It has been rough the past week.
I wanted to learn by listing down some of my lessons and keeping myself accountable with an action plan.
But I did take quite a while to pen down these thoughts, as I kept having new ideas on where I did wrong, and what I could have done better.
If it’s not obvious yet, I had significant parts of my portfolio in the Terra ecosystem, and they have now gone close to zero.
Here’s what I learnt from this experience so far:
One key part of my investment strategy is to build bigger positions in areas I have conviction in.
Conviction can be built through whitepaper research, overall system and tokenomics research, studying their pros and cons, edge cases and overall probability of success.
However as I built more conviction in Terra, I started to follow ‘influencers’ on Crypto Twitter that shared similar views, and slowly fell into an echo chamber.
This then turned into a self validating space where we started to only consume content that we want to hear, and tuned out other opinions that were in opposition of my beliefs.
In hindsight, this was a recipe for disaster.
I should have been humble and open to alternative views of my investment thesis.
The true mark of conviction should be to take in opposing views, and having a rational argument to counter them.
If there are little rational counter-arguments, that should also signal that my conviction is flawed and there might be possibilities of failure.
Which brings me to the second point.
Say that we find a possible risk of the ecosystem. What do we do next?
In the case of Terra, a death spiral was always on the books and a risk I was well aware of.
But my mistake was in my flawed understanding of the scale and extent of this risk.
When we consider the impact of a benefit/risk, it would be logical to think in terms of:
Probability X Scale of benefit/risk = Total positive/negative value
In the case of Terra, it seemed to have a decent chance at becoming the biggest stablecoin in future, which would give it a 10-15X ROI, and an overall pretty positive projected value.
But at the same time, it had a small chance of having a totally devastating risk event (like this one). In this case aggregating after the two, it likely had an equal or even greater projected negative value than its projected positive value.
When taking this into consideration, I should have naturally positioned my portfolio accordingly, or taken out my initial capital at least when Terra was doing well.
I had a tunnel vision towards the positive value, and totally neglected the negative possibilities.
As Terra grew enormous in market capitalisation, and had a strong backing of investors and partners, it seemed that it was too big to fail.
The hypothesis was that these other partners and blockchains and investors would never allow Terra to spiral all the way down.
Another hypothesis was that the key man Do Kwon himself has successfully built so much with Terra. If he has executed so much, naturally he can do so again right?
Well, I was dead wrong.
The takeaway here is clear: Nothing is too big to fail.
This is simply lazy thinking that can be fatal in bear markets like such.
There are always risks and volatility in any investments, but this one did hurt more due to the conviction I had.
This has also humbled me and provided many takeaways that ill be carrying over to future investments.
Portfolio risk management. Positioning to survive. Conviction with humility.
This has been tough. But I'm down but not out. I’ve been through worse.
I’m actually much more motivated and ready to learn the fundamentals again, to tear apart all my crypto investments theses and rebuild.
To anyone facing a similar situation, feel free to chat on Twitter anytime.
This episode has taught me some lessons, and I hope you can take away some insights from my mistakes as well.