3 differences in thinking to help you better understand blockchain investment

Although investment is called investment in the traditional financial market, it is also called investment in the blockchain field. With the development and growth of the blockchain industry, many traditional financial institutions have gradually begun to enter the blockchain industry, and the financial products in the blockchain industry are becoming more and more numerous and more formalized, and there is also a trend of moving closer to traditional finance. However, at this stage, the difference between the two is still very large, and it can even be considered that they belong to two completely different "worlds".

If you fail to realize the difference and blindly apply the investment thinking of traditional financial markets, you may suffer great losses.

Because I have some investments in both markets and have deep experience in them, I can feel the difference between the two more clearly. I personally believe that there are three important differences between traditional financial investment and blockchain investment in terms of thinking.

1. Extreme Thinking

What is extreme thinking?

When investing in the blockchain industry, you must first assume that the most extreme situations in the market will occur and be prepared for the worst at any time.

In fact, to be more precise, this is not an assumption. In the blockchain field, extreme situations are bound to occur.

The extreme thinking mentioned here is somewhat similar to the "black swan" thinking in traditional finance, but the probability of a black swan event is very low and it only happens once in a long time. However, the frequency of "black swan" events in the field of digital currency is very high. Black swan events are originally used to refer to low-probability events. If the probability of occurrence is very high, then the term "black swan" is not very accurate, so a more direct term is "extreme thinking."

For example, two days ago, the price of Bitcoin fell by as much as 40% in 24 hours, and the market value of the entire digital currency market increased by at least 50%. This is unimaginable in the traditional capital market. It is hard to imagine that the overall market value of the A-share market or the US stock market evaporated by more than 50% in a single day. If this is the case, then subsequent financial businesses such as mortgages and pledges derived from stock prices will encounter major problems, and the entire financial market may collapse.

Although a 40% drop in a single day is rare in the digital currency market, a 20% or 10% drop in a single day is common and needs to be treated as a regular event. Moreover, 40% is only for Bitcoin. For a single company, a single-day drop of more than 60%-70% is also possible.

If a sharp drop is barely acceptable, the most unacceptable thing is to return to zero. Although the stock market often plummets, it is rare for it to actually return to zero. Among the thousands of listed companies in the A-share market, only a few eventually delisted, a very low proportion. The blockchain digital currency industry is different. In just a few years, there are thousands of tokens, and these tokens have not been strictly audited. Most of them are virtual coins. 90% of these tokens will eventually return to zero.

It is precisely because of these differences that when investing in the digital currency market, you should take extreme thinking as the starting point of the entire investment system. You should keep thinking: What extreme situations may occur in the entire market? What should I do if an extreme situation occurs? What extreme situation will occur in the company I invest in? If these extreme situations occur, can I withstand it?

Before investing, you should use these possible extreme situations to do stress testing. You have to assume that the market really drops 50% in one day. How can your investment withstand this? Obviously, if you want to withstand it, you can't add any leverage; you have to assume that the entire market will continue to be depressed for 3-4 years. How can you withstand this? If you want to withstand this situation, then your funds must be long-term, cost-free, and even a little interest may drag you down. At the same time, you must have a steady stream of cash flow outside the market to supplement; you have to assume that the token you invested will return to zero for various reasons. If it returns to zero, will it be a fatal blow to your investment? If you want to avoid this risk of returning to zero, then you must be more cautious in selecting investment targets and diversify your investment funds.

2. Cycle Thinking

Another difference in thinking is that when investing in the blockchain field, you need to have cyclical thinking.

The cyclicality of the digital currency market is particularly obvious, and according to historical experience, one cycle is every four years.

There is also a certain degree of cyclicality in the traditional stock market. For example, a financial crisis will break out every once in a while, but it is not absolute. Sometimes a financial crisis occurs every 5-7 years, and sometimes it only occurs once every 10 years. The duration of each financial crisis is also different. Sometimes it is over in a few months, and sometimes it lasts for several years or even more than ten years.

This is a very interesting thing, because you know the time of the cycle and the general direction of the fluctuation. What is the most difficult thing in investment? Information is the most difficult, and certainty is the most difficult. If you agree with the statement that there is a 4-year cycle, then many of your investment behaviors can be planned based on this, and many investment plans can be adjusted accordingly. If this rule is established, this is a very favorable condition for digital currency investment compared to stock investment.

Moreover, there are companies behind stocks. Although the overall market is not good, some companies can grow against the trend, and their stock prices doubled during the financial crisis. Although the stock prices of some companies did not double, their profits were not affected much, and they continued to pay dividends every year. The dividends and fundamentals of these companies are not affected by the financial crisis. At present, digital currencies do not reflect such characteristics. As long as Bitcoin falls, basically all digital currencies fall with Bitcoin, and it is difficult to maintain their independence. In addition, digital currencies do not have many landed businesses, and they have energy but no dividends, so there is no such thing as growing against the trend.

So, for stocks, we talk more about long-term investment; but for digital currencies, is it better to invest in the long term? Or is it better to follow the cycle? This is also a question that every investor needs to think about.

3. Quantitative Thinking

In traditional stock investment, many aspects can be quantified. There are a lot of data in stock investment, including operating data, financial data, market sentiment data, various announcements, etc. These are the basis for stock investment to be quantified. More importantly, stocks can be valued. The valuation theory of stocks is based on the discounted cash flow model. This valuation has theoretical support and is widely accepted by the market. On the basis of this valuation, the entire capital market has been derived, from valuation to financing, from financing to listing, and then to subsequent additional issuance and repurchase, etc., forming a complete set of logic, and also generating the most widely accepted investment theory: value investment. However, for digital currency, it has no cash flow. No cash flow means that you cannot accurately value it, and no valuation means that many theories in traditional finance cannot be applied.

If valuation is regarded as the "anchor" of investment, then digital currency does not have such an "anchor". We need to find other "anchors" to replace them. Otherwise, our investment will have no foundation and will continue to be in panic and greed as the market fluctuates.

Of course, the absence of traditional cash flow does not mean that the market value of the entire digital currency is a bubble. The digital currency market will sooner or later form its own unique valuation system, but this system has not yet been fully established. In the future, this system will be based on other indicators, such as new account addresses, the number of active users, etc. At that time, the digital currency market will still be able to find its "valuation anchor".

So, at this point in time, how can we make good blockchain investments? I think we can learn from the investment methods of VCs and PEs. When VCs and PEs invest, they invest in start-ups or early companies. At that time, the companies had no cash flow and could not be valued, so VCs created a "track theory": since I can't find the best athletes, I will invest in the entire track. For example, if I want to invest in the shared bicycle industry, I will invest in the top 3 and top 5 companies in the shared bicycle industry; if I want to do food delivery, I will invest in the top 3 and top 5 food delivery companies. Although only one company may succeed and the others fail, as long as one company succeeds, it can bring me dozens or hundreds of times the profit. My profit is enough to cover the cost of those losses, so the final rate of return is not low.

When investing in the digital currency field, we also need to learn from this investment method. Even if we are very optimistic about a company, we cannot put all our hopes on it, because the uncertainty is too great and there are too many black swan events. Moreover, even if the company itself is doing well, such as a company like Ethereum, but Vitalik is infected with the coronavirus, or some other unexpected situation occurs, it is really hard to say how Ethereum will develop in the future, and it is really hard to say whether anyone can replace Vitalik. Therefore, no matter how optimistic you are about a project, you need to find ways to diversify the risk and improve the anti-fragility of the investment.

The above are some of my thoughts. I believe that there are more differences in thinking between traditional financial market investment and digital currency investment. Friends are also welcome to communicate with me.