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The Logical Levels Of Risk In

Start your formal crypto education for free and earn tokens at https://cryptoversity.com/ --- I thought it was about time I addressed this concept directly. I’ve referred to the concept a number of times but haven’t actually dealt with it on it’s own. So this is essentially a model that is a work in progress, as most of crypto is. The model is based upon my thesis that, the “further away” you go from base assets like Bitcoin and Ethereum, the more your risk profile increases. While the risk level might go up in lock step, the reward may not always be a perfect reflection of the risk level. The “sweet spot” as I’ve previously referred to it, is when there is a risk to reward ratio that is more heavily weighted on the reward end. So let’s get into the model and my proposed levels. I’ve created a very basic illustration using the model to help explain it. I’m suggesting that there are 4 logical levels of risk. We know that crypto investing is already a high risk asset class, but I’m not coming from the perspective of a general investor here. I’m starting (and staying within) the realm of crypto. I’d say that Bitcoin is the reserve asset in crypto. You personally may measure your returns from dollars to dollars, but many seasoned crypto investors measure their returns from Bitcoin to Bitcoin. This is based on the premise that Bitcoin will expand from being the crypto reserve asset to being the global reserve asset. So from that point of view, it makes more sense to accumulate BTC than USD. But that is a personal preference. If we say that Bitcoin is the reserve asset, that effectively makes it “cash” putting it at the risk level of 0. No gains, no loss, just preservation of purchasing power due to Bitcoin’s limited supply. If you own 210,000 BTC, you will always have 1% of the BTC supply. Not so with a fiat currency because it’s elastic money. Your share of the whole changes all the time. Now let’s say we want to invest to make more Bitcoin. We then progress to risk level 1 which, in my illustration are some base layer smart contract platforms such as Ethereum and Cosmos. When I say base layer, they are networks that you can build apps on, but they are also networks that you can build other networks on. Before we go there though, let’s make sure we establish risk level 1. I have zero risk if I sit in Bitcoin as cash and as I trade some of that in for a level 1 asset like Ethereum or Cosmos the risk that I am taking is that I get less BTC back when I sell. The intention however is to get back more BTC than I invested. I’ll say this again. The reason many crypto investors choose to measure their wealth in BTC is because it’s the only objective measurement. Unless you have something that is absolutely scarce, how do you know if you are accumulating or losing wealth? That’s why when I give examples I say things like “if you owned 1% of the Bitcoin supply, you would always own 1% of the Bitcoin supply”. That is a totally objective measure. If you go from 1% of the Bitcoin supply to 1.1% then you know your wealth has increased. By contrast, if you own 1% of the dollar supply and increase that to 1.1%, that doesn’t tell you much. You need to do another calculation to figure out if your net purchasing power has increased or not. So back to the model then. I left off saying that Ethereum and Cosmos were base layer networks that can be used as a platform to build apps, or as a platform upon which to build other networks. Let’s take Cosmos as an example. ThorChain and the Terra Luna blockchains are networks that are built on Cosmos. Cosmos has its own ATOM token, so in my model here, the ATOM token would be on risk level 1. It’s one “step” away from bitcoin. Then we have ThorChain with its native token RUNE and Terra with its native token LUNA. Since these are built on a network that is already at risk level 1, I consider these risk level 2 since they are 2 “steps” away from Bitcoin. The same goes for Polygon. I consider this also to be a level 2 since it’s built on a level 1 asset like Ethereum. I’ll come back to Uniswap in a moment. Expanding beyond Polygon then we have specific apps built on that platform like QuickSwap or Sunflower Farmz. They get labelled risk level 3 since they are built on top of a risk level 2. And then finally, I’m considering a risk level 4, which would be anything built on a risk level 3. If Sunflower Farmz is a level 3 then in-game NFT items are even further out and I’d consider those risk level 4. It would be no surprise that the age and the market cap of an asset has a lot to do with it moving through the logical levels of risk. Almost all crypto assets start out as micro-caps, like Sunflower Farmz. Tiny, tiny market cap. I was going to say, as they grow they go down the risk levels but I’m not sure that is the case.