🃏Know When to Fold and When to Go All-In

Outlook

🃏Know When to Fold and When to Go All-In

In the picture above, you can see me and Frankie (the real card shark) without cards. In fact, in any given poker game you'll find us without cards most of the time. That's because waiting for good cards, it turns out, is far more profitable in the long run than playing many hands. We call the measurement of this profit its expected value (EV).

EV is the average return you can expect for some type of action in an infinite number of trials. It's calculated as:

It's important to note a few things about EV:

1. EV is as accurate as the variables utilized in its calculation.

2. EV is an average, not a predictor of the actual outcome of the next decision.

3. EV can be positive or negative.

To continue our example, in the case of poker, both x and P(x) are certain and therefore you can precisely calculate the EV of any decision with any two cards over time. That means I can't tell you if you'll make money in the next poker hand you play. Instead, I can tell you how profitable a decision will be over many hands. As the number of hands go up (1,000 or 10,000, or 100,000 hands) the EV will become more and more dependable.

EV gets a little more theoretical as the variables become less known. You may know if you drink more, that's a negative EV play. But calculating that next drink's EV, well that's an entirely different objective.

As a VC, I would often analyze over 200 deals a year. This work would lead to 4 or 5 investments, a ratio of deals looked at to investments made of ~50:1. You have to kiss a lot of frogs in start-up investing and it turns out that just like folding in poker, passing on investments is often the highest EV play.

It's impossible to predict how profitable an individual investment will be, however, I'm convinced that designing a system that consistently and thoroughly qualifies opportunities results in the difference between world-class and average returns.

At CryptoBull Capital, we are about to release a diligence report on an NFT project. As a newsletter subscriber, you get it here first.

I'm super excited about it for a few reasons:

1. It helps move the bar in the space towards a higher standard of how to evaluate NFT projects with fundamental value (aka not art NFTs).

2. It allows us to share our diligence process and all the different criteria we look at when adding to our own portfolio.

Macro Overview

🏀 Digital Assets Bounce Back, ETH Takes a Lead

In our last newsletter, we discussed how poor risk-management practices from some of the world's biggest digital asset firms had caused a rapid liquidation of leveraged bullish positions. This led to inorganic price suppression in the markets.

Our thesis was that this forced-liquidation, combined with growing stablecoin reserves, was signaling a buying opportunity.

Since that time, ETH is up ~50%, while BTC is up a much more moderate 5%.

Below, I’ll elaborate on why ETH and some altcoins are outperforming BTC and what might be next for the asset class.

Bullish

🖇 ETH Merge Approaches

The Merge is Ethereum's shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS), reducing energy consumption by over 99% (PoW requires a ton of electricity).

It's a big deal. The Merge has been in development since late 2020 and will set the foundation for a more scalable and more secure Ethereum network. It will enable:

• Lower transaction fees (increasing accessibility to the network's ecosystem)

• Scaling solutions such as "sharding", which exponentially increase ETH's maximum transactions per second (allowing for more users and for applications to expand their use cases)

• Diversification of validators (providing a secure network through further decentralization)

• Staking rewards (further unlocking the ability to earn income from owning ETH)

If we think of blockchains as cities, then Ethereum would be New York City, where the biggest businesses (applications) and residents (users) live. But it's always been the most expensive place to do business and is congested with traffic.

Well then after the Merge, "NYC" is about to become cheaper and less crowded!

Summary

The best way to increase investing EV is to convert unknown unknowns to known knowns through a thorough due diligence process (take that Dr. Suess!).

Digital assets are growing up. Technological advances, like the Merge, continue to position the sector class for growth.

Prices are showing signs of a bottom, as rebounds indicate an increased appetite for digital asset accumulation.

As always, your feedback is helpful and if there are any topics you’d like to see discussed in the future, suggestions are always welcome. Not financial advice.