In January 2018, my crypto portfolio showed a value of $350,000. At the time, I had invested about $20,000, making the multiple a cool 18x.
A smart man might have cashed out some of that money; a genius would’ve cashed out all of it. I was neither smart nor a genius, and so I watched that $350,000 shrink into $30,000 at its lowest point over the last 2.5 years — all while continuing to invest. My portfolio has recovered a good bit since then, but it’s still far from its all-time high.
The only way to learn how to act in a financial bubble is to live through one. You can read all the psychology and trading books in the world — how you’ll handle the real experience is written into none of them.
Me, I had to go up and down to learn. I don’t regret anything. I had a lot of fun, and I learned a great deal in an extremely compressed period of time. Some of my initial theses crumbled to bits, but I believe others are still valid.
I wanted to take enough time to reflect on this story. It’s been three years since I first began studying cryptocurrency, and today is a good day to tell it.
Here are 9 lessons I learned about money and investing.
Disclaimer: I’m not a financial advisor. This post recounts my personal experience as an individual. If anything, it’s probably a tutorial on what not to do rather than what to do.
1. Don’t count your chickens before they hatch
I guess technically, I didn’t “lose” $300,000 — because you can’t lose something you don’t have. The money never hit my bank account.
To this day, I haven’t cashed out a single cent. I’ve sold assets to buy others, but whether at a profit or at a loss, I always used that money to buy more assets. That’s a fine strategy to have, I think. They always say, “Treat the money you invest as if it’s gone forever.”
On some days, however, I pretended to have that money. I felt and behaved like someone with $300,000 in the bank. That’s not good, because that’s what leads to feelings of remorse when you later do realize that, actually, you don’t have the money. Never count your chickens before they hatch.
2. Think about profit before you think about taxes
In Germany, any gains from cryptocurrency you held for more than a year are tax-free. That’s a tempting promise, and so my plan from day one was to hold everything for at least a year.
(Un)fortunately, the profits came and went much quicker than that. Paying taxes on $100,000 in profits is a lot better than having no profits to pay taxes on.
But the flip side of the German tax rule — any gains you make from selling within a year become part of your overall taxable income (and thus drag up your tax bill for everything else) — clouded my thinking.
You have to take profits when there are profits to take, period.
3. A good time to take profits is when they feel too good to be true
Looking at old screenshots, I realized my portfolio hit $100,000 on December 23rd, 2017. On January 7th, 2018, it hit $300,000. When your portfolio triples in two weeks, it’s probably a good time to take profits.
For months, I spent 2–3 hours every day studying blockchain technology and the crypto markets. There were enough signs. I listened to smart Youtubers every day. I distinctly remember one of them pointing at a vertical chart, saying: “Anyone who doesn’t tell you to take profits on a chart like this is probably trying to scam you.” But since it didn’t align with my plan, I didn’t understand the urgency of taking profits. And so I never took them.
In hindsight, I would always take some profits when times are so good you know they won’t last. Planned or not, it’ll still give you peace of mind.
4. Have an exit plan before you enter
My investing philosophy is compounding every dollar I can spare indefinitely. I’m not in a rush, and I know the biggest jumps on an exponential curve happen at the very end of said curve.
That said, you should always have a contingency plan. In my case, “What do I do if my portfolio grows a lot before I hit the tax-free holding period?” I never asked myself that question, and that’s why I didn’t have an exit plan to follow.
The best time to come up with an exit plan is before you even invest. “If this grows 100% in a year, I’ll sell 50%.” Making these plans won’t guarantee you execute them, but if you don’t have them, you definitely won’t do anything.
5. Numbers rarely reflect reality
Most people are frustrated with the markets because they want them to reflect reality — but that’s not what markets do.
The stock market is a discounted version of the expected future economy. The crypto market reflects the expected value of future blockchain networks. When people have bleak expectations, prices are bleak too. And when people are euphoric, so are the prices — regardless of our current reality.
On any given day, some crypto networks are grossly undervalued, whereas others are worth more than they should be. The same applies to companies in the stock market.
Numbers rarely reflect reality — but that doesn’t matter as long as you adapt to what the numbers are. Don’t let cognitive dissonance get it in the way of managing your money as best as you can.
6. When you have “a number,” nothing else matters
In finance movies like Wall Street, there is often the question of, “What’s your number?” Allegedly, everyone in the business has an exact sum of money for which they would retire and quit competing in the markets.
Unlike trading, wealth is not a zero-sum game. The things you create can add value to everyone’s benefit and at nobody’s expense. That said, a number can still be your guiding star in a positive sense. My number is $10 million.
Naval Ravikant is a thinker, philosopher, and investor. His net worth could be anything from $4 million to $4 billion, but I’ll never forget him saying, “Every time you see one of these billionaire founders giving away to a hospital or whatever, you know they overshot. They didn’t need that much money.”
$10 million will pay for the lifestyle I want to have until I die. It’s a lofty goal, but it’s also comforting. I don’t need a $600 million yacht. I need freedom.
The good thing about determining your number is you know exactly where you’re headed. Nothing else matters. It’s much easier to take profits — or stomach losing money if you don’t — when you know your long-term goal.
7. When you believe in something, commit to it
One of the conclusions I drew after hundreds of hours of research is that, yes, blockchain has lots of potential, but, like the internet in 1993, the mountain of unlocking it still lies ahead of us.
It’ll take years to build the infrastructure upon which good blockchain apps can attract a large share of the population, and there are many ways the effort could fail. If it works, however, the rising tide will lift all boats.
Amazon’s stock went down 95% after the dot-com bubble burst — from $100 to $5. 20 years later, the drop looks like a blip on the radar, and one share costs $3,000.
At the end of the day, what matters in investing is taking out more money than you put in. Right now, I’m down 20%. I used to be up 1,650%. Will both look like a rounding error in two decades? I don’t know, but I believe in the industry, and that’s why I’m still in the game.
8. Make risky investments when you’re young
When I tell people that I invest most of my money into cryptocurrency, they often tell me I’m insane. I think investing in risky assets when you’re young is actually quite reasonable.
When you’re young, you don’t need a lot of money. You still have the energy to recover from financial setbacks. And every extra day of being invested early will add exponentially to your compounding returns decades later.
I want to buy my riskiest assets first, not last. If I lose $100,000 now, I can recover. If I’m late to the party, most of the returns will have already happened. The more my crypto portfolio grows, the more I’ll invest into stocks. Then, I can look at index funds, real estate, and so on.
The older you get, the less risk you should take on in exchange for safer returns. Start bold, grow more timid. You don’t want to bet the house when you’re 60. You want to bet it while you can still build another house.
9. Save early and aggressively
As my friends are starting their first jobs out of college, some go from earning $0 to earning $4,000. I often tell them: How you spend your first paycheck will determine how you spend every paycheck.
It only takes one month of spending it all to get used to spending it all. Five years later, you’ll still have $0 invested, and you’ll have lost the last five years of your exponential growth curve — the years with the biggest returns.
Even if you don’t earn a lot, chances are, you can take away 10% and it won’t hurt at all. Maybe even 30%. Or 50%. However much you can put aside without feeling pinched, do it and do it now.
Whether you first save for a while or invest all of it right away, the only way to learn to manage and grow your money is to commit some of it to that end.