Position Sizing based on Fundamental Analysis and Risk Level

Position Sizing based on Fundamental Analysis and Risk Level

Today we’re going to talk about how position sizing.

Refer to the image below for the guide. It seems daunting but it’s quite easy.

Let’s start by setting a premise that this table was made for people with more than $100,000 in capital. But don’t worry, it is perfectly usable for someone who has less. We’ll go through examples later on.

Let’s recap for a minute (Read on our Fundamental Analysis Article for more information on Conviction Level):

  • Conviction is defined as, our belief that the project will do well in the LONG RUN.
    • The level will depend on the scoring system defined on the Fundamental Analysis article
  • The risk level is defined as, our calculated assumption of a black swan event that derails it from our conviction level.
    • The level will depend on its fully diluted valuation.
  • Extremely High-Risk Level: Less than 10 million fully diluted valuation
  • High-Risk Level: Less than 100 million fully diluted valuation
  • Moderate Risk Level: Less than 1 billion fully diluted valuation
  • Low-Risk Level: Less than 10 billion fully diluted valuation
  • Extremely Low-Risk Level: More than 10 billion fully diluted valuation

In most instances, a fully diluted valuation will be different from the market capitalization. We will be using FDV as it’s a more accurate representation of the current valuation of a project if you take into account future emissions. Remember, too large of a difference between the FDV and Market Cap is a red flag because it represents future sell pressure.

In my experience, as a project gain a higher FDV, the more resilient it becomes. The liquidity rises and the volatility decreases. You have a lot more time to swap to a stable coin before the price crashes. Thus we can assume, that the risk level decreases as a project gains adoption. Even the most degen project, if it has 17 million dollars in liquidity, will take a couple of days before it reaches 0.

Position Sizing = Conviction Level x Risk Level

So to get your position sizing, you simply use the table to cross-reference between the conviction level of a project and its current risk level. It’s that simple.

A high conviction level project with an FDV of 700 million USD (Moderate Risk) will require you to have 5% of your portfolio.

A low conviction level project with an FDV of 10 million USD (Extremely High Risk) will require you to have only 0.25% of your portfolio.

What about those purples on the right?

It just means that if you have less than $10,000 on your total portfolio for crypto, it would be more optimal for you to only invest in projects with a fully diluted valuation of less than 100 million. This would limit you to pre-sales, projects that have just been dumped, and those sleeping gems. You only have a few thousand dollars in your name, it is in your best interest that you multiply it as soon as possible even if you take in a lot more risk.

If you have less than $250,000 on your total portfolio for crypto, you’re now able to invest in projects with a fully diluted valuation of up to 10 billion. The rationale behind this is that you have a lot more money, that even just an x3 to x5 for each coin will be a significant amount of money.

If you have more than $250,000 on your total portfolio for crypto, you’re now able to invest in the blue chips such as BitCoin, Ethereum, and various stable coins. Now that you have a lot of money, even just 20% APY on your coins will be significant, year after year. You are more concerned with preserving capital at the expense of potential gains.

What if I have less than $100,000 to start with? What if I only have a thousand?

That’s where leverage comes in. Okay, don’t crucify me, it’s not a real leverage but I like to call it one. Check the upper right hand of the image. There’s a leverage level there. The formula is pretty simple:

Leverage = $100,000 / Your Capital

What happens? Your portfolio sizing will become massive, allowing you to concentrate your money into a few high conviction plays that you are early to.

I repeat: HIGH CONVICTION PLAYS.

  • Any time you are leveraged more than 5x, you are only allowed to invest in projects that you have a high or extremely high conviction levels.
  • Any time you are leveraged more than 2x, you are only allowed to invest in projects that you have a moderate to extremely high conviction levels.

Aside from that, another rule you must follow is: invest at least in 2-3 projects, but not more than 6-7.

What’s with all the limits?

We now have risk level limits and conviction level limits. Why do we bother with these things?

If you have a low capital, your job is to multiply it as soon as possible. You do that by concentrating your money into new start up projects who are still in their pre-sale or infancy period [risk level limits]. This, however, will increase your risk as they are the most vulnerable of going to $0. We mitigate this by only investing in the highest of the high quality projects [conviction level limits]. These are few and far in between, but we go ‘all-in’ if we see one. This means being active in the community, shilling it on social media as much as possible, keeping up to date with the events and more.

If you have a high capital, your job is to preserve your capital while growing it in a steady pace. You do that by diversifying your money into more investments, even if the moon potential is fairly limited [risk level limits]. Since you need to diversify into more projects, your conviction level limits are relaxed and you can invest in more lower quality but HYPE driven projects. Remember, a low conviction play does not mean it cannot pump, it only means that it will not do well in the long term. You may also participate in safer investments such as stable coin farming and blue chips such as bitcoin and ethereum.

Next Topic: How to find the perfect entry on your investments.

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