Smart Investors (Crypto Edition) Chapter 1

Preface: The Right Path

There are no wasted steps in life; every step counts.

Most newcomers to the crypto world are attracted by stories of wealth, only to encounter a series of pits—big and small—and suffer significant losses. How can this be changed?

Is there a book that can help newcomers avoid detours and pay fewer tuition fees?

Is there a book that is simple, easy to understand, and systematically explains the common knowledge of the crypto circle?

Is there a book focused solely on the crypto world that helps people earn money naturally through the right system?

The answer is: No.

So, why am I not doing this?

After all, I have stepped into many pits, taken many detours, and finally found my way in the crypto circle, achieving excess returns. I can combine classic theories with practical experiences to give newcomers a good direction.

This idea sparked the conception of writing this book. But how to write it, and what to include, are big questions. How can I achieve my goals, such as correctness of theory, systematic approach, readability, and rich content?

Achieving all of these is not easy, especially the “correct theory” part. Is there a universal investment truth that applies everywhere? Are there universally applicable investment rules? Everywhere are masters and classics— which are just deceiving appearances, and which can stand the test of time?

I have taken many wrong turns, read almost all books on investment and trading, and even made many mistakes due to incorrect theories. Coincidentally, my love for blockchain and in-depth research into the crypto world have made me reflect.

Looking back, I regret the many detours I took and losses I suffered.

I do not want others to go through the same painful experiences repeatedly. The pain of losing money over and over is too great. This is the origin of the idea behind this book.

There are no wasted steps in life; every step counts.

I decide to write this book, “The Smart Investor (Crypto Edition)”, combining classical theories with the realities of the crypto world.

From the very first day you see this book, I hope you will start a new, joyful investment journey, heading steadily toward happiness😄.

1. Correct Theory

In hundreds of years of financial history, many heroes have fought in the financial arena and achieved remarkable success: George Soros, the financial giant who dared to short sovereign currencies; Peter Lynch, who studied hundreds of stocks and made daily decisions, with an annual return of 29.2%; Jesse Livermore, who shorted during the 1929 stock crash and made over $100 million.

Many successful investors have their own “secret skills,” and their investment systems are often completely different from others.

Soros prefers heavy positions; his major battles were almost fought with full force, aiming for a decisive victory.

Peter Lynch favored observing and holding many stocks, making numerous small decisions daily. He believed that small losses are much less damaging than problems caused by big decisions.

Livermore was entirely a speculative trader, with extremely high risks, which also led to multiple bankruptcies.

1. The Most Outstanding Investor

But throughout the history of the stock market, perhaps only one person stands out as the most exceptional individual investor: Warren Buffett, the leader of Berkshire Hathaway.

In Buffett’s investment career, he was often considered “outdated” or “behind the times”—especially during bull markets. But whenever people thought “Buffett is just so-so,” the market would usually give them a strong blow.

He is a perennial figure in the financial world. He believes “wealth only needs to be accumulated once”—meaning he thinks that as long as the method is correct, everyone will inevitably become wealthy and avoid failure. In a speech, he detailed how many “ordinary people” using similar investment systems as his have beaten fund managers over the long term with correct theories.

Perhaps we cannot become the next Buffett, but mastering the right investment theory is necessary.

As long as the direction is correct, no matter how far the road, we will eventually reach the destination!

I spent a long time contemplating how to write this book and how to accomplish this seemingly impossible task. Until one day, I saw Buffett talking about Benjamin Graham’s legendary work, The Intelligent Investor, and suddenly gained a new perspective.

2. The Most Scientific Investment Theory

In 1950, as a junior student, Buffett read The Intelligent Investor. At that time, he had been experimenting with investing for several years but made little progress. However, this time, he claimed to have had an epiphany, saying “it was like meeting the apostle Paul on the way to Damascus.”

Buffett believed “this is the best book on all aspects of investing,” and he repeatedly mentioned it at shareholder meetings and other occasions. Even many years later, he still regarded it as “the best book.” To some extent, based on Buffett’s own words, without this book, he might have wandered in darkness longer, but with it, he finally found the way. In the discussions of this book, we will help you better understand Buffett through practical insights.

The Intelligent Investor is logically clear and meticulously reasoned. However, for crypto investors, many parts are no longer applicable—for example, bonds and index funds; and many parts are entirely different—for example, evaluating common stocks versus evaluating digital currencies. Moreover, for beginners without investment experience, understanding can still be challenging.

Therefore, I will use illustrations and simple language, following a correct foundational framework, combined with the realities of the crypto world, to guide you into the world of crypto investing.

2. Practical Crypto World

The crypto world is completely different from the stock market. While the underlying framework of traditional finance also applies to crypto, the specific operational ideas differ significantly. There are two main differences.

1. The High Speculative Nature

Pure value investing systems are not suitable. Even Bitcoin, which has been held from the peak of the 2017 bull market (around 20,000 USD) to today (September 18, 2022, when I am writing this), has experienced losses when considering time and economic costs, as shown below:

BTC K-line

“In the crypto world, one day is like a year in the human world.” Most currencies’ life cycles are much shorter than the decade-long periods in stocks. Look at Dogecoin’s K-line—huge fluctuations, with hundred-fold and thousand-fold increases happening within a year.

Doge chart

Dogecoin, or doge, gained widespread attention after Elon Musk’s endorsement on Twitter. In an immature crypto environment, such attention serves as fertile ground for price rises—especially when other projects have not yet built strong ecosystems or practical value.

Later, Shiba Inu’s incredible surge and NFTs like BAYC skyrocketed. In this speculative domain, we discovered new phenomena: consensus, memes, etc. These are concepts less emphasized in traditional economics but widely celebrated in crypto. Early blockchain evangelist Li Xiaolai once had an audio recording that caused a sensation. His famous quote, “Stupid consensus is still consensus,” temporarily hurt many retail investors’ faith.

But times have changed. Objectively, because the crypto market is still small and its ecosystem is flourishing, even valuable projects are subject to speculation. This is perhaps an unavoidable aspect of financial investment.

Soros’s famous quote: “The history of the world economy is a soap opera based on illusions and lies. To succeed in wealth, recognize the illusion, invest in it, and exit before the illusion is recognized by the public.”

The enormous speculative nature of the crypto world means that investing here involves considering social factors, emotions, consensus, memes, and other complex, crypto-specific elements. Fortunately, beneath these bubbles of speculation lies immense productivity comparable to the internet revolution and infinite possibilities.

Delicious beer inevitably has more foam—let’s be smart investors, understand speculation, face it squarely, and surpass it.

2. The Huge Volatility

Value investing does not mean long-term holding alone, but long-term optimism is a common approach. Amid such extreme volatility, inexperienced investors are easily lost in the upswing, increasing their investments, and panicking during downturns, selling at a loss.

ETH once broke its price baseline and was criticized as a scam. BNB was issued at a discount but gained an astonishing thousand-fold increase over the years. Even Bitcoin, which has broad consensus and relatively smaller fluctuations due to its size, can surprise investors. See the video below:

Thus, smart readers can already sense that in the crypto world, the divergence between intrinsic value and market price can be much larger than in stocks—this is both risk and opportunity.

In crypto, most currencies’ life cycles are not measured in decades but in months or years—some projects fail, and some are quickly overtaken by new developments and innovations.

Therefore, crypto investments must always be vigilant about high volatility and not hold on stubbornly. Ignorance of the industry’s new trends and blindly burying oneself like an ostrich in the sand is far more dangerous than in the stock market.

3. The Great Growth Potential

In stock valuation theories, whether it’s finding a moat, valuation, evaluating teams, or industries, these are often not applicable in the rapidly growing crypto world. There’s a saying: “In crypto, one day is like a year in the human world.” Especially because blockchain is open-source, many projects you see as good may be copied or optimized within days.

This rapid evolution reflects the fastest progress in human history. But for individual investors, lacking the ability to adapt to the trend can be disastrous.

Therefore, I am eager to write something that provides a systematic reference for all crypto investors—something that can withstand the test of time and remain powerful regardless of how many people learn and apply it.

At the same time, it is dedicated solely to crypto investors, distinguishing it from all stock investment books. Classic investment theories never go out of date, but for most ordinary people, “the more you learn, the more you lose”—because many seemingly sound investment theories from the stock market are completely unsuitable in crypto.

The structure of this book will mostly follow the logical system of the original classics, but the content is completely reconstructed based on the realities of the crypto world. Therefore, readers can understand the content smoothly even without having read The Intelligent Investor, without the need to cross-reference the original.

However, I encourage everyone to read the original book at any time. Of course, if you find doubts about applying it to crypto, you are also welcome to read this book.

Finally, I want to quote Warren Buffett’s words to dedicate to everyone for a better tomorrow:

What matters most is your personal ability; others are trading your ability. The best investment is to develop yourself!