The Perceived Value of Predicting the Unpredictable

I attend too many Web3 conferences, so I’ve had the chance to be part of many conversations with developers, business reps, and investors. One of the most dominant conversation topics is price speculation. It’s worth an essay because I find the practice meaningless.

Most things that impact token prices are short-term events. To this end, topics that tend to hijack conversations include:

• Recession indicators → How bad and how long will it last?

• Interest rates → Will the Fed bump up another 25 bps or stay firm?

• Unemployment rate → Is the job market weakening?

Most of these discussions, while appearing intellectually stimulating on the surface, are, in fact, useless exercises in forecasting.

Most investors don’t do an adequate job predicting short-term outcomes, making forecasting a useless exercise: Few can take action that results in superior gains based on these opinions, even fewer still are well positioned to adjust their portfolio according to these opinions, and almost zero will be able to achieve consistently right moves in response to updated information.

If the above is accurate, we can conclude that conversations on price don’t matter because it is very, very difficult to know which information we are attaching weight to is or is not already priced in.

A weighted scale serves as an example to illustrate this phenomenon. On one side is the information, and on the other, what’s priced in. In an efficient market absent irrationality and hysteria, the weighted scale is leveled at an equilibrium.

However, traders tend to focus only on one side of the weighted scale, leading to imbalances that multiply as other investors respond with similar or varying expectations. As an individual investor, it is essential to balance both sides of the scale, with information equally impacting tokens on the left and the price on the right equally.

In other words, it's not about what happens in the market; rather, it's how these events affect investors' expectations.

There’s an inherent difficulty in an investor’s approach to weighing macro events in relation to their portfolio.

For instance, suppose we consider the anticipated macro factors that impacted Bitcoin's price. In that case, the Fed raising rates or conducting open market activity is part of the narrative. But would new information cause this price to move in the short term? Separately, the collapse and subsequent receivership of Silicon Valley Bank may influence short-term pricing, but was it a first-order or second-order effect?

Despite the macro events that push the weighted scale to overweight on one end, token prices are even more susceptible to considerable movements due to stochastic factors.

Implications?

As with traditional securities, short-term macro events and subsequent random occurrences should have a negligible long-term impact on token prices.

So, we should pay little, if no, attention to them.

The Token Mentality

The desire to trade tokens, combined with a focus on short-term reactionary thinking, forms the foundation of what I call the “Token Mentality,” which is characterized by overemphasizing token prices and short-term market events. As a result, the token mentality leads to misguided investment decisions, a lack of attention to long-term fundamentals, and a diluted approach to Web3’s narrative.

Whereas decentralization proponents view tokens as a long-term approach to supporting the imagined order of a user-defined internet experience, I believe few, if any, think of investing in tokens in this perspective. As a result, most people buy tokens to sell them at a higher price, thinking they’re for trading, rather than for perpetuating and supporting the imagined order that is Web3.

In my recent article on tokens, we briefly mentioned the Greater Fool Theory: No matter what price I pay for a token, there will always be someone who will buy it from me for more than I paid, even though I’m selling because I’ve concluded that it has reached full value.

The connection between these two ideas prompts a quote from Ben Graham, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

What does this mean?

The market behaves like a popularity contest in the short term, with token prices swayed by investor feelings, fads, and emotions. In other words, noise defines price movements. Market traders "cast their ballots" through buying and selling decisions that lead to unnecessary and irrational price volatility. This irrationality worsens as every Twitter trader tries to squeeze themselves through the same door all at once.

Yet, over the long haul, the market starts resembling a scale as tokens prices gradually mirror the genuine underlying value of an open-source software product based on factors such as revenue, adoption, and utility. As time passes, the market typically self-adjusts through a reversion to the mean, and the fleeting influences of sentiment and trends dissipate. Consequently, the spotlight shifts to the inherent worth of these imagined orders, which emerges as the primary force driving token prices.

Over-indexing on short-term performance

Since short-term investment performance is highly influenced by noise, results from investors on Wall Street Bets, Discord trading groups, or even hedge funds can present a misleading picture. By misleading, I mean talking about superior gains in good times. As a quick example, my social media feed has slowly eroded any mention of “elite trading groups” and “get rich quick through stocks and tokens” courses as interest rates have risen… I guess we are not in “good times” in 2023. Take the image below as evidence:

Confidence, timing, and skill are essential ingredients for success in investing through cycles, and to preserve one’s ability to “not lose one’s shirt” and “stay in the game.”

But for much of the 2020-21 bull market, if all you had was confidence exerted at the right time, you didn’t need much skill. In the height of the market frenzy, it’s hard to remember this when people are making money, trading.

As I took a step back from token trading in 2021, I reflected on an essential principle: the quality of a decision cannot be solely judged by its outcome. This concept has been a recurring theme in my writing, emphasizing that even well-reasoned decisions based on comprehensive information can sometimes result in unfavorable outcomes. Conversely, we've all witnessed situations – perhaps even involving ourselves – where someone has made the right call for entirely wrong reasons. In other words, we did the work, stayed prudent, and were met with failures, whereas others guessed or even flipped a coin and were rewarded handsomely by luck.

I bring this up for a simple reason: it is worth separating the outcomes and high-flying results touting token trading from the bull market and recenter our frameworks around first principles: tokens are a means for ownership to usher in a new internet paradigm, the Web3 imagined order.

Save Yourself From Yourself

Warren Buffett offers a nice suggestion for investors in Web3: imagine you have a punch card permitting only ten investments throughout your lifetime. You may only get three great ideas in your lifetime, so ten opportunities narrow down your shot on goal to be quality.

This idea encourages more thoughtful decision-making, directing attention toward opportunities with the highest potential for success. By prioritizing quality over quantity, you can resist the urge to trade in pursuit of short-term profits incessantly and instead focus on achieving substantial, long-term returns, staying in the game long enough to see the fruition of Web3’s narrative absent emotional toil and frustration.

It may be worth adopting the mindset that you don’t make money on what you buy and sell; you make money (hopefully) on what you hold. Think more. Trade less.

“Time, not timing, is key to building wealth in the stock market.”

Guidance For Overcoming The Token Mentality

It’s easy to lose sight of the message and impact behind Web3 when money is involved. It poisons the ethos and erodes the messaging that drew people to care in the first place.

If our goal is to both make money and support the ushering of a user-defined internet paradigm, expectations on time should be equated with expectations on capital appreciation. If you view this investing game on a five or ten-year timeline, then the only thing that should matter is the difference between your starting amount and your ending amount, balanced with your goals and needs for that invested capital in between.

With this in mind, rather than focusing on short-term market fluctuations and the noise surrounding the cryptocurrency landscape, I present a framework below that has helped me assess investment in both private Web3 projects and public ones:

• Understand your broader goals with investing within a particular space or sector, with a clear expectation on your risk appetite and targeted capital appreciation.

• Study cryptocurrency projects and protocols, with an emphasis on their revenue generation models and long-term earnings potential (fundamentals) rather than hype or media attention (reactionary investing) (e.g., is this a temporary solution to a current problem or a sustainable one that withstands trends and swings).

• Seek to acquire tokens in projects and protocols that are attractively priced today, relative to their long-term earning potential and lasting relevance in the market.

• Update your framework and model at yearly intervals to ensure the investments you hold maintain durability over time (e.g., update your thesis when new information arises at the same point each year, avoiding the influence of short-term volatility).

• Prune and adjust your portfolio if its growth trajectory no longer aligns with your original, personal investment thesis.

What mindset is needed to gain an investment insight, rather than random token selection?

• Focus solely on the long-term, treating token ownership as an interest in the ethos and mission of the project, rather than a mere gambling chip.

• Recognize that risk is relative - the higher a perceived return, the higher the accompanying risk. There is almost never a free lunch.

• Invest only what you can afford to lose, and create a mental model around your margin of safety.

Conclusion

Token trading and focusing on short-term, reactionary heuristics have given rise to the "Token Mentality," characterized by an overemphasis on token prices and short-term market events. This leads to misguided investment decisions, a lack of attention to long-term fundamentals, and a distorted approach to Web3's narrative.

By placing tokens in the context of ownership interests in imagined orders, we can move away from short-term speculation and work towards a cohesive, value-driven Web3 ecosystem.

To overcome the Token Mentality, it's essential to focus on the long-term perspective and see token ownership as an interest in the ethos and mission of a project, rather than a casino chip. By adopting a more prudent investment approach, focusing on long-term potential, and continuously updating our investment theses, we can support the development of a user-defined internet paradigm while also seeking meaningful returns on investment.

Adopt a mindset that emphasizes quality over quantity, think more, trade less, and let the long-term perspective guide your decision-making in the ever-evolving world of Web3.

Thank you to Samuel Wheeler, Zoe Enright, and Nico Stanfield for their thoughts and edits on this post.

References:

www.oaktreecapital.com/insights/memo/what-really-matters