A simple strategy to win big on crypto, starting right now

You don’t need to hold more than those 5 cryptos. Sharing my personal approach, based on an analysis of 10,000 assets.

There is a simple way you can design and implement a crypto strategy that makes triple digit return a year. Let’s explore how, so you can start today with a very small investment, try for yourself, and scale out as you like.

Three things you need to understand in order manage risks

The one reason there is ridiculous money to be made in this market is that this is a turbulent one. And volatility is not something you can suppress (you cannot do that, you can only transform it into risks you won’t see), it is something you need to understand and respect.

To harvest this market’s returns without letting it destroy us, there are three things we need to understand:

1. How liquidity impacts the crypto market
2. How to construct a portfolio that minimizes the risk of ruin
3. How to size our portfolio and deploy our strategy

To illustrate this, I have collected up to 8 years of data for the 11,598 crypto assets exchanges listed on CoinGecko, using their free API. CoinGecko monitors on over 500 exchanges at the time of writing. I removed stable coins and cryptos that never seemed to have sufficient liquidity to be tradable (more on that shortly) and still ended up with a bit over eight thousand traded crypto assets for this analysis.

Understanding the market liquidity

Market liquidity is too often taken for granted, yet this is first thing you need to understand on any market, simply because when a market becomes illiquid, you can’t buy or sell assets anymore. Simply because when a market becomes illiquid, it ceases to be a market.

If you hold crypto that you cannot sell anymore, well, you have lost your money and this crypto is virtually dead. If you cannot by a crypto because the liquidity is too thin (i.e. there is a low traded volume, and it is only flowing between a few insiders), well, you cannot benefit from those parabolic returns you see right then, sorry.

Here is a plot that illustrates the survival rate and life expectancy of cryptos since 2014.

The area of the boxes represents the number of cryptos in each category. It shows that 46% of cryptos currencies in this analysis ended up dying and that 34% died within 200 days.

We can also witness the Lindy effect here: the longest a crypto lived, the longer it is likely to survive.

We consider that a crypto is “alive” once its daily traded volume crosses the USD $100k and “starts dying” the last time it goes under the 100k bar. If it started dying less than 30 days ago, we will give the benefit of doubt and consider it alive (let’s say it’s still on the reanimation table, and there is hope).

So, liquidity is a double edge sword: on one end you can’t capture all the off-the charts returns commonly advertised by the crypto market, on the other, you may just lose your investments. And this is a major problem because thin liquidities are very frequent in this market.

Diversify your crypto portfolio

With about 46% of cryptos becoming worthless at any point in time, the risk of you losing all your money while holding onto any coin for too long is significant. What if you hold 2? What about 5? 10?

Let’s have a look:

Here we have simulated the performance of equal weighted portfolios holding random set of cryptos for the same 90 days period.

Do not pay too much attention to the returns for now, the point is to give you an order of magnitude of what you could make a month if all goes well. Pay attention to the risk of ruin, that is, when all assets you hold lose go to zero during the same month.

Yes, if you hold 2 random cryptos, that’s about 0.43% chances in a 90 days period, which is nearly 10% in 5 years!

Holding more cryptos than 5 doesn’t seem to reduce our risk further.

Can we rely on those frequencies going forward? Certainly not, we still are at risk of a systemic market crash, a default or theft of an intermediary (if any), your account being hacked, etc..

And in most of those situations diversifying by increasing the numbers of cryptos in your portfolio doesn’t help, we will need to look elsewhere for answers, and that’s a story for another day. Similarly, the returns expressed above are historical, and there is no guarantee that the future will deliver anything similar.

Nevertheless, this experiment gives us a sense on how our portfolio behavior evolves as we change this variable.

Select your portfolio

So, we learnt that the longer a crypto is traded the longer we expect it to last, that that five or more assets in a portfolio does a good job at reducing the risk of ruin.

This inspired me a few strategies:

• Top 10: Hold the top 10 crypto by market cap
• Top 20: Hold the top 20 crypto by market cap
• Small 5: Hold the 5 smallest market caps in top 10
• Small 10: Hold the 10 smallest market caps in the top 20

For all those strategies, we use rank the cryptos by market cap at the end of each month to determine which ones go in our portfolio, re-balance our portfolio so we hold an equal weight of the selected basket, hold throughout the month, and repeat the process at the end.

Here is what our returns look like for the last 8 years, compared to a holding bitcoin or all the 100 largest market caps:

On the last 8 years you would make 100 to 235 times (yes times, not percent) your original investment. Even if you had entered in 2018, at the beginning of the bear market, all those strategies except for the “Small 10” would have made positive (20%-200%) returns.

Not too bad, is it?

Here again, this is a model based on the past, the objective is to give us some intuition on how this market behaves and translate it into guidelines to construct our portfolios.

I personally like the profile of the Top 10 and the Small 5, and find it interesting that the Top 20 tracks the Top 100 very well.

Be innovative, do your own research, invest in what you believe in.

Roll out your strategy: Think big, start small

Here is a way you can start rolling out this strategy with $10 in 10 minutes.

But think big first.

1. Size your crypto portfolio

Before going any further, you need to decide how much you are going to invest in this as portion of your savings and in relation to other assets you hold. So only invest money you are ready to lose. You will also need to discipline yourself to take benefits when the opportunity comes, after all this is the only way you can recoup your original investment and eventually make money. So set an upper limit to your allocation.

Personally, I let my total crypto holdings oscillate between 1% and 3% of my total savings.

2. Define an investment schedule

You don’t buy ten of roller coaster tickets and buckle yourself in for all ten rides in a row! Unless you are really gambling pocket money for the lottery, please do not deploy everything at once. This is an extremely volatile market, it is nerve-wracking in the beginning, but it also gives you a lot of buying opportunities. If you need to convince yourself, take another look at the 2018–2020 period in the chart above…

Get in slowly to give yourself time to get acclimated, invest equal lots monthly until you have reached your total desired allocation.

It took me years to deploy my first 1%, and if I were to do it again from scratch today, it would still take me over a year.

For example, if you have decided to deploy $3k in this crazy market, deploy $250 every month for a year. You get the idea.

3. Pick a holding platform

There are many ways to roll out your strategy with a wide spectrum of risk and complexity. Our objective here is to start small and with the simplest solution, so we want to select well-established, secured, and easy to use platforms that can get you started in minutes and with a very low first deposit.

And the major crypto lending platforms are a good starting point from this perspective:

• They give us a high interest rate of 4–8% per annum on cryptos we hold there, and up to 12% on stable coins. Exchange rates are acceptable, so the cost of deploying and rebalancing our portfolio is largely covered.
• There are enough well established, tried, and audited platforms to choose from.
• They are easy to use, hold your crypto with professional custody service providers for you and give you a single entry-point (typically a mobile app) to track and manage your portfolio.

Yes, there are risks inherent to the use of those lending platforms (counterparty, insolvency, custody), ultimately you need to decide whether to trust any platform managing risks for you or manage it yourself.

I personally use the two platforms below, they have more than a billion USD asset under management, were both founded in 2017.

1. Nexo — Simplest to use, best overall interest rate for our use case at the time of writing. Signup with my referral link here for a $25 bonus.
2. Binance — Largest variety of assets and one of the best established and used crypto platforms for all type of use case. But there are so many products that it may take some time to get your head around it. “Binance Earn” is the section you are looking for. Signup with my referral link and we split the commission 50–50.

4. Execute your strategy

Every month on the same day:

1. Use a platform such as CoinMarketCap or CoinGecko to look at the current ranking by market cap. Remove the stable coins. So based on today’s ranking and CoinMarketCap live data, this is what the Top 10 and Small 5 selections would be:

2. Sell the cryptos that are no more in the list, add the amount of cash you had planned to deploy, if any.

3. Buy the new entrants, and re-balance your portfolio so all cryptos are equally weighted in dollar terms. Remember that re-balancing (swapping/buying/selling cryptocurrencies) always carries cost, and that you don’t have to be ultra-precise (it’s OK if one crypto weights 10% more than the rest), so be reasonable avoid trading when you can.

That’s all!

I hope you have enjoyed the scroll and gathered something new

Getting in crypto investing can be pretty hassle free, and there is a wide choice of strategies that will enable you to make money off this market.

But most importantly you need to see for yourself whether this is something for you.

A good way to figure this out is to start now and start small.

Acknowledgement

A bit of inspiration and good data is what every post takes. Special thanks to:

• The Market Sentiment blog for inspiring parts of this. research (have a look, there is more to learn there).
• The Top 10 Crypto Index Fund Experiment for diligently testing one such strategy for four years now.
• The data for this article was gathered using the free CoinGecko API.

Disclaimer

Everything discussed here is provided for information only and should not be considered a financial advice.

While I sincerely I hope you will find this content insightful, and hopefully entertaining, please consider your own situation first, do your own research, think for yourself.

“I don’t want you to think like I do. I just want you to think.” — Frida Kahlo