Crypto portfolio update

Invested in: USDC, NEAR, ETH

Net return: 635.0%

Comments: The bear market has firmly taken root. Almost every cryptocurrency has dropped in price over the past two weeks, with the bulk of the sell-offs happening this week.

I warned about this in the previous newsletter:

With the bulk of my liquid capital in USDC, my portfolio had thankfully avoided the brunt of the price dips.

Meanwhile, I've

• Increased my ETH allocation
• Increased my NEAR allocation
• Sold my AVAX allocation

My allocation in DFK heroes has dropped significantly, due primarily to the falling price of JEWEL (which heroes are priced in).

Considering that we are in a worsening bear market, I'm content with how my portfolio is performing.

Current allocation:

Market outlook

The big picture outlook continues to be bearish and is not likely to change any time soon.

With the global tightening of monetary policy I'd expect risk assets (like crypto) to remain depressed for the foreseeable future. 

I don't think we've seen the worst of the bear market and am prepared for prices to fall further than they already have.

A bull market will come again, but nobody knows when. For now, all we can do is tread carefully and be patient.

My plan

Approximately 70% of my portfolio has already been allocated, so I'm not looking to add any further exposure at this time. I'd prefer to see prices at lower levels before increasing my stake.

Now is not the time to get aggressive. Now is the time to sit back and wait.

 DeFi Kingdoms

Users (30 days): 191.3k (+3%)
Transaction volume (30 days): $540.5m (-27%)
Discord members: 91.1k (-2%)

It seems like ages ago when I sold my JEWEL/CRYSTAL bags (and got widely mocked for it):

And now, less than 4 weeks later, the prices of JEWEL and CRYSTAL have fallen more than -70% and -90% respectively.

I don't bring this up to brag, but to highlight that:

• There are a lot of people who don't know what they're doing, and are yet supremely confident that they do (the Dunning–Kruger effect comes to mind)
• Under the right circumstances, there is significant alpha to be enjoyed at the expense of other players/investors. For example, the self-professed "long term holders" volunteered themselves as exit liquidity while they "diamond handed" their bags all the way down to present levels.
• JEWEL/CRYSTAL prices may eventually go up again, or they may not; What happens in the future is not the point. The point is that regardless of what happens, I'm now better positioned to respond. Meanwhile, the "diamond handers" are stuck in a weak position (a large paper loss) that restricts their ability to respond to changing circumstances.
• Even after JEWEL and CRYSTAL have fallen so much, I'm still seeing a lot of these "long term" guys in Discord making predictions about the future price. The worse part is, they're doubling down on their error and name-calling everyone else. In spite of all the evidence to the contrary, they still think they know what they're talking about! Incredible.
• One of the reasons I stopped participating in Discord is because the nonsense-to-value ratio has grown exponentially. Don't get me wrong, I think a lot of the people in there are well-meaning; They just fail to recognize how clueless they are about the investing/ economic aspects of DFK. If, after losing 70% of your investment you still think you're on the winning side, well then... all I can say is 'good luck'. Too many people allow their emotions to get in the way of reason.

Some of you guys have asked me to elaborate on how to make better forecasts about the future of DFK. This is too deep a topic for me to explain in a single newsletter so let's start with some points to consider:

• How do you know that "what you know" is true?
  Joseph in the screenshot above claimed that CRYSTAL "will be at $100 in months". How did he come to that? If he understood the facts/economics of DFK he'd know that such an outcome is highly unlikely. Blind hope does not lead to reliable forecasts. Always question the source of your views.
• What are the incentives of those making forecasts?
  This is another reason I stopped participating in Discord. The mods and whales in there are highly incentivized to talk about how great things are going to be. If you had millions invested in the game and couldn't easily withdraw, you'd be bull-posting all the time too.
• Develop your own independent opinion before considering others' views.
  It may seem scary to form your own opinion, but consider that most people in the community are either incentivized to "talk their bags", have no idea what they're talking about, or both. Many of them are no smarter than you; They're just irrationally confident of their (erroneous) views. If you want superior investment returns, you have to think for yourself. The best decisions you'll make are often those that run counter to popular sentiment.

The future of DFK

"DFK as an investment" is, at this time, not in a good place.

The catalyst that was supposed to propel the game to new heights (i.e. Crystalvale) did not play out, and there are no new catalysts on the horizon for investors to look forward to.

To reflect this reality, the price of JEWEL has dropped to levels not seen since the first couple of months after launch.

Does this mean it's "game over" for DFK?

Here's my view:

• The best days of DFK - from a gaming perspective - have yet to come. The devs do seem capable of building a good game. When the full combat feature is released (in some faraway future), it will likely be fun.
• The best days of DFK - from an investing perspective - are likely over. In terms of risk-reward, I doubt we'll see many exceptional opportunities from here on out.
• The status quo may be broken if a large number of new players join the game. Unfortunately, this it has not happened with the Crystalvale expansion and there's no reason to expect it to happen in the foreseeable future.
  

As always, these views will change if there's a material shift to present circumstances.

My plan

There are still small pockets of inefficiency in the hero/item markets, so if you know what you're doing you might make some money flipping undervalued assets.

Personally though, this would not be a good use of my time so I'm mainly focusing on leveling up my heroes. There's a widening gap between the low-level vs high-level heroes, and if this continues the latter may turn out to be significantly more valuable than the former a few months from now.

Bottom line: Keep leveling your heroes. The cost of doing so is low and the upside is potentially high.

[Important Update]

Just as I was about to send out this newsletter, news broke that certain parties have been exploiting locked JEWEL and mining far more of it than the developers had intended.

The exploiters found a way to game the system, and have been doing it for months at the expense of everyone else. There's no question that they did this intentionally. 

Those who played fair were taken advantage of - the exploiters could dump their tokens on them.

There are many aspects to this event, but as far as I'm concerned there's only one aspect that really matters: How the devs respond.

In the interest of time I'm not going to go into the whole argument about "decentralization" or "if there's no rule it should be allowed". These are beliefs that a young protocol like DFK does not have the luxury of adopting. Long term, perhaps. Now? No.

Don't agree? Name me one smart contract enabled protocol that's truly decentralized.

It doesn't exist. At least, not yet.

The DFK devs' only response so far has been to fix the "bug", which was apparently made known in January.

The exploiters have seemingly been allowed to get away scot free.

This, to me, is a HUGE issue because:

• This sends a signal that it's okay for people to try exploiting the game. If there is no punishment for cheating, what do you think is going to happen? Simple: people will keep trying, eventually succeeding, and getting away with it. At the expense of everyone else.
• The game then stops being about DFK, and about "how to exploit DFK".
• Knowing this, would you continue to play?
• I sure as hell wouldn't. Only fools and exploiters would.

I understand the intention of "code is law". But that's not a realistic guideline at this point in time.

Eventually, when the crypto ecosystem is mature enough, this might be possible. For now, almost all crypto projects are still experimental and their integrity has to be protected from malicious actors. That's the reality. The policies that work for a fledging start-up are not the same as those that work for a mature multinational corporation. The devs need to apply the appropriate policy to the circumstance.

Vitalik Buterin knew this, which is why Ethereum was hard forked after a major hack. The people who believed "code is law" chose to go with Ethereum classic... and do you know where it is today? Exactly. Nobody cares.

So this is not a new lesson. We already know how things worked out in both cases. The question is, do the devs have the guts to make the hard decision? Or are they going to hide behind the platitude of "decentralization" and reward the exploiters?

I am gravely concerned because if the devs don't take a strong stand on this matter, I question their ability/willingness to balance the interest of all stakeholders moving forward. You don't need a rulebook to tell you that exploiting locked JEWEL is wrong. If the devs can't see this, I struggle to see a bright future for DFK.

This issue is especially pertinent as we are in a bear market. If confidence isn't quickly restored, I fear it may never truly recover.

Admin update

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Dunning-Kruger effect

 Quote of the week

He who looks outside, dreams. He who looks inside, awakens.

- Carl Jung

Thanks for reading, and have a great weekend.

Cheers,
Slowmad

P.S. If you have any questions or feedback, let me know at: chris[at]digitalslowmad[dot]com

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