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A few months ago I took a deep dive into investing in DeFi. Won some, lost some, learned a ton.

Here are 10 lessons learned that I wish I knew 6 months ago 👇

1. Don’t overpay

The #1 risk in DeFi and crypto overall is overpaying for your investment.

This is an exciting industry promising exponential growth. But there is a perennial tendency for market to get way ahead of actual development, even though the development is exciting.

To add fuel to the fire, crypto market is global. Unlike for S&P and Nasdaq, you have world-wide retail demand, channeled through stable coins of various qualities, to chase a number of projects that are still mostly happening in developed countries.

That’s a perfect setup for inflated prices.

Hight quality assets can be bad investments. Low quality assets can be great investments. All depend on the price you paid.

The more you paid, the more vulnerable you are to market volatility. And volatility in DeFi / crypto is high.

2. Don’t listen to Twitter

Most of crypto twitter is noise. People shout out random “price targets” or worship their favorite token like a religion.

Be careful listening to high frequency traders. These are often smart people w/ great insights. But their time horizon is likely shorter than yours.

If they tweet that Uniswap is a great buy, it may be true… for the next 8 hours. And they are not obliged to inform you when they sell it a day later.

3. Do use valuation metrics

Some people say valuation models like P/E, P/S, and discounted cash flow (DCF) do not apply to an “exponential growth” industry like crypto.

They also said internet companies didn’t ever need to make money, at the height of dot com bubble.

It’s not hard to find information like transactions, fees, number of users, for DeFi platforms. A few resources:

CoinGecko also has free APIs you can query for similar info if you can code.

Obviously P/E won’t tell you the whole story. You need to apply human judgment on the prospect of any project. But valuation models serve as a first-pass baseline.

For example, according to Crypto Fees, Uniswap has a price-sales ratio of 18. It’s up to you to decide whether this is expensive or cheap. But at least you have a basis for comparison w/ other investments.

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4. Do compare DeFi projects with stocks

For some crypto projects, token holders are similar to shareholders. For others they are not. You should read about a project’s tokeneconomics and make your own judgement.

Regardless, I find it helpful to compare a DeFi project w/ listed companies of similar valuation.

Uniswap has a market cap of $10 billion. That’s akin to a medium sized Nasdaq listing. Find companies of similar valuation. Ask yourself, should Uniswap be worth more or less than these and why.

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5. Use the product yourself

Most DeFi projects are for retail users. Get your hands dirty and use them. Did you enjoy trading on Uniswap? Why and why not?

Granted, UX is only part of what a product offers. Still, it gives you valuable info about the execution ability of the team and how they think.

For me, if I don’t even enjoy using a project, how would I have the confidence to hold it through thick and thin?

6. Do listen to what other people say…

…Selectively.

VCs and industry analysts publish investment theses. Read those. They are informative. But keep in mind investors are not neutral.

Once they invested in a project, it’s in their best interest to promote it as much as they can and project max confidence.

Ignore it when these people give a “price target”. They got in much earlier than you. Now it’s their job to pump it.

If you’re interested in a project, join their Discord channel, subscribe to their blog, listen to their podcast interviews. Look for analyses about where the project is going. But most price talks are trash.

7. Do write down your investment thesis

Think about your thesis in terms of buying the whole project, not just a few tokens.

Write down, “I’m buying Uniswap for $10 billion today because a)…b)… and c)…”

If your thinking is unclear, writing it down will help you see the holes.

8. Do find counter arguments to your thesis

DeFi is a competitive space. You can easily find interviews / writings from founders of competing projects. Listen to how they think of their competitor (that you’re interested in). It can be eye-opening.

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9. Don’t chase shiny objects

New projects are coming out all the time. You don’t have the bandwidth to look into most of them w/ any depth. If you chase every promising opportunity, before you know it you have 20 tokens on hand.

Unless you have a team of analysts working for you, it’s impossible to keep track of 20 projects on your own.

I’m trying to limit to 3 projects to actually invest in at any given time. If I want to invest in a 4th one, I need to convince myself why it’s better than the 3rd. It definitely takes discipline.

10. Do realize any sense of safety is false

Industry pundits talk about stock-to-flow models, four year cycles, and price targets w/ an air of great certainty.

These talks are popular b/c we humans are scared, vulnerable creatures always looking for comfort and assurance from external authorities.

These people make it sound like your crypto investment is a sure bet. It’s anything but!

You’re investing in one of the riskiest asset classes out there, prone to sudden crash, and probably over-valued. Any sense of certainty is a big fat illusion.

I believe this space will see tremendous growth for years to come. If you’re reading this, I assume that may be your view, too.

But whether we as individual investors will survive the turmoil to get to the brave new world is a totally different question.

Be meticulous. Exercise caution. And best of luck!

p.s. This is not investment advice and I’m not an investor of Uniswap. I used it as an example. You should do your own due diligence.