5 Things I Learned About Investing in 2021
When I wrote about investing in Top Shot at the start of this year, the whole NFT landscape looked quite a bit different. Most of you likely never heard of non-fungible tokens, let alone realized a .jpg of an ape in a tie-dye shirt with a slice of pizza just kind of like hanging out of his mouth could be worth so much money.
“Eight figures for a fucking photo of a pixelated alien? That’s insane!” many of you declared. And I wholeheartedly agree.
Those are worth nine figures now.
I had actually purchased NFTs before Top Shot. Who could forget Robert?
I'd like to introduce you to Robert pic.twitter.com/3HWY7rdt3j— Jonathan Bales (@BalesFootball) December 8, 2017
Robert couldn’t spawn at the fastest rate—wait, can cats spawn or is that just like fish? I could have sworn I heard that ferns spawn. This sentence now seems like it’s grammatically incorrect—but as my first NFT, Robert had a special place in my heart back then, and still holds a special place in my heart meow.
After the kitties, I didn’t think too much about NFTs again until about 18 months ago. I started buying a few pieces of digital art, but was too embarrassed to tell anyone. I remember going out for a birthday dinner with my mom and nervously telling her about it. The conversation was basically like when Peter and Lois Griffin needed money, so Peter said he was “gonna suggest we eat the kids, you know jokingly at first, but then gauge your reaction and if you were cool with it, go from there.”
I made the suggestion. I gauged her reaction. She was not cool with it. I immediately recommended the beef tartare, which I knew they made tableside with a generous portion of meat that she’d enjoy, so as to distract from the fact she didn’t just ask if I’m going to lose all my money.
“Don’t forget about the kitties Jonat- ooohhh beef tartare okay that sounds great!” It worked.
Here’s how you know I was nervous to talk about my wild idea of art not needing to actually exist physically to hold value. I wanted to tell you guys about it, but I was scared you’d all laugh at me and make me feel like a loser #online, so I wrote some words on digital art and how to find the next big thing, but put it at the bottom of an article called The Time I Pretended I Was Jake Delhomme’s Son. From that post:
I’m completely willing to admit this might be the biggest blunder of my life, but I think the future of art is digital. Not only should ownership of actual physical paintings be tokenized—fraud is a big problem!—but there are a variety of benefits of art that exists solely digitally as compared to physical art (the collector/artist relationship can shift and even become aligned, the art itself can change over time, you can quickly buy/sell without storing it, ownership/prices are transparent, and so on).
When you start to go down this rabbit hole, you inevitably end up asking “Why does this thing need to exist in the physical world at all to have value?”
As I examined the sorts of areas to which I’ve gravitated from an investment standpoint, I noticed a trend. Digital art, cryptocurrency, eSports, trading cards—they’re all a continuation of this inevitable trend of moving the physical world online.
And if you notice, they’re all widely rejected by older generations but overwhelmingly accepted by younger ones. I remember learning how much money kids spent on digital items in video games and thinking it was so stupid, but why? It’s so easy to write off what’s different or what we don’t naturally understand as silly, but it’s exactly those things we don’t naturally understand or agree with—yet are popular—that we should spend the most time figuring out.
And so, when it comes to finding the next big thing, I think you’re on the right track if you’re asking these questions:
1. What are kids (high school/college-age) interested in?
2. Which things that exist physically will move digital?
3. How will the democratization of ownership change the investment landscape?
When I look back at that initial thesis on NFTs and my rationalization of the art/Top Shot purchases, I think I was right about some stuff and wrong about more, but mostly completely blind to the immense power of NFTs—what they could become and how they can unite people—and how quickly we might get there.
Investing Lessons from 2021
I’ve discovered so much over the past year, so I thought it might be cool to give a quick recap of a few lessons I learned through trial-and-error and from all of the amazing, like-minded people I’ve met along the way.
1. Popularity + Serious Flaws = Opportunity
I’m going to tell you a story no one except like two people know. A few months ago, I sent ETH from one wallet to another. I always send a test transaction to make sure everything is good. Well, almost always. This time I was in a rush and sent the entire amount right away—about $60,000 worth at the time—on the wrong chain.
Now, I don’t know if you know anything about sending money on the wrong chain, but let me tell ya, it ain’t good. However, it can usually be reversed…unless you send it to a wallet on an exchange that I won’t name but rhymes with Schmoinbase that holds your private keys and won’t give them up.
I take responsibility for the mistake. I knew I couldn’t do this, wasn’t looking at which chain I was on in my Metamask, didn’t send a test, and sent to a wallet whose keys I don’t own. Also, please don’t send me messages about what a moron I am. I know this.
Crypto’s detractors point to some serious flaws like this in certain aspects of the technology, many of which are very valid. There are cash grabs and hacks. Design is mostly very poor. Some of the shit you need to do to stake or farm in DeFi is just bananas. It’s very unapproachable for the average person, so they often just give up.
There are two ways to interpret these weaknesses. One is what I see from most, which is effectively “This is the disruptive technology you’ve all been talking about that’s going to change the world!?!? I don’t see much being changed and a lot of this is borderline unusable.”
The other interpretation is that crypto has seen incredible growth despite these obvious flaws, which is even more impressive. If this many smart people believe in the future of crypto, are leaving their jobs to work in the industry, and are part of an “intolerant minority” of believers, it makes the current limitations a sign of strength, in a way.
When you have true believers in something with very obvious weaknesses (but a path toward improvement)—and logical reasons to think there’s something special (such as trustless transactions)—that’s a great sign of opportunity.
2. The concept of “1,000 true fans” is more accurate than ever.
I’ve always been a big believer in the idea that growth is fueled by hardcore users—the few truly passionate customers who’ll buy anything you create and effectively act as free marketing (and the best type) for your business. This concept was most eloquently laid out in “1,000 True Fans.”
Web 1.0 let people consume content, but not truly produce it.
Web 2.0 allows for content creation and distribution (mostly via social media), but monetization is very difficult and still done almost exclusively through middlemen.
Web 3.0 is beginning to and will allow for true ownership of content and community without the need for intermediaries.
There are many resulting changes to the internet—most of which I think we can’t really foresee at this point—but it seems likely to me that some of them could be:
- Company sizes will mostly trend down as it makes more sense for them to become decentralized and for workers to do their own thing.
- Via DAOs, NFTs, and other means, “companies” will be built by entire communities with a decentralized structure instead of the traditional top-down approach.
- The value of 1,000 true fans will soar, as the ability to uncover these people, interact, and trustlessly transact will all improve exponentially.
Companies used to be incentivized to find their 1,000 true fans and eventually monetize them in a way that often resulted in unaligned incentives. Now, the “company” is the group of fans, and the fans are the “company.”
Many aspects of crypto allow people to focus on what they do best and love the most—and get paid for it—and that will have a dramatic effect on company structure and the way communities are formed and operate.
And, just as happened with NFTs in 2021, some of it will happen more rapidly than most of us can even imagine.
3. Invest in categories.
I’d hardly consider myself a traditional investor or trader—I never really put much time into the stock market and I’m pretty much a fish with my finances in a lot of ways—but I have invested/traded in alternative assets (DFS/betting the past decade, crypto the past five years, companies the past few years, NFTs and dinosaur skulls the past year).
One important realization I’ve had is it’s probably better to invest in certain categories than trying to pick individual winners from all over the place. You can pick these categories by focusing on things you think will be true about the future or the general direction we’re headed and combining with your own interests/skill set. Start broadly and work down.
As an example, I’d say the categories I focused on this year were the logical conclusion of this type of thought process:
Investing → Alternative investments → Digital focus → Crypto → Defi/NFTs → Defi 2.0/Collectibles + Games
At least for me and the way I think about the world, it’s easiest to identify general trends from a macro perspective and then learn those areas and get exposure to the entire category.
4. Taxes are important to understand and plan for this year.
I’m the biggest donkey on the planet when it comes to taxes. I’ve left lots of money on the table in past years just from being lazy or ignorant about simple ways to reduce my tax burden.
There are important things you can and should do before the end of 2021 to reduce your tax liability. If you’ve traded any crypto or NFTs this year, figuring out how much money you owe on your own is very difficult, and optimizing for the lowest possible tax rate is borderline impossible without help.
You basically have to use a tax service, in my opinion. We posted a great review of TokenTax, which is what I’m using this year, primarily because they have support for DeFi and NFTs.
We have analysis of end-of-year tax strategy from actual accountants who know what they’re doing and not some shmuck who lost $60k in the dumbest possible way and just told you he knows nothing about taxes.
But the main thing I’ve learned: the type of asset, how long you’ve held it, and the cost basis all play important roles in determining if it’s smart for you to sell before the end of the year.
5. Have a bias toward non-action.
The biggest mistake I made in my early days was buying and selling too frequently. I realized that when I looked at how many fees I accrued over the year, which come in many forms: trading fees, gas costs, slippage, short-term capital gains, etc.
I think a bias toward action is right in most areas of life, but the opposite is true in investing. If you don’t have confidence something is the right move, don’t do it. This general philosophy results in fewer (but larger) buys, and fewer sells (because if you don’t have conviction in selling, you shouldn’t).
And if you think about how people have a lot of success trading, I think this is right. In my experience, they’ve typically seen enormous gains from a small percentage of investments, which requires moving with conviction and not selling too soon. You can’t get rich selling the true winners after they increase 30%. That doesn’t mean to hold something in the face of new, contradictory information, but the benefits of taking asymmetric bets disappear if you don’t let them provide asymmetric upside because you don’t hold.
One note: outsized rewards go to those who are first, so when something is new and shows signs of being special, don’t wait. There’s not going to be enough data to tell you to make the move, and by the time you wait for enough data, it’s too late. Plus, if it’s truly early, it will be a cheap mistake if you’re wrong.
Thus, I’ve learned the importance of making far fewer moves, moving quickly and with conviction on the few I love, and holding onto winners.