Issue #18: Conviction

Depending on your lens, crypto had a rough week, a typical week, and a resilient week.

One thing is for sure though, weeks like this see a transfer of wealth from people with low conviction in an outcome, to people with high conviction in an outcome.

If you weren’t paying attention, crypto prices fell nearly 50% on Wednesday and Thursday (and another 25% Sunday morning). Market dips like this are highly emotional, and they prey on people with low conviction. Low conviction is more likely to sell (in some cases for a loss), whereas high conviction is more likely to hold or buy more.

During turbulent times, conviction can be the difference between a short term loss and a long term gain, and it is the topic for today’s discussion.

Let’s zoom in…

The Importance of Conviction

Conviction is having a strongly held belief or opinion.

When you have conviction, you are willing to look past short term setbacks and focus on the long term goal. You will push through when others might quit because in your mind, the outcome is inevitable.

Conviction allows you to adopt a longer time horizon.

That is so powerful. When you adopt a longer time horizon, you have the benefit of patience and immunity from daily swings up or down.

Most of my investment mistakes were made because I lacked conviction. I either sold too early, or I didn’t buy in the first place.

Developing conviction in something doesn’t happen overnight. It comes from doing the research and educating yourself. There is no shortcut. The product of doing the research and educating yourself is an informed opinion, and an informed opinion is the basis for conviction.

I dove into crypto in 2013 and have been learning ever since. I can’t learn fast enough. The more I learn, the stronger my conviction becomes, and the easier it is for me to be patient.

Fundamentals

When you adopt a longer time horizon, you naturally start looking at different data points - data points that support the long term objective. My conviction in blockchains and DeFi becoming global financial infrastructure is based on research, education, and reinforced by data points around adoption, usage and resiliency. Let’s take a look…

• Adoption. Banks, Fintechs, and asset managers are onboarding digital assets faster than ever before. This hasn’t stopped. If you don’t understand the forces around institutional adoption, read Issue 14 - The Great Migration.

• Usage. Public blockchain infrastructure is supporting a staggering amount of financial activity, and its market share will continue to grow as more assets are tokenized.

  Ethereum is absorbing a higher percentage of this new activity…

  

  Fiat currencies are migrating to this new infrastructure as well. There are over $80B worth of stablecoins on public blockchains today…

• Resiliency. When you are building new financial infrastructure, the only way to really know if it is capable of achieving global scale is to put it through a stress test. Fortunately, crypto delivers this several times a year in the form of double digit percentage price drops.

  On March 13, 2020, when the stock market dropped on the COVID travel ban news, crypto markets crashed by 50% in an hour. When this happened, DeFi protocols buckled under the stress. Stablecoins slipped their peg for prolonged periods, oracles couldn’t keep up with rapidly declining prices, and some protocols found themselves in debt after vulnerabilities were exploited.

  This week, the opposite happened. DeFi operated exactly like it was supposed to.

  Stablecoins like DAI maintained their peg far better than they did a year ago. Below are screenshots of DAI’s price movement on March 13, 2020 and May 19, 2021 respectively.

March 13, 2020 (“Black Friday”)

May 19, 2020

Across the board, lending protocols handled record liquidations without any hiccups.

And decentralized exchanges saw record trading volumes with near 100% up time. Uptime is a particularly sensitive issue because centralized exchanges have historically struggled with outages during periods of peak activity.

Through my lens, the fundamentals supporting my conviction about this technology have never looked better.

Parting Thoughts

I write this newsletter for two reasons: (1) selfishly, I want to explore topics that I otherwise wouldn’t have an opportunity to explore so that I have a better understanding and stronger opinions, and (2) I want to educate others.

My goal is to help you understand enough about enough so you develop your own conviction and adopt a longer time horizon.

To that end, I hope I’ve been successful.

Thanks for reading,

Andy

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