Issue #4: Intro to Portfolio Management

Apr 21, 2022

So I’ve written about (1) the mindset to play the game, (2) how to watch wallets to find ideas and (3) how to research and develop conviction in ideas. A logical next step is how to manage your portfolio / size positions. I’m going to walk through how I would at least think about it at different account sizes, but first let’s go through some high level points.

High Level:
What is the point of any of this? I come from a traditional finance background, where position sizing & portfolio management is second nature. But most people aren’t really taught even regular stock portfolio management, let alone crypto portfolio management. Hopefully once you’ve gone through this entire post, along with the other initial 3, you are now ~80% of the way there to start being a “more sophisticated” onchain investor.
Sidenote: hopefully you can even match the success of one of my early followers.

The basics.
The point of portfolio management is to diversify risk. By diversifying your portfolio, you are inherently going to make less than going all in on something that can 40x, but if that 40x token gets hacked/exploited and then goes to zero, your account is now wiped out. The amount of diversification you run with should be influenced by (1) how much risk are you willing to take (can you withstand losing your entire portfolio) and (2) what are your return goals. I personally run a fairly concentrated high risk portfolio, with capital appreciation as the main goal (will give concrete examples later in this issue).

Some concepts:
So right when you are starting out, you need to define your trading parameters - meaning, you need to have a defined portfolio sizing and timing policy for yourself, so that you can be more organized and structured in your investing process (this will develop over time). What does this look like? You should define a few of these things for yourself as a starting point

What % of stables are you going to hold? Why would you change it?
What is my maximum position size?
When will I sell or trim positions if a token goes in my favor or against me?

Why is this important? Well, when you first start out, you have no process to find, size, time or sell ideas. Having at least some basic rules about your portfolio will keep you from (1) going all in on some shitcoin, (2) can keep you in the game longer and (3) will force you to take profit on positions that work, so you don’t end up marrying your bags too long, and end up being one of the sob stories of $5k into $270k back to $5k.

A High Level Example:
So you’re seeing whales move on a token that seems like a good buy (using wallet lists you made yourself using my content). You do your OWN research, and find out the following

The token’s market cap is low, and its tokenomics look good
You dig into the token’s discord / twitter alpha experts and realize its launching a product very soon that you think could be cool / innovative
Comparable market caps of similar products are multiples higher than your token’s

What do you do? Well, you are probably going to buy it! Ok but how much? This is where portfolio management and processes come in. If you have high conviction, maybe you allocate 80% of your desired max position size into the token (ex if max position size is 8% at cost, then you buy ~6%), and then dollar cost average the rest ahead of the catalyst you are watching (ex. buying every day or every other day until your catalyst hits). As the token appreciates, you then put into practice your take profit parameters (ex. sell half of the position at a 2x and let the rest ride).

While seemingly simple, it can get complicated in practice as people get overly emotional about their investments, and then end up (1) over sizing them and/or (2) not taking profit at predetermined levels. I have done both, and it has cost me a lot of money. Lastly, its important to note that your macro view should have at least some bearing on your position sizes (crappy macro, lower concentration, less risky positions). Ok this is probably getting too boring so lets run some examples through various account sizes.

$5k or less portfolio
How would I run a $5k or less portfolio? Well hopefully some of you have been watching me try to run $5k into 7 figures again with my public address, as there are some lessons to be learned there. At below $5k, I would not be LP farming, as the amount of reward typically is too low to make a difference (unless you are super early to the token like folks on JEWEL). Similarly, I would not be holding much in stables or stable farming. If this is your risk-on money (meaning you can lose it all and your life doesn’t change), I also would not touch BTC, ETH or any of the major caps. You are fishing for low cap, 10-30x+ potential tokens/NFTs.

At this account size, the only reason to not go all-in on one token, is you don’t want your portfolio to go to zero - you can see I practice what I preach on my own public wallet where I hold just 2 positions. But you can still be very concentrated across 2 positions with limited stables to buy the dip (good entries on a 10-30x don’t really matter at this size). I also would highly advise against using leverage. The allure of levering up 30x on DOGE before SNL sounds great in theory, but 99 times out of 100 you are going to just get wiped out, given a +/- 4% move has you liquidated. I’d wager even if you hit your first couple of trades and run $5k into $20k using high amounts of leverage, you will eventually get liquidated.

To have the highest odds of success, I think you should either focus on NFTs, low cap tokens in DeFi / GameFi, or slang meme coins. So a lot of my whale watching is on larger DeFi stuff like GMX or DPX, but you can actually manipulate it for what might be best for your portfolio. Having a bigger account, I focus more now on longer term holds, or highly unique tokens with catalysts (or both). I’m still trying to find low caps with a lot of upside, but they can take longer to play out once they get to $50m ish market caps. Note: I honestly wouldn’t even know where to start on NFTs, so I’m not the best resource there.

I think if I were to go back into meme coin land, I would collect 2 specific types of wallets: (1) influencers that shill low liquidity trash and (2) guys that seem to be good at meme coins. If trying to find an influencer wallet, I would download excel files of each token they have mentioned over the last few months, and then cross reference token overlaps until I think I have them. It will take some time, but I guarantee you will be able to find a few. Once you have their address, you can front run their shills the next time you see them buy, and finally have the game rigged in your favor!

For finding elite meme coin traders, I think you could replicate the process I went through on GMX in my whale watching issue, but do it for a few successful meme tokens, until you have a few accounts that you think are sharp money (look for folks early to tokens like CULT, FLOKI, etc). You can even run their account through a tool like Zerion, which can measure an addresses performance over time. Below is an example of a whale wallet I watch run through Zerion (note it can be messy as ETH network seems to be the only one that works for P&L).

For take profit parameters, selling at 2x is probably too low, as you need to really get your account number up. Something like 3-4x and sell half is probably better, but you will have to learn what works best for you. At this account size, portfolio management doesn’t even really matter, outside of not going all-in. You need to find just 1 high octane 10-30x idea, and then you are in much better position.

~$50k Account Size
Maybe it seems like too far of a jump, but realistically the game doesn’t change much from $5k to ~$50k (assuming its play money for you). Once you start getting to $50k, I think you can start taken max position sizes down (aka lower concentration) as you want to have a little more capital preservation, but if you want to run it to 7 figures, you will still need to keep the gas on. Also at this size, some farms (100%+ APR) can be worth it, because if you drop in $18k of your portfolio into a 150% APR LP farm, you are spitting out ~$2k/month, that you can be throwing at more NFTs, low caps and meme coins. If it were me, I still would not be touching ETH, BTC, BNB (kek) at this size, and would be focused on appreciation. I’d run a barbell approach of ~40% longer term low cap holds (or things with a catalyst) + 30% into LP farms of tokens I think won’t go straight to zero + 15% meme coins / NFTs and the rest cash. And then roll the LP rewards into your NFT / Meme coin bucket, and use your cash to buy the dip on long term holds.

Again, it is more art than science, and you need to play to your strengths, but these are roughly how I would at least think about it. But Wizard, where do I find good farms? Your whale wallets will most likely have a few high APR farms that they like for you to check out.

The point here is that you are still focusing on high risk stuff with massive multiple upside - but $50k gives you a lot more shots on goal than $5k, so you are using diversification to increase the number of shots on goal to hit a 30x on $5k. The basic idea is that if you try ~10 times to hit a 30x with ~$5k, you only need to hit 1 to triple your portfolio vs. betting on just 2 tokens where you could get wiped out, and then having to start the $5k to $50k process again.

$100k - $500k Account Size
I think once you start getting into the 6 figures, a core holding of ETH/BTC starts probably making sense from a lower risk, but still decent reward view (if you are more risk averse). At this size, I would again take down max position sizes as you are starting to work with “meaningful” amounts of money, and if you get multiple 6 figures of crypto from nothing, I would take ~$100k and take your chips off the table (if it is life changing money). If you are still running with max risk, I would mimic the allocations from the $50k account, just with lower individual position sizes (at $50k a 33% position size is a potential max, while at $200k, maybe 20-25% is your max). Once you clear 6 figures, you are playing both capital preservation and appreciation games, so bringing down position sizes makes sense here. The beauty of getting to this level is that its much easier than running with $5k. Why? Now smaller multiple returns (2-3x) can still make a measurable impact on your portfolio, and LP farms can turn into a second income ($50k @ 150% APR is $75k per year!).

You can either take this second income, sell it and cash out, or roll the rewards into your established system of NFTs / meme coins / small caps. Having all of your processes built from day 1 will give you a bigger advantage vs. even me because I didn’t really know what I was doing until ~6 months in. I think if I could have found my own content a year ago, my account size would be 10x higher, so hopefully this content helps you push to the next level.

$500k+ Account Sizes
Not sure many whales are following my content (most of them know the game already), but I will still cover what I’m doing at low 7 figures, and will go into a few examples of what other 7 figure+ whales are doing.

So for me, I like to have at least $1m in lower risk stable farms across things like STG, GLP, Convex, SYN, PTP, etc - with the goal to hit ~10% blended returns. This is obviously risk averse, but once you start getting to really life changing levels of capital, the name of the game is to keep it! I still work full time, but if I didn’t I could live off this $100k/year, and use the rest of my capital to keep my foot on the gas.

For the remainder (which I run as a risk-on portfolio), my allocation is 60% to high conviction low to mid cap positions that I think will beat ETH. I have ~6 positions, so still fairly concentrated, but a 10% max position size at this level is smart, because if one of your investments gets hacked, you live to fight another day, and can make 10% of your portfolio back (vs. losing 20, 30, 50%). 30% of my risk-on portfolio is in 100%+ APR farms, which serves as either additional firepower to buy projects I like, or its farming projects I already really like, so I just keep the rewards. And then the remaining 10% is some stables that I hold to buy the dip or opportunistically short where applicable.

Your goals are very different at a $2-3m portfolio size, as you only need to 4x your portfolio to be at 8 figures. At this level you can be much more patient on almost everything you do, as the entries / exits matter more (10% of a $1m position is $100k) vs. the smaller account sizes it doesn’t move the needle as much. I know for some my portfolio will seem like too low of risk, while others will say its too high, but this is what works for me, especially when I don’t have 24 hours per day to dedicate to catching every hot trade / narrative / launch. Let’s wrap up by looking at a few whales I follow to see how they approach things - but please note they usually have many wallets, so the amount of position concentration you see in 1 wallet, does not necessarily mean they are taking such a big position as a % of their total crypto portfolio.

Example #1 - Arthur Hayes
Obviously this is not his main wallet, but its one that I’ve come across.
Currently he is running a $4.8mm account, with major allocations of:

42% FXS
32% GMX
8% FODL

Obviously a risk-on portfolio, with high position concentration (but still not all in). You can see that he has numerous other smaller moonshot style positions as well (something you see a lot in bigger wallets).

Example #2 - DegenKing
I’ve followed this wallet for awhile, as this person is early to a lot of cool degen stuff (like GMX). Still not very diversified right now, with a 40% position to Metis, 31% to USDT and 26% to DPX.

If you watch enough wallets, you will end up noticing that individuals run with a lot more concentration than funds, as they aren’t risking other people’s money.

Wrapping Up: Hopefully this intro to portfolio management was helpful to you, and kind of rounds out the basics of the process of active on chain investing. Through all of my content, you should now be able to find, research, time, size and sell a token with at least a more established framework than you had before! If this was helpful to you, please retweet for broader exposure - and if you have any questions for me about the substack, or a general question, please don’t hesitate to ask.

Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.