I used to write about horse racing for a living. It was a long time ago. And it was fun! I loved going to the track and talking to trainers, watching people place bets, reveling in the ferocious thunder of hooves hitting the dirt in the stretch run, and hearing crowds roar as horses approached the finish line. It was exhilarating.
One of the more interesting aspects of horse racing is the wagering. Track operators space out the races so there’s plenty of time between races to place bets. And watching people choose which horse to bet on is fascinating.
Advanced bettors consult the Daily Racing Form — which contains all sorts of data and analytics — crunch the numbers, factor in competition and track conditions, and then place their bets.
Casual bettors typically approach betting a little differently. Some like betting on longshots. Others like betting on horses of a certain color. But the most popular approach (that I’ve seen) is betting on horses based on their names. People love betting on horses based on their names. Whether a name is regal, funky, or funny, nothing attracts attention like a cool name. In fact, my very first bet in horse racing was on Editor’s Note because I connected with his name (and I won my bet!!).
To a certain degree, crypto reminds me of horse racing. Yes, the fundamentals (as in horse racing) are critical. A good crypto investment needs to be a good project, show traction, have a good development team, and be secure and scalable. But a cool name doesn’t hurt. And there are plenty of cool names in crypto.
That brings us to Optimism. Optimism is a Polygon competitor. It’s a layer 2 solution designed to help Ethereum scale. The simplest explanation is that it uses its own ultra-efficient method (rollups) to process transactions while leveraging Ethereum to keep every transaction secure. Instead of reporting transactions individually to the Ethereum chain, it broadcasts them in batches to increase efficiency and save resources. Optimism transactions are typically cheaper than Ethereum transactions. And they’re speedy too. There’s an immediate acceptance or rejection. Withdrawals do take seven days to process, though.
There’s an interesting near-term catalyst for Optimism coming up. It’s planning to upgrade the network in March. The “Bedrock” update will make Optimism faster and transaction fees cheaper while fine-tuning its compatibility with Ethereum. Optimism saw a nice spike in prices and usage when Bedrock was first announced. Bedrock’s implementation should help sustain some of that forward momentum.
I worry a bit about buying into Optimism right now. Coinbase just announced that it is building its own layer 2 solution that’s powered by Optimism. The news sent Optimism soaring. It began the year trading for less than $1. It’s now trading for around $3.02 — significantly higher than where it was trading earlier this year. That said, Optimism just launched last year. And it’s taken some time to gain traction. But it is happening. According to DefiLlama, there’s around $908 million in total value locked on Optimism. That’s pretty good for a relatively new project.
For a volatile small cap coin like this, dollar cost averaging (buying a small, fixed amount each week) your way into a position is critically important. Optimism’s long-term potential is solid. But when you combine crypto’s highly volatile nature with potential market downturns (driven by inflation and regulatory uncertainty) and a small coin that’s spent more time trading below $2 than above it, prudence is warranted.
That said, I’m optimistic about Optimism (sorry, couldn’t resist). And I believe this is a good spot to add it to the portfolio as long as you’re planning on holding it long term (or at least until we’re well into the next bull market). Optimism was a great project at the beginning of the year. And as Coinbase’s decision to build on top of Optimism shows, the project has tremendous long-term potential. Just remember that crypto is an inherently risky investment. Anything can happen. More importantly, we’re still in a bear market. And I don’t think we’ve hit the bottom of the market yet. So make sure you dollar cost average into this position.
Rules of the Road
Investing in a bear market is tricky. It is likely that the market will go down further from here. But it’s important to be opportunistic. So if you have capital to invest — and you’re psychologically and emotionally willing to enter what promises to be a highly volatile market — here are some guidelines to follow.
- Do not invest money you can’t afford to lose. The markets are in for a rough ride. If you can’t afford to lose the money, don’t risk it.
- Focus on projects with strong use cases.
- Look for teams or communities that are active and committed to their projects.
- Always enter a position using dollar cost averaging. That means buying a small amount each week rather than buying your entire position at once. That way, if prices continue to fall, you lower your overall acquisition cost.
- Don’t try to time the market perfectly. Nobody can. And I believe this bear market will be around for several months. So if you want to wait, that’s perfectly okay. But when you do invest, make sure you utilize dollar cost averaging to buy into the market.
- Diversify your crypto portfolio. From a percentage standpoint, bitcoin and ethereum should be the biggest investments in your crypto portfolio. But you need exposure to a much broader and more diverse set of coins to take advantage of the full upside of the crypto markets. Bear markets are a good time to diversify your portfolio and increase exposure to different crypto sectors.
Remember, investing in crypto is risky. Investing in a crypto bear market carries even more risk. Less than 5% of your overall portfolio should be invested in crypto. That said, I believe Optimism provides an attractive risk-reward ratio.
Optimism can be acquired on Coinbase.