Before investing, it’s important to define your own personal strategy.
If you don’t have a strategy, you’re just gambling.
According to Wikipedia, an investment strategy is:
A set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio.
When determining your personal investment strategy, you can start by asking yourself the following questions:
After identifying your personal investment strategy, the next step is to create a portfolio that aligns with your strategy. Are you a HODLer? Day-trader? Are you more risky or more conservative? Are you building a retirement fund or trying to double your money and cash out?
No matter what your strategy is, I encourage you to reserve 10% of your portfolio for testing out new ideas. I call this the “slush fund” strategy.
In this context, a slush fund strategy is reserving 5–10% of your portfolio for testing out new ideas. Depending on each individual and their current portfolio, your slush fund can look very different.
For example, if you’re a conservative investor who only holds coins in the top 10, adding some lower cap projects would qualify as slush fund investments.
On the other hand, if you’re already well diversified in both the assets you hold and the strategies you implement, your slush fund will look very different. You might try out presale investing, cash-flowing your cryptos, acquiring a masternode, or maybe you start mining.
To recap, there are 2 requirements for your slush fund:
Now that you understand the basics of what a slush fund is, I’m going to explain why you should implement a slush fund in your portfolio.
The investor with the most information will always have the advantage. By implementing a slush fund, you force yourself to get out of your comfort zone and learn new strategies. You will become a more well-rounded investor, which increases your chances of spotting opportunities before others do.
Humans consistently fall into the trap of “herd mentality,” also known as groupthink. Even though we consciously know the herd is often wrong, we still follow the herd because it feels safer and there is much less friction.
Since most people follow the herd, popular investments become extremely overvalued. Smart investors seek undervalued assets. By definition, undervalued assets are not popular.
Although Warren Buffett is anti-crypto (he is also famously avoids internet tech stocks), he built his empire based on this premise:
Be greedy when others are fearful, and fearful when others are greedy.
Lastly, as a word of caution: Just because something is unpopular, doesn’t mean it’s undervalued and will increase in value. Sometimes the investment is unpopular for a good reason. However, putting yourself in this skeptical/contrarian mindset can often lead to hidden gems.
Allocating 10% of your portfolio to crazy experiments may actually decrease the volatility in your portfolio. Of course, this assumes your slush fund is not directly correlated to your main holdings.
Having a well-defined investing strategy prevents us from allowing our emotions to make decisions for us. We’ve all been caught up in FOMO and found it hard to sit on the sidelines when the next big coin is pumping. This does not always make for the wisest investment choices.
However, by allocating only 10% to riskier experiments (like chasing a pumped coin), we are free to try out new ideas, and even if they fail we still retain the vast majority of our capital.
By allotting a fixed 10% of your portfolio to wacky ideas, it forces you to choose your experiments wisely. You can still have some fun with your investments, but this positive constraint leads to better decision-making.
It’s important to note that you don’t have to allocate all 10% on one single experiment. You could have 2 experiments each for 5% of your total portfolio, or 10 experiments weighted at 1% each.
By experimenting with new strategies, you might uncover undervalued gems or identify a new strategy that better suits your skillset.
For example, I was initially focused on trading the crypto markets. Over time, I realized how much I enjoyed researching the technology, business use cases, and product-market fit. So I completely stopped trading and instead focused on my strengths: fundamental research.
In the words of the Thai fruit seller who convinced me to try durian (the stinky fruit) for the first time:
“Never try, never know.”
There are theoretically endless possibilities for where to direct your slush fund, so I don’t want this list to limit your thinking. Free thinking is the key to an effective slush fund.
Disclaimer: I am not a financial advisor and this should not be construed as investment advice; these are simply ideas to consider when building your slush fund.
Instead of owning digital assets, you can experiment with owning shares of companies that are deal with cryptocurrency. This ranges from companies that mine bitcoin, to retailers that accept crypto payments, or anywhere in between. Take a look at these 5 crypto stocks to watch in 2018.
While I don’t imagine we’ll ever see anything like the 2017 ICO boom, there are still opportunities in this space. ICO investing is an entirely different beast compared to value investing in the big market caps. It’s significantly more risky, but with this risk comes potentially massive gains.
Presales are becoming a popular way to invest in early-stage projects. You essentially participate by pooling funds with other investors to buy up pre-ICO tokens at a discounted price. Each presale has a different discount, vesting period, etc. As always, do your homework before participating.
If you already invest in ICOs and presales: you could try new strategies. Experiment with selling the tokens before the ICO gets listed, wait for a major exchange listing, or consider creating new metrics to determine when to sell.
If 100% of your crypto portfolio is holding digital assets, you might want to consider mining. However, mining requires a base level of technical expertise, so if you don’t possess this, understand that you have a significant learning curve to undertake.
Another option is cloud mining, which is where you rent physical mining equipment and get paid a percentage of the gains. The biggest cloud mining operation is Genesis Mining.
Identify the most popular trends in the crypto space and form your own opinion. If you disagree with the consensus reality, that is a good indicator to explore the contrarian point of view. This strategy can lead to buying up undervalued projects for pennies on the dollar.
Here are a few examples of how this thought process goes:
While this obviously doesn’t work every time, sometimes you can find massive gains by taking the risk.
It’s important to allocate your slush fund to new ideas, contrarian ideas, ideas that push your comfort zone. This how personal growth occurs and how you as an investor can stumble upon the hidden gems are hiding – and besides that, it can just be fun to mix things up. To keep it simple, if you’re a day trader consider experimenting with swing trading or cash-flowing your cryptos. If you’re a value investor, try out trading or flipping ICOs.
Personally, my favorite strategy is called “Sell to Cover.”
The goal of this strategy is to acquire small positions in many tokens and de-risk my capital as soon as possible.
I’ll use an example to illustrate: I buy 100 tokens of project X, and when the value doubles I sell half my stack (50 tokens). This leaves me with 50% of my initial tokens while preserving 100% of the initial capital. Then I’m free to invest that same initial capital into another project while slowly building a portfolio of many different “free tokens.” I’ve also heard this strategy referred to as “free soldiers” or “planting seeds.”
The next 3 strategies are based on cash-flowing your crypto.
A masternode requires you to purchase and lock up X amount (a lot) of a certain digital asset, and it usually requires you to commit servers or some infrastructure to the network. In exchange for your services, you are paid out X tokens per period, generally out of the inflation pool and/or transaction fees.
Masternodes are capital intensive, as they require large upfront costs. But, if done correctly, they can be an excellent way to “cash-flow your crypto.”
Masternodes.pro lists all the masternode coins – including Dash, Zcash, and LUX – as well as the cost to acquire them and the potential income.
Some masternode coins include: Dash, Zcash, LUX
Proof-of-Stake (PoS) is an alternative consensus mechanism to Proof-of-Work (PoW). With PoS, you commit coins to the blockchain (staking), which offers the network added strength and security. Stakers are then paid with “new money” via inflation from the network. Each “staker” is paid out proportionally based on how many coins they stake.
As an investment strategy, you can allocate a portion of your portfolio to PoS coins which pay out “dividends” in the form of new tokens from the network.
PoS coins include: NEO (which pays GAS), ARK, KCS, and PIVX. Both VECHAIN and OMG plan to start PoS rewards in 2018.
The Steem ecosystem pays out inflation proportionally to the content producers that the networks deems “valuable.” In simple terms, the more credibility you have (Steem Power), the more your vote “counts” when determining who does/doesn’t receive inflation payments. This makes having Steem Power a valuable commodity in the ecosystem.
Because Steem Power is valuable, secondary markets have popped up where you can lend/borrow Steem Power with interest. As an investor, you can earn up to 25% annual returns (paid in Steem) by lending out your Steem Power.
Please note: you do not lose your Steem during this process. At the end of the lease terms, you receive all your Steem Power back. You can compound your new Steem and increase your lending power over time.
Remember to go slow, focus on your education, don’t take unnecessary risks, and never let your “slush fund” exceed 10% of your total portfolio.
A few questions you may want to ask yourself before diving in: if you’ve never tried out a slush fund, what new strategy interests you the most? If you already have a slush fund, how do you identify new potential strategies?
Now that you have some new strategies in mind, you can consider implementing your own take on the “slush fund strategy.”
Author’s Note: I should thank that Thai fruit seller who convinced me to try durian for the first time. Durian has since become my favorite food, and that open-mindedness has led me to many unique experiences around the world. Never try, never know.
Related: A Guide to Long-Term Cryptocurrency Investment Strategy
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