In investing, you have very little control; the risk-to-reward approach is really the only variable you can control.

Understanding this and knowing how to plan strategically gives you a much better chance at success and profits in the market.

This is the building block of the whole series, and we want to highlight the most important element first.

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Key concepts

1. Importance of risk-to-reward
   • Risk to reward is the foundation of investing. This ratio helps investors determine whether an investment is worth the risk compared to the potential reward. It lays the groundwork for all investment decisions, ensuring the potential returns justify the risks. Without this understanding, investors are essentially navigating the investment landscape mindlessly.
2. Control in investing
   • The only controllable variables in investing are:
     • The assets you choose to invest in
     • The amount you decide to invest
     • The timing of taking profits
   • Market movements and outcomes are beyond your control, no matter how thorough your research and analysis. By focusing on what you can control, you can make more strategic decisions and better manage your investments.
3. Setting expectations
   • Setting realistic expectations based on analysis and research prepares you for market fluctuations. Clear goals help you hold through market ups and downs and resist external influences. For example, if you invest in Solana based on Ethereum’s past cycle performance, setting a realistic profit target helps you manage your investment better and avoid making impulsive decisions during market volatility.

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Understanding risk-to-reward

Definition

• Risk: The capital you invest with the expectation of a return
• Reward: The potential profit from the investment

Understanding the risk-to-reward ratio is essential because it allows investors to evaluate the potential returns against the risks involved. This evaluation helps in making more informed investment decisions and managing expectations.

Calculating risk-to-reward ratio

• Identify the potential reward: Estimate the potential profit of the investment.
• Methods:
  • Use charts to analyse price movements
  • Examine tokenomics to understand the asset's fundamentals
  • Review historical data for past performance

For example, a 1 to 5 risk-to-reward ratio in the crypto market means you aim to make $500 for every $100 invested. Calculating this ratio lets you determine if the potential reward justifies the risk.

Setting expectations

• Importance:
  • Prepares you for the investment journey
  • Helps you manage emotional reactions to market fluctuations

Setting expectations based on thorough research ensures you are prepared for the road ahead. A clear profit target makes you less likely to make impulsive decisions during market volatility. For instance, if you have a firm conviction in an asset, you can confidently hold through temporary downturns.

Guiding investment decisions

Pre-determined desired outcomes can help you decide whether to invest.

For example, if your portfolio consists of low-risk assets with potential 3X returns, adding a higher-risk asset with potential 5X returns can balance your strategy.

A clear desired outcome helps you determine whether an investment fits your overall strategy. This approach ensures that you are making informed decisions based on your risk tolerance and investment goals.

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Creating conviction

• Factors contributing to strong investment conviction:
  • Tokenomics
  • Fundamentals
  • Technical analysis
  • On-chain data
  • Historical data
  • Pioneer assets (e.g., Dogecoin setting the trend for meme coins)
  • Narratives and macroeconomic factors

Building a case around these factors makes holding investments through volatility easier. Thoroughly understanding an asset can develop strong conviction, making it easier to hold during market fluctuations.

Strategic planning

• Diversified Portfolios: Most investors build diversified portfolios to spread risk.
• Example:
  • Using the barbell strategy:
    • Allocate a significant portion to low-risk assets (e.g., BTC, ETH)
    • Allocate a smaller portion to high-risk, high-reward assets (e.g., meme coins)

This approach balances potential returns and mitigates risks. By diversifying your portfolio and using a strategic plan, you can achieve a more balanced and resilient investment strategy.

Paul Tudor Jones' strategy

• Focuses on investments with at least a 1 to 5 risk-to-reward ratio
• Ensures a clear strategy to maximise returns while controlling risk

Paul Tudor Jones, a well-known investor, emphasises the importance of a solid risk-to-reward ratio. By only considering investments that meet this criterion, he ensures that his portfolio is more likely to earn significant returns.

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Practical example

• Suppose you have $10,000 to invest:
  • Divide it equally across five different investments ($2,000 each).
  • Aim for a 1 to 5 risk-to-reward ratio:
    • If one investment succeeds, you break even
    • If two investments succeed, you double your money
    • If three investments succeed, you significantly increase your returns

This approach ensures you can absorb losses and still come out ahead. You increase your chances of overall success by spreading your investment across multiple assets with a high risk-to-reward ratio.

Minimising risk

• Stick to high risk to reward potential investments
• Diversify across market sectors (e.g., AI, gaming, layer ones, memes).

You can minimise risk by focusing on high risk to reward potential investments and diversifying across various sectors while maximising potential returns.

Perception and attitude

• Your perception, attitude, and approach are crucial
• Maintain realistic goals and manage expectations
• Stay focused on your strategy, avoid market noise, and stick to informed decisions.

Maintaining a positive perception and attitude is vital. Realistic goals and managed expectations help you stay focused and avoid being swayed by market noise and external influences.

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Cryptonary's take

Thank you for watching the first episode of Investor Insights. Remember these key takeaways:

• Understand the importance of risk to reward
• Set clear expectations and plan strategically
• Focus on your perception and approach to investing

By applying these principles, you'll be better prepared to navigate the cryptocurrency market and achieve your investment goals. See you next week for a new episode!

Takeaway

• Always understand what risks and rewards are
• Set expectations and plan strategically
• Use your initial decision as a guide
• Maintain a positive perception and attitude

If you put in the time and homework, you'll be much better off.

See you next week for a new episode!