Bankroll Management & Asset Allocation - Crypto Is Like Poker - Part 1

in cryptocurrency •  4 months ago


Speculating in cryptocurrency markets or other markets is very similar to a game of cards in many ways, especially when it comes to bankroll management and asset allocation. We have to learn how to accurately assess risk, and know how much we can afford to lose - not betting the house, but not being afraid to bet our savings.

Transcript

One way in which playing a game of poker is similar to investing or speculating on crypto assets is bankroll management.

Not a lot of card players get good at bankroll management because at least on the surface it seems like it's not really part of the game. Simple rule is, when your bankroll is small you'll have a higher tolerance to risk. When your bankroll is large you want to make defensive moves - you want to take a risk averse stance try to protect your capital.

Let me give you an example. Let's say you play cards at your local card room and you're playing this game where you buy in for $50. You really want to take a shot at the $200 game or the $500 game but your bankroll is maybe only $1,000. In the meantime you're still earning about $500 a week from your day job. In this case you'd actually be putting 50% of your bankroll on the table if you stepped up to that higher level. On the surface that seems like it's imprudent, because you're putting half your net worth on the table. Really, it's not a bad idea the reason is when your bankroll is small it's easier to replenish. All you need to do is go to your 9-5 for a few weeks and you can get that money back. So it makes sense to be risky.

However, when you have a larger bankroll. So say your net worth is actually tied up in your house, it doesn't make sense to go risking 50 percent of your net worth on a speculative asset. If you saved up for years to buy your house then it's going to be much more difficult to replace compared to some kid who only has a thousand dollars to his name. Now the errors that I see people make sometimes in poker, you have these guys who will be low-level grinders and they'll play these ridiculously low stakes games, $2 games, and they'll have a bankroll of a few hundred dollars. They'll say "oh I never want to put more than one percent of my bankroll on the table at a time." By doing that they're putting a cap on the skill level and they're also putting a cap on their earnings.

Playing these micro stakes games, it's going to be a lot more difficult for them to start to move up and actually become a professional. Of course even if you get a big win like a 5 buy-in win in a $2.00 game that's only ten dollars. Wow. But if you're playing a $100.00 game that's $500 it starts to look pretty good, it starts to look like you could quit your day job. The microstakes players say things like "oh I don't want to put more than one percent of my bankroll on the table" or more than 5%, but they're not considering how much that money is actually worth and how easily it could quickly be replaced.

You see this analogue when it comes to personal finance, there are these people who will put the money in the bank put the savings away and you'll suggest "Hey, why don't you invest in something, why don't you take a punt, put it on the stock market, put it in crypto, whatever" and they say "Oh gee I really I just don't want to lose money, I don't think I could take it if I did" and when that happens they're virtually guaranteeing that they're going to lose their money because over time - the inflation is just going to eat away at it. On the other side we have these crazy wild gamblers some might call them degenerates or sick boxes, and they roll up and they've got nothing but their rent money, $1,000, and they put it on the table and they risk it all, and who knows if they're paying rent that month or if they're getting kicked out on the street.

There are these stories in crypto as well. There's probably a lot of cases where people have bet their rent money, but of course the real sensational stories are the ones where people take out an extra mortgage and then it goes down 20% and they have no idea what they're going to do. They've overestimated their capacity for risk and they've probably underestimated the risks as well.

So we need to learn lessons from both of these people. The thing is, when you're talking about money, you can't avoid risk. So we need to know that. We need to learn that lesson from the degenerate gambler. The lesson we learn from the risk-averse person is that we do need to look at the risks - not solely at the risks - but we do need to look at the risks. When people are risk averse you normally find that they're being controlled by fear. They have this scarcity mindset and they're quite afraid of losing what they have. Robert Kiyosaki likes to flip this on its head and says if you experience fear, what you need to do is "fail early and responsibly".

Kiyosaki: And my Rich Dad also said, failure is part of success. People who avoid failure also avoid success. The biggest expense is not what you spend. Your biggest expense the money you're not making because you're afraid.

Kiyosaki: So the thing that my rich dad taught me very early on called FEAR - fail early and fail responsibly. If you know you're going to fail, do it now. Don't wait, because each time you make a mistake you get smarter - if you do it responsibly. The first deal my wife and I did when we got back into real estate was a forty-five thousand dollar deal. Six thousand dollars down. If we failed we would have got smarter than somebody who didn't fail at all. But we did it, so we pushed the boundary, going bigger and bigger, hoping to fail. Everybody is avoiding failure, I'm hoping to fail because I'm gonna get smarter.

By putting small amounts of money on the table into investments we can start to develop a threshold for risk, and that's very important, if you want to be an investor or an entrepreneur. The great thing about crypto assets is as opposed to say, stocks, when you buy stocks a lot of the time they charge you a trading fee, and it'll be five dollars or twenty dollars.

With crypto it's based as a percentage, so you might pay 1% or less than half a percent as a trading fee, and that means you can start very small You can even smart start with as low as five dollars or twenty dollars. If you have a low threshold for risk you can build it up very slowly, starting at a level you're comfortable with. You've probably heard people saying "don't gamble more than you can afford to lose" or "don't invest more than you can afford to lose" And that's a very good rule of thumb - the other side of it is, you have to be able to assess what you really can afford to lose.

So the risk-averse person might have thousands of dollars saved in the bank and he's being stingy, tying up his pants with a drawstring, and he thinks he can't afford to lose that money. The reality is, he can.

On the other side you have this risk-inclined gambler or investor and he wants to put the rent money in. So you need to be careful, make a budget if necessary and find out how much money you really need to survive, because the excess money you have, if you want to become wealthy, should be put into something that's gonna grow it. Rich people don't work for money, money works for rich people. My final note on that point is that some crypto speculators like to say "play with house money" or professional gamblers like to say "play with your winnings" So when you do make some gains at the casino or in the market you can take out the money that you've initially invested, that way all that you're playing with is profit and you can take that initial money and put it into another project

The Episode

You can listen to the episode on Anchor and other podcasting services here: Cryptonomics - Crypto is like Poker. Or watch on YouTube below:


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