Early Investing

Mailbag: Airdrop Requirements and Risk Tolerance

Mailbag: Airdrop Requirements and Risk Tolerance
By Early Investing
Date December 2, 2018
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Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: It seems like all the airdrops require Twitter or Facebook, and I am not a participant in any such social media sites for a whole bunch of reasons. I do have a Disqus account as that seems benign. Maybe it is just as perilous as other social media sites, but that has never been my impression. So why must these coin drops always require that we participate in dangerous media sites like Facebook? Is there another option? – John H.

A: I share your concerns about social media sites – particularly Facebook. I don’t like their data collection or sharing policies. And I never participate in airdrops if they require anything I feel uncomfortable about.

But think about it from the airdrop project’s perspective. It is giving away free coins to thousands of people and needs a way to ensure that robots don’t steal them. Social media sites like Facebook, which make an effort to ensure their users are unique individuals, provide an easy way to do that.

So, like many things on the internet, airdrops are a trade-off. You’re opening up some of your information in exchange for some coins. Some won’t mind this trade-off at all. Others, like you (and me to some extent), won’t do it.

I do recommend screening any airdrops you choose to participate in carefully. Make sure the organization is legit. Check out the white paper and the founders’ LinkedIn profiles. And make sure everything looks good.

The requirements to receive airdropped coins are different for every offering, but most do require some sort of social network that identifies you as a unique individual (by phone number or other verification means). Of course, these measures aren’t foolproof. But from the project’s perspective, they’re better than nothing.

There are some ways you can get a free phone number to attach to social media accounts (like Twitter, which doesn’t require you to use your real name). And some airdrops will ask only for a Twitter follow. You can read more about that here.

+ Early Investing Co-Founder Adam Sharp

Q: Back in July 2017, I bought $100 of ethereum. Today it’s worth 50 bucks. So I don’t see how you [can be] making all these gains. – Mike P.

A: It’s not easy to make an investment and watch the price fall. I can see why you’re discouraged.

It’s happened to me… way too often. Heck, once is too often. But it’s the risk you take when you invest – even when those assets are a lot less volatile than ethereum.

Is there anything you can do about it? There are no guarantees in the investment realm. But there are tricks of the trade you can use to manage and limit risk.

Let me share one that I use…

It’s pretty simple: You aim for an upside that is at least five times your downside. How does it work in practice?

If you think a 100% gain is a reasonable expectation, you’ll tolerate up to a 20% fall (5 X 20 = 100%). Likewise, if you think a 400% gain is within reach, you’ll tolerate an 80% fall (5 X 80 = 400%). If you’re aiming for 40% returns, then an 8% dip is acceptable. And so on.

How about an extraordinary upside of 500% or more? That requires a willingness to ride your investment all the way to zero.

For me, at least, ethereum fits this last category.

How much risk you tolerate should be a function of both your upside and your downside, right?

Without realizing it, anybody buying a lottery ticket operates on this principle.

Lottery participants are perfectly willing to lose their entire investment for the upside of winning 1,000 times the cost of their ticket.

When people tell me that smacks of irrational behavior, I disagree. But because the odds are stacked enormously against you, you shouldn’t use money you need to pay the bills. But using a little beer money? Why not?

Of course, my definition of what is considered “reasonable” could differ from yours. It’s subjective and open for debate.

That said, I feel that ethereum going up 500% or more is a reasonable goal. If anything, it’s on the conservative side.

Now, this is just a tool to manage risk. It’s based on the simple premise that the more money you think you can make, the more rope you give your investment.

Can ethereum rebound from here? Of course it can. The question is when?

Ethereum is pretty much considered a lost cause right now. Which makes me believe it’s near a bottom… perhaps very near.

Seems like a good time to consider reloading. Smart crypto investors look ahead. They understand that bear markets are followed by bull markets.

Buying low isn’t easy. It requires tuning out all the negativity. Or, in this case, ignoring a strident anti-crypto narrative that comes with buying extremely low.

You asked, how can you make gains? This is how: by buying quality assets at ridiculously low prices for a shot at ridiculously large gains.

It sounds so easy. But it’s not.

+Early Investing Co-Founder Andy Gordon

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