Decision making is difficult in crypto. There are so many things happening, protocols being built at lightspeed and CT constantly moving onto the next new thing within 5 minutes. It feels like you have to make a decision on a token now or miss out forever.
Well, you don't.
You always have time to think it through. What I hope to do in this article is to help you build a framework for decision making in crypto, so that no matter the outcome of your decision, you can look back on it and say “it was the correct decision at the time”.
How do we start choosing what to buy?
Before we even start, we need to define the best outcome for our decisions, so that we have a goal that guides our decision making process.
The base assumption being that you want to make a shit ton of money from cryptoassets, a good outcome from a decision happens when you are able to sell a token at a higher price than what you bought it for.
THIS is your main guiding goal for all your decisions. I know, it sounds too simple and too stupid to say out loud. But you'd be surprised at how many people lose track of this one main goal as they FOMO into the next hottest token without thinking, holding it to the top and selling the bottom for an excruciating loss.
Knowing the above, we can then dive further into the 3 main decisions all cryptcoin holders make:
What should I buy?
When do I buy?
When do I sell?
What should I buy?
When evaluating a new project or token, the main question you need to answer is not “why should I buy this?”. Rather, it should be:
“Why will other people buy this?”
It is important that you form a thesis around this - what is the scenario that needs to happen for people to come out of the woodwork to buy this token?
It can be something as silly as “I think Elon will tweet about this token in the next 5 days”, or something more fundamental such as “I believe volume for DeFi Perps will increase as people flow out of CEX Perps, therefore I will buy tokens of DeFi Perp projects”.
If you do not have a thesis at all, you are buying purely based on hope that numba will go up. Unfortunately, hope is not a strategy, and you are more likely to crash and burn.
Once you have a thesis, you need to evaluate the probabilities of your thesis being fulfilled. It helps to be brutally honest with yourself and question both best and worst case scenarios. Crypto veteran Cobie has written a great article on applying probabilities to your trading decisions:
Nobody will be able to predict 100% what will happen, as the crypto markets are messy at best. However, if you can come to a conclusion about the probabilities of your thesis being fulfilled, it allows you to make 2 decisions:
Buying can be a good decision if you ascertain the probability of your thesis being fulfilled to be high.
Your position sizing will be determined by probability weightage too - if you think that it is a low probability thesis but are still going ahead with the buy, you probably should not bet the farm on it.
Build your thesis around deterministic value
The example theses that I gave above are based on speculation, but we should look at the deterministic value of a token too - that is to say, how does the token derive value and create buy pressure, beyond speculation that others will buy it?
I believe this forms a stronger thesis for a token - speculative value can go to $0 the moment people stop believing (which can be at any random moment), but it is highly improbable that deterministic value goes to $0 if the token and project does what it is supposed to. As DegenSpartan puts it:
There are two main questions you can ask to derive deterministic value for your token:
Is there value accrual to the token?
Is there a need for people to buy the coin to use it for the protocol?
If the answers to the above questions are “yes”, it is more likely that a value for your token can be sustained outside of speculation.
Value accrual
There are many ways in which value can accrue to a token, but one of the most common and straightforward is distribution of fees from a protocol to a token holder.
An example of this is Curve, which is one of the biggest DeFi protocols where users can trade and swap stables with low slippage for a fee. If you hold and stake $CRV, 50% of the trading fees will be distributed to you.
As long as Cuve continues to grow as the top stableswap AMM and remain as one of the kings of DeFi, you can assume that there will at least be some deterministic value to holding and staking $CRV (i.e. people WILL pay up to a certain price to own 1 $CRV because it is worth it).
Is there a need for the token?
The Ethereum blockchain is a simple example of requiring a token to participate in the protocol. Hundreds of high quality DeFi protocols are hosted on the Ethereum blockchain, and users are required to pay gas fees in denominated in $ETH in order to perform transactions on the blockchain.
This creates buy pressure, and creates value for the token - as long as there are useful protocols attracting users, $ETH should theoretically never go to zero.
There are many other such tokens as well - all L1s like $SOL and $AVAX require their native tokens for fees, and $CRV and $CVX are needed for voting for Curve gauge weights. These all lend intrinsic value to the token if people continue to use the protocols.
There is nothing wrong with betting on speculative value only, but value accrual and token requirements leading to deterministic value usually gives a more concrete thesis. Regardless of how markets move and how sentiments shift, you know that if the protocol works as intended, there is always a fair deterministic value - and that can lend conviction to your decision.
When should I buy and sell my token?
I don’t have a clear answer on when you should buy or sell something, and anyone who says they have a 100% clear idea is lying to you or trying to sell you something.
What I do know is that unless you are a whale who can decide the bottom and top, you are statistically very unlikely to buy the bottom and sell the top on any token.
However glorious “buying the bottom and selling the top” sounds, you must remember that’s not what we are here for. Remember: the aim of the game is to sell a token at a higher price than what you bought it for.
Trying to time the bottom can cause you to miss the boat.
Trying to sell the top can lead to holding on all the way to the bottom.
Trying to eke out every single bit of value from a trade will leave you worse off than if you just tried to capture the meat of the move.
Over time, from countless failed trades, I have formed a buy-sell framework that helps frame my decisions:
Once again, before you even buy: form a thesis as to why you think the token will go up. This forms the basis on which you can review your trade.
If you have a thesis, start buying. Scaling in usually works better - you won’t time the bottom, sure, but you can be sure to get exposure at a lower price if it starts rising, or a better average entry price over time if the price drops further.
Review your trade periodically. If your thesis is fulfilled/failed and there are no further narratives you can see, SELL all your tokens no matter the price. There is no worse strategy than hanging on to hope that the price will somehow pump, even though your thesis has been fulfilled or failed.
If the price pumps and your thesis still is not fulfilled, it is usually a good idea to sell on the way up. Too often we get caught up in “the profits that could have been”, but the reality is that most of my wins came from selling into pumps, while losses came from holding on too long, round-tripping a 10x back to 0.5x.
Most people suggest recouping capital on a 2x pump, or selling a percentage of holdings at each milestone (e.g. sell 20% on a 50% pump). But it doesn’t matter what system you use, so long as you sell on pumps and TAKE PROFIT. If you don’t sell, you cannot win.
Build your own decision-making system
For most of us retail traders, we can dream about hitting that 1000x and changing our lives, but the real alfa is in being consistent and grinding our way up over a couple of cycles with a proper system in place.
This article is not meant to guide you on every single step and tell you when to press the red or green button; it is meant to help you build a framework of making well-reasoned picks, and a consistent system of buying and taking profit.
In our next article, let’s explore the other side of decision-making: the emotional side, all the nifty ways with which our monkey brain tries to screw us over, and the steps we can take to reduce FOMO and panic selling.