In today’s Exponential Investor

  • What is risk?
  • Being late but also early
  • 169-times in less than three and a half years

This week, I’ve looked at the risk of scams in the crypto markets. This is a clear and present danger to be aware of.

These scam risks also exist in the stock market or just day-to-day life too for what it’s worth. Let’s be honest: there isn’t a Nigerian prince with £1,000,000 waiting for you on the other end of that badly worded email…

But while scam risks can be easily avoided once you know what the red flags are, there’s another risk that is more dangerous to you than you might think.

A proper definition

First off though, what is risk? No one ever really looks at what it is, rather than what it might be.

Risk can be the best friend and the worst enemy to an investor. It is the chance of an event moving in a direction outside of what you expect.

It’s most often viewed negatively. It’s most often viewed as the chance of an event moving against you to your detriment.

But the most useful definition of risk doesn’t really mention negative outcomes – just a direction that is unexpected. That means risk can work for you in a good way too if managed correctly.

That’s why some embrace risk. Some fear it. Some pay no attention to it whatsoever (these are the YOLO (you only live once) folk…).

But what is the right approach?

How much or how little thought should be given to risk? And how do you manage it?

Furthermore, in the highly volatile and “risky” crypto market, where do you even begin?

Well I have a very distinct view on crypto markets and dealing with your risk.

In my view, if you think about risk like this, you can navigate the crypto market with more fun and pleasure than people who don’t think about risk like this.

Also, understanding risk in the right way can set you up to get the best of the crypto market when it’s thrown at you, and help mitigate the worst of the market when it inevitably hits home too.

Little down, lots out

It’s also worth noting that my approach to risk in crypto is exactly the same as my approach to risk in the stock market.

In my view, the riskiest thing that investors do… is nothing at all.

In my 28 years of investing in the stock market and a decade in crypto markets the best course of approach has been to at least be active in the market.

Have some investments, develop and refine your portfolio and strategy over time. Look for the big themes and trends and fish out those which you think are best poised to ride those themes and trends long term.

For example, one of the biggest investment trends I’ve seen in my life is the crypto revolution.

It’s something I saw coming from a long way out. And for years I’ve been writing to investors, like you, on how to capitalise on it best.

For the bulk of my time in that market, I have been looking for cryptos that directly present investors with lifechanging opportunities.

Those opportunities include cryptos that over time have delivered 10-times and 20-times returns for investors. Of course, sometimes cryptos will crash into oblivion, failing and with the token ultimately being worthless.

But on the balance, just a few of the mega-winners far outstrips the mega-losers.

This lopsided risk/return profile is known as asymmetric risk. That is, risk where the outcome of one is so much greater than the downside risk that it’s a lopsided equation.

For example, let’s say you risk £100 in a crypto because that’s the kind of money that if it did crash into oblivion, you wouldn’t lose any sleep over.

After all, £100 is just a big night out for dinner and drinks these days. You probably wouldn’t lose any sleep over it.

Now the downside risk here is your £100. But your upside risk (the good side of the risk equation)… well, there’s potentially unlimited potential long term in crypto.

For example, in April 2017, when I first recommended Ethereum at $64.50 to investors, I was arguably late to the metaphorical party. It had been worth under $10 just a year earlier.

But the long view of the potential was quite clear.

When Ethereum hit an all-time high in November 2021 of $4,891 it was showing a paper gain of 7,482%.

That means £100 invested in April 2017, less than five years later would be £7,582. This is how symmetric risk can work for investors.

Now, you certainly wouldn’t have bet the house on it way back then. The volatility for most people, would be far too much. But that’s the thing about the crypto market, you don’t have to bet the house… and you don’t ever have to, nor should you, use debt.

Small, risk capital amounts that you are comfortable risking, can pay off massively. And if they don’t, you’re not going to be homeless.

Risk of inaction

Now, ask yourself, what’s £100 to you?

Is it a lot? Is it a big night out? Is it money you could risk? Maybe not? The amount of risk capital you use in any investment is a decision only you know and can take.

The responsibility on managing your capital is a decision only you should make.

But how and where to put that risk is where we come into the picture. And it doesn’t even have to be solely the crypto markets either.

Just this week I saw that a company, Animoca Brands, had completed a capital raising giving its business a valuation of US$5 billion.

Wind back the clock to September 2018…

Animoca Brands was listed on the Australian Stock Exchange. I know this because I prepared a research report on the company and recommended it to investors in Australia.

At the time, Animoca’s market cap was just AU$41 million.

I recommended them because it was getting more heavily into crypto and NFTs such as CryptoKitties and an upcoming virtual game, The Sandbox. With that they were launching The Sandbox’s in-game crypto token, SAND.

Fast forward to today, The Sandbox is a “metaverse” game with a crypto market cap of US$4 billion. As noted, Animoca has a valuation of US$5 billion.

From A$41 million to US$5 billion is a 169-times increase in value of the company in less than three-and-a-half years.

I remember at the time readers writing to me saying it was too risky. And when the company actually traded lower, I copped it from those saying it was a dud and that crypto was just one big Ponzi scheme.

Those investors took no action. They didn’t see the trend of crypto, digital assets, blockchain-based gaming. They decided that it was less risky to sit it out and do nothing.

In reality, the biggest risk they took was doing nothing at all.

A little capital in at that time, might have taken them to a 169-times increase in value. In less than three-and-a-half years.

This is an outlier I might add. And not everything I’ve covered is as successful as Animoca Brands, or Ethereum.

But I could get 100 wrong, and just one like Animoca right, and you’d still be better off.

This is what faces investors who do nothing.

You will miss 100% of the shots you don’t take. Or you can weigh up your risk capital, figure out what you’re prepared and comfortable to play with, and look for some of these asymmetric risk opportunities.

In my view, this not only makes you a better investor, but it makes the whole investing journey, particularly in crypto, so much more fun.

Until next time…

Sam Volkering
Editor, Exponential Investor