markets. But you have to be very calculated about the risk that you take.

When you combine ignorance and leverage, you get some pretty interesting results. - Warren Buffet, on Global Financial Crisis of 2008

Risk Layer 1

Owning the asset at all is a risk. I don’t think anyone talks about the risk of simply owning an asset. Whether it be a stable coin or an Ether, there is risk involved. With crypto there is a separate concern about safety of the wallet’s private keys. Then you might concern yourself with the supply and demand of the token in question. Token utility. Future market performance.

These are the very basic worries of owning a cryptocurrency asset.

Risk Layer 2

Depositing any asset into a contract to earn yield is an added threat to the token’s future. The contract could be hacked, or the contract could be exploited. There is a lot that could potentially happen while that token is in the contract.

Risk Layer 3

You may receive a token that is a liquidity pool token. Then you can take that token, which functions as an IOU, to get a loan. The new added risk is the security of the IOU. The value of the derivative could lose its peg to the original asset. This could lead to liquidation.

The value of the original asset could fall sharply and threaten liquidation as well.

Risk Layer 4

Whatever you do with the loan. That is the risk here. Can you pay it back so that you can secure the IOU for the original asset?

The Investor and the Ape

The art of investing is a very difficult one because each individual person has their own goals and expectations of return. So after people decide their concerns - time horizon, allocations, and reference narratives - they are better adept to invest.

This is why I am writing this post. I encourage people to look at risk from the aspect of traditional finance. Many of the vile tools of traditional finance - primarily lack of clarity - has been destroyed by block scanning technology. Knowledge is only asymmetric if you do not investigate projects.

Take advantage of the tools you have. Understand the market. Play it calm and day to day. Jump in discords & touch grass.