How to Rationally Trade Moonshots (100x - 1000x)
How to Rationally Trade Moonshots (100x - 1000x)
A Brief and Realistic Guide
One of the best advantages of the crypto world is that you can retire on less. With the right mix of platforms, it is not difficult to get 13% APR for depositing your dollars at a crypto-bank (just read this article and ask questions on Discord).
That means that with $2,000,000 you can earn $260,000 each year for doing nothing. This is real passive income. Unlike real estate properties, you don’t have to deal with tenants and new compliance regulations etc. This is mere interest earned.
The real question, then, is how can you get that $2,000,000 (or $10 million if that’s more to your liking) quickly?
Well, one answer is to follow The Art of The Bubble’s Trading Strategy, which aims to get 32x every five years.
Another approach might be called The Art of the Bubble’s Moonshot Strategy. The idea is to buy a basket of promising opportunities in the hopes that at least 1 or 2 really blasts off so that you are set. If you get just one 1000x moonshot, that would turn $2,000 into $2,000,000.
This approach might be less reliable. With The Art of the Bubble’s Trading Strategy, macroeconomic data guide the decision process. With Moonshots, the foundation turns on intuition and sector research.
Yet, just as our Trading Strategy takes standard practices from Wall Street and applies them to areas that only small investors can take advantage of, the Moonshot Strategy takes the ideas of venture capitalists and does the same.
Mostly, we’ll focus on cryptocurrencies, especially because we are in a crypto-winter and everything is on sale. This means we’ll have the best chance of finding real moonshot candidates.
In this opening newsletter, I’m going to outline the basic idea that makes this approach rational, called a basket strategy, and then I’m going to look at one set of moonshots on the Cosmos (ATOM) and Terra (LUNA) blockchains.
Paying subscribers have already received my thoughts on these coins on Discord, but I haven’t given them a full description just yet of the platform, so I think this will help them too. Because these analyses don’t use my proprietary algorithms, DIY-er subscribers will get future updates too.
Let’s start with the risk analysis.
What Precisely Is A Basket Strategy?
This is the strategy that venture capitalists, like Mark Cuban and (fellow philosopher) Naval Ravikant, use. Most people, however, have a mistaken understanding of just in what it consists.
A basket strategy is not buying a lot of stocks or coins in hopes that some will “hatch.”
It is about buying better than a proportional amount relative to the mathematical expectation for a trade.
Let me unpack that a bit. “Mathematical expectation” for discrete cases = (reward * the probability of its occurrence - risk * the probability of its occurrence).
In plain terms, it’s the reward minus the risk, adjusting both for the likelihood of their outcomes.
For example, suppose you buy a hypothetical MoonShot coin for $100. You did some research and conclude that its possible reward is 10x. You conclude further that the likelihood of that good outcome is 20%. On the flip side, your research also leads you to conclude that the possible risk for the token is that it might drop to 0. Most moonshots fizzle out after all. You put the likelihood of that happening at 80%. Is it a rational bet to buy the coin?
Well, if you substitute those numbers into the above equation you get this.
Mathematical expectation = (1000 * .2) + (-100 * .8) = 120.
Since that’s a positive outcome, it’s a rational bet. Even more telling, it’s higher than your initial $100, which implies that it has a remarkably high premium relative to its risk.
Now I need to introduce some caveats.
First up, this bet is still most likely to lose money. In fact, given the scenario, the most likely outcome (an 80% probability) is that you’ll lose everything.
A rational bet approach assumes that you have enough money to keep bankrolling these things. Over the long term, these best make money, but not on each trade. Mark Cuban is a billionaire. Naval Ravinkant is well on his way there (if he isn’t already).
If you join us on Discord you’ll see that I like to buy these moonshots for fun. I have enough money to do that … at about $100 each such bet. These investments aren’t even casually linked bets so that taking 100 bets with a 1% chance of success won’t guarantee you a winner (that’s the gambler’s fallacy).
Hence, caveat #1 = a rational bet on low probability outcomes is still likely to lose you money on any individual bet, so you need to have enough money to cover a lot of losers.
You can help your odds if you only buy moonshots that you think have a 1 in 4 chance of succeeding, and then buying at least 10 of those. If your expected outcomes still work in that case, then you probably have a rational plan.
Caveat #2 is for all my math nerds. I love you all (I really do).
There are more complex ways to define this process, but the increased precision won’t help. I remember my “lightbulb” moment came when reading how a successful quant defined his algorithms for trading a benchmark index by assuming a Gaussian distribution even though the index performance had obvious skews. His explanation for his approach was peak engineering: “garbage in, garbage out.”
His point, basically, was that input data that we’re using is so noisy that more precise definitions don’t help.
So, yes, the general definition for mathematical expectation is defined in terms of a Lebesgue integral, and the probability spaces for this scenario (if you break it down) more closely approximate those continuous values than the discrete outcomes addressed here. But we have so little confidence in our input data that such procedures amount to showing off how much math you studied at uni, not sound investment strategy.
These rough representations of mathematical expectation, then, are about as good as we’ll get for building investment models. Always keep in mind that it’s better to be approximately right than precisely wrong.
So with these two caveats and the general idea in mind, let’s turn to identifying some moonshots in the cryptocurrency space.
The Current State of Cryptocurrencies
Now, we’re going to do some market research. Our goal is to find some investments that we hope will have better than a 25% chance of succeeding and will do 100x to 1000x.
To do that, we are going to bet on an out of favor platform and hope that it succeeds well enough in the next crypto-currency bull market.
Just so that everyone is up to speed, most cryptocurrencies are not like Bitcoin. In fact, Bitcoin won’t even be like Bitcoin come November.
Bitcoin uses cryptographic technology to secure a list (a ledger) of who owns which coins and how much they paid. Its original goal was to mimic how currencies work, so it is correctly called a crypto-currency.
What Vitalik Buterin, the key developer of Ethereum, realized was that Bitcoin was wasting its technology. Rather than have the blockchain technology power the coin, why not have the coin (Ether in this case) power the blockchain?
The Ethereum protocol, then, uses cryptographic methods to secure the blockchain. But it’s not a coin or currency—at least not primarily. It’s actually a global computer, and its blockchain technology runs other applications. You spend Ether to run them. Since they’re decentralized applications, they’re called D’Apps rather than just Apps.
Ethereum is hence best described as a crypo-platform.
This difference has important investment implications. Since Ethereum is just a computer, any competitor that is faster will obviously be better and might take its market share.
Remember, this thing hopes to run all the applications in the entire world, so it needs to be really fast. Right now, Ethereum can process only 15 transactions a second. It needs to hit at least Visa’s levels of 50,000 transactions per second (TPS) to be viable.
Even still, Ethereum has proven a revolutionary idea and spawned all kinds of new technology, including decentralized exchanges, Non-fungible tokens, decentralized autonomous organizations, synthetic stocks, crypto lending, and crypto-insurance.
The developers of Bitcoin have (belatedly) realized that platforms are the future of cryptos, and so have planned to upgrade it so that it can run other programs on it too. That is what their Taproot upgrade is going to do in November.
The problem for Bitcoin is that it will still be slow and it’s even slower than Ethereum, doing just 3 - 4 transactions per second.
Given this backdrop, the biggest problem in the cryptocurrency world right now is to fix this slowness. More specifically, it’s a race to see who can develop a blockchain technology that does the following three things:
Has a functioning smart contract platform (to host programs),
Has a fast platform that can do at least 50k TPS, and
Has a vibrant ecosystem of programs running on it.
Bitcoin has none of those, which is why I’ve long called it a legacy technology. Even after it upgrades to have #1, it’ll have to succeed at #2, which Ethereum has been working for 4 years now, before it can move onto #3.
Ethereum, currently has #1 and #3, since it was the first crypto platform ever. This means it has 90% of the world’s D’Apps and so already has adoption. The problem is that it is way too slow. I hate using it, but I’m often forced to do so.
Ethereum’s roadmap suggests that they will fix most of the speed problems by about this time next year.
This gives competitors, who don’t have to upgrade old technology, about 12 months to scoop up market share from Ethereum.
Maybe, like the iPhone and Android, there will be 2 platforms that people use. Or maybe like TV streaming services, like Netflix, HBO, Hulu, and Disney+ there will be 3 or 4. The competitors don’t have to beat Ethereum so much as establish themselves.
Whoever manages to do that is likely to hit a $5 - $10 trillion market capitalization, as they’ll have somewhere between ¼ to ½ of the world’s blockchain activity and the value of that activity is likely to equal the total amount of US Dollars circulating called M2. That’s roughly $20 trillion.
There are about a dozen such competitors for the top platform spot right now, and each of them has its own little ecosystem of applications.
To my mind, only a few have a real shot at accomplishing all three by August of 2022:
The Ethereum Platform
The Solana Platform
The Cosmos / Terra Platform
I’m less optimistic about Polkadot (DOT) and Cardano (ADA) because they are so far away from accomplishing speed (target 2) and adoption (target 3). Cardano will finally be able to host other programs (target 1) in August and then it’ll start on speed. Polkadot is already focusing on speed but has done poorly in promoting adoption.
Binance has quite a few D’apps, and it’s fast, but it’s not really decentralized in the way that I’d like. That means that it’s open to a lot of manipulation. People use it right now because of a lack of alternatives, but that’s not a long-term plan.
By contrast, Solana and Cosmos-Terra are already fast enough and already have the relevant applications on them. Since Cosmos is the least favored (it’s not even a top 30 coin) it's the perfect candidate for a moonshot platform.
Cosmos and Terra
One reason this ecosystem works well is that it’s pretty narrowly focused on what is called DeFi, short for decentralized finance. This is putting blockchain to use in doing the things that traditional banks did, such as holding money, offering loans, etc.
Here’s an image that CoinMarketCap put together to explain the landscape of decentralized finance about 3 months ago.
The base blockchain for Terra is Cosmos. So, to be clear, Cosmos can do more than decentralized finance and Terra is the blockchain project built on it for decentralized finance specifically.
Also, the symbol for Cosmos is ATOM, while the symbol for Terra is LUNA. Yea, confusing. Maybe that’s part of the reason these projects are discounted.
Strangely, Cosmos is presently ranked #37, with a market cap (= total coins * price per coin) of $2.5 billion while LUNA is ranked at #29 at $3.3 billion. People clearly don’t understand what’s going on here.
This would be like ranking Uniswap, which runs on Ethereum, higher than Ethereum.
In any case, the LUNA decentralized finance ecosystem has a stable coin, UST, an exchange called Terraswap, where you can swap for other coins. It also has a lending platform, called Anchor, which is basically a bank, and a synthetics platform, called Mirror, where you can buy representations of stocks using cryptocurrencies.
Anchor also has insurance for its deposits that you can buy. One is Nexus Mutual and another is InsurAce. That’s important because Anchor offers 19.5% APR for depositing your money with them and that is better than anything else in the cryptocurrency world. The insurance makes it safe too.
Also, not shown in the image above, because it’s brand new, is the Spectrum Protocol that aggregates yields for you—if you’re interested in yield farming—like yearn.finance does for Ethereum.
I know that’s a lot and if you are not deeply into the decentralized finance world, you may wonder what it all means.
The takeaway is this: the Cosmos-Terra platform is a complete platform offering everything currently available on Ethereum, but faster and with cheaper costs.
No other platform can claim to have done this. Binance is not only centralized, its Linear protocol is still in development. Solana, not featured above, doesn’t have a synthetic platform at all. Polygon and Avalanche, two other competitors, are both still building out their ecosystems. And Ethereum is ridiculously slow.
None of this means that Cosmos-Terra will win the platform wars. VHS, after all, was a provably worse product relative to BetaMax and it still won.
But, as a moonshot candidate, this is fairly reasonable. So, let’s look at possible returns.
From 10x - 1000x
To be clear, the timeframe for these moonshots is 12 - 24 months. I’d expect 12 months for the crypto winter to end and another 12 for the next bull run to ride up a lot.
This means that any buys you make in the next 12 months could fall a lot more. You might want to crash cost average these coins. I don’t give advice, after all, I’m only educating about possible approaches.
Right now, Cosmos (ATOM) and Terra (LUNA) are fairly large coins. If successful, they could still reasonably do 10x. That would put their market capitalizations at $25 billion and $33 billion respectively.
In the last bull run, that would have landed them in the top 20 coins. If the platform is successful, I’d expect both to be top 10 coins, so they’d likely do 20x - 30x.
The Mirror protocol is simply the best synthetic asset protocol presently in existence. Yet, the Mirror coin (MIR), is presently ranked #234 with a market capitalization of $222 million. More coins will be minted over a period of years though (just as Bitcoin has been doing). If it did 15x, that would bring it to what Synthetix, its inferior Ethereum competitor, hit for a market cap this last May of 2021. If the market for synthetic assets grows, and I imagine that it will, then it could reasonably do 100x, with a market cap around $22 billion.
The Anchor (ANC) protocol is the best lending protocol in existence using APR on stablecoins as a measure. It plans to expand to allow other coin staking and other kinds of yield farm staking so that it’ll compete with Aave on the Ethereum platform. Presently, Anchor is ranked #242 with a market cap of $159 million. If it grew to hit Aave’s price last May, it would do 51.5x. If the LUNA platform does well, Anchor could grow to a market cap of $16 billion, which would give you a 100x return. This would have made it a top 30 coin in the last bull run.
Now for your 1000x + possibility, the Spectrum Protocol (SPEC). This is so new that it’s not even listed on Coinmarketcap. It’s also still being audited, so it could be a scam, and the developers might just run away with everything you invest. Don’t say I didn’t warn you. The relevant comparison on the Ethereum Network is Yearn Finance, which had a little over $3 billion in market cap this last May. Should the LUNA protocol do well in the next bull run, SPEC could reasonably surge to that range. Since its present market capitalization is likely a minuscule $3 million, that would amount to 1000x. If it did better than Yearn, you would get more than 1000x.
Concluding Thoughts
In this newsletter, I hope to have given you a way to think about moonshots. You not only need a basket of such buys, but you also need to make sure that each of those buys has a reasonable prospect of success.
Otherwise, you’ll just be buying the equivalent of lottery tickets.
I also tried to give you a sense of how to do the sort of analysis needed by looking at the Cosmos-Luna platform, and the coins associated with the platform.
The platform is presently the only fast, cheap, and complete decentralized finance platform in existence. We’ll just have to see if it is able to garner enough adoption through the present crypto-winter to succeed in the next bull run.
Notably, all of the coins in this newsletter are linked—well, except for Spectrum which might still turn out to be a scam. My point, though, is that you’re basically making 1 investment here in different ways. So, you will need quite a few more coins to fill up different baskets.
And that’s why I’m going to send out further updates to all paid subscribers (DIY-ers, Crypto, and Bubble Riders). Also, if you don’t know where to buy these, you can ask on Discord.
That’s all for this week! Happy Trading!
Disclaimers
General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.