Crypto as a business….. “Businesses work for you, so you don’t have to work”
I have been fairly quiet over the last few months. After spending the majority of 2020 providing free and unbiased educational content to the crypto community, I took some time away to reflect on the last 4 years in the crypto market.
I have always been proud of myself, that throughout various bull and bear cycles I have maintained my core values and principles, principles which include honesty, integrity and accountability.
On the topic of accountability, it would be wrong of me to claim that I played the market cycle as well as I could have. We can always do better, and constant evaluation of our portfolio and strategies is without doubt mentally challenging. Financial markets have a way of making you feel like you have under achieved. No matter how well your portfolio performs, the human brain always “wants more”, an inherent design flaw in the design of the human mind. When you couple this with the dynamic and fast paced nature of the crypto market, you can be right today and wrong tomorrow.
The ability to dynamically change your thought process and align with portfolio allocations is not easy. As portfolios grow in size the challenge becomes all the more difficult, managing risk and maximising returns is like spinning plates. As one starts to spin slower, capturing the risk and acting accordingly is key. Inevitably one will fall, and how you act in this instance is just as important. Reallocating value from under performing positions is hard, sometimes cutting the winners even harder, a skillset that has to be developed with time and experience.
Throughout my period of reflection, I spent a great deal of time thinking about the optimum angle to approach the crypto market; that is, breaking down the component parts of a functional and risk managed portfolio, coupled with the yield generation aspect that the digital asset landscape offers. A portfolio has many similarities to any functional and well performing business or balance sheet.
My favourite analogy is referring to my personal crypto portfolio as a business, a business such as a bakery or pizzeria — let’s break this idea down and dive into more detail :
Digital assets or crypto currencies, the name does not matter. What matters is the quality and properties of the asset.
Select digital assets have similar properties to pizza or bakery ovens; a one time investments that has the ability to produce a recurring revenue stream. However, unlike catering equipment, one key difference is that if you are able to select the right asset, it has the potential to asymmetrically appreciate whilst producing pizzas. Turbo charged pizza ovens anyone?
Leveraging digital assets as collateral in a collateralised debt position, to unlock capital and potentially defer taxes, is a strategy used by the wealthy.
Rarely will you see the rich selling assets, as borrowing against them has many advantages which are well documented. Companies such as Celsius Network offer loan services on crypto at astonishingly low rates. Borrowing at less that 1% interest is a powerful way to unlock capital in just a few clicks.
Alternatively leveraging De-Fi money markets such as AAVE allows trust-less lending and borrowing. You are at the mercy of the smart contract liquidation point and the Ethereum transaction costs (GAS fees) which, in volatile times can be eye watering, but you retain permission over your funds and can access them instantly.
The choices to generate yield in 2021 are abundant; De-Fi or Ce-Fi, only you can make the choice.
From my perspective a mix and match, or blended approach has always proved fruitful. Check out my other medium article where I dive deeper into yield generation.
This is a tricky one, as high quality equity offerings in the crypto space are few and far between. The digital asset landscape has attracted the attention of traditional finance VC’s who are scoping up the majority of quality equity offerings in closed round deals. Examples of such companies that refused to tow the traditional line are FV Bank & Celsius Network. They were generous to offer the crypto community equity allocations at attractive pre-money valuations. Anyone who managed to capitalise on these gifts will be handsomely rewarded in the merger and acquisition frenzy which will take place in the next 3 to 5 years.
Adding quality equity to your balance sheet is a power play for long term growth. It is sometimes difficult for the human brain to imagine the magnitude of future IPO valuations that will be awarded to the companies trailblazing the future of finance. Coinbase has taken the first step with its (COIN) IPO offering and early investors were handsomely rewarded.
Keep an eye on Bnktothefuture for future equity deals. Listings have been few and far between over the last 6 months, however the odd gem does pop up every now and again.
Location & Structure
To incorporate or not incorporate; we can debate this in a separate article, but approaching your portfolio as a business will raise questions on structure and geographical location.
Reviewing the playbook for tax efficiency, and coupling this with your entity location & residency is a key aspect to maximising returns without falling foul of the law. I see so many instances of individuals with 6 and 7 figure portfolios, simply choosing to turn a blind eye to the fact that they are running a fairly large business which is liable to taxation.
Often setting up a company entity provides a safe haven and tax break. Be sure to do your due diligence and seek professional advice if unsure.
Now this is where it gets interesting…
With the above in mind, does it matter what the value of your underlying assets on your balance sheet are “if” the revenue stream from your business is stable or even growing? Would you sell your bakery ovens if they went down in value or the property devalued? Absolutely not.
BTC is a perfect example, with a track record of 200% annualised growth over the last 12 years, why would you sell? Maybe you have excess value allocated to BTC on the balance sheet and you need to rebalance, or maybe you see opportunity cost in holding excess BTC. Constant evaluation of the business is smart.
If none of the above conditions apply, and just the USD value has depreciated, maybe reducing the revenue stream is not the smartest decision.
Alternatively, accessing the equity locked within your assets via a loan can be lucrative if the capital is put to work efficiently. Food for thought…
But of course, the challenge is selecting the assets in the first place, and once you have the assets, there is always a multitude of options to consider. Just HODL’ing is the right strategy if you are holding an under appreciated asset with strong growth potential. If the asset has recently experienced explosive growth you may look to re allocate portfolio value, due to increased opportunity cost of holding capital in a low yield or speculative asset.
Defensive plays are extremely powerful in over extended market conditions. Often rebalancing a portfolio to include stable coins can increase weekly / monthly revenue streams for your business, whilst managing risk and setting up for accumulation in less frothy market conditions.
The multitude of options associated with USDC and the various other stable coins are not to be underestimated. In a recent article I will share my opinion regarding USDC & maximising yield on stable-coins. Be sure to check that one out.
Undoubtedly, the key is to mix and match the financial tools in your box, or maintain the temperatures on your ovens to cook the perfect pizza. It takes time to perfect the perfect recipe. Consistency and frequent evaluation are typically what yields a satisfying outcome, no pun intended.
It is no surprise that the majority of market participants choose to adopt the “buy low and sell” high methodology. Lured in by the “get rich quick” mentality, the average retail investors focuses on a short term time horizon.
Taking a longer term and more business orientated approach will undoubtedly help you navigate the choppy waters of the crypto market and capture the inevitable long term appreciation of your assets.
Minimal operational costs and an upward trajectory of growth for the next 5 to 10 years make this an extremely attractive business opportunity. Compare this to traditional finance, property management or hospitality and I am sure you will agree that the return on time and initial capital outlay is unrivalled.
I encourage you to focus on the “revenue stream”, portfolio structure and “manage risk”. Chances are if you achieve these three objectives you have a good shot at achieving life changing revenue streams resulting in true financial freedom.
Final thought … Rome was not built in a day. Take your time and expand your time horizon and always manage risk. I hope to see you all in Rome someday so we can enjoy a slice of freshly baked pizza together.
*As always this article is not financial advice, do your own research and come to your own conclusion.*
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