We talk about risk all the time in investing. In the stock markets, companies can fail or not meet expectations. And if that happens, stock prices can go down or tank. In real estate, a property’s value could drop over time. Or it might not generate as much revenue as expected. Or a natural disaster could destroy it. With startups, there are all sorts of risks to sort through before making an investment — product risk, market risk, funding risk, etc. And any one of those risks can sink a startup. All investments carry some sort of risk. You can’t turn $1 into $5, $10, $100, $500, or $1,000 without some risk.
In crypto, the risk factor is even more significant. There’s tech risk, adoption risk, policy and regulatory risk, social acceptance, ecosystem risk, contagions, volatility, product-market fit, timing risk, and much more. There’s a reason I always remind crypto investors to never invest more than they can lose. The risk factor is higher than any other asset class.
The First Stage Investor portfolio holding Solana reflects that risk. As of this writing, it’s down about 75% since we recommended it last April — a victim of multiple contagions. But with high risk comes potentially high rewards.
Polygon is up more than 100% since we recommended it last May. Uniswap is up more than 30% since December. It’s extremely difficult to generate these types of returns so quickly in anything — let alone in a bear market!
Overall, the First Stage Investor portfolio is doing well. In the last year, we’ve picked more winners (coins that have seen gains since we recommended them) than losers. And long term, these coins (except for one) are set up for success when the next bull market takes off. (Editor’s note: The Crypto Asset Strategies portfolio is doing even better than the First Stage Investor portfolio. Sign up to learn how to invest in smaller cap altcoins.)
Solana is the only coin that I’m worried about. I believe the best strategy here is to wait for the first big leg up in the next bull market and then sell. That should mitigate most of the Solana losses.
Now let’s get into our newest addition to the portfolio.
This month we’re adding Binance Coin (BNB) to the First Stage Investor crypto portfolio. We’ve never had a coin with a risk profile this high (absent contagions) in the portfolio. So we’re creating a special speculative section of the portfolio for BNB.
Outside of bitcoin and ethereum, it’s hard to find a large cap coin with as much potential as BNB in terms of utility, usage, and long-term outlook. And in terms of use right now, BNB is near the top of the list as well.
BNB is largely used to pay transaction fees on Binance, the world’s largest crypto exchange by trading volume. BNB is also used for transaction fees on BNB Chain (previously Binance Smart Chain), which is used to develop all sorts of decentralized applications. BNB Chain has processed more than 3 billion transactions since it launched in 2020. Bitcoin, by comparison, has completed just over 800 million transactions in its history.
That’s an impressive start for BNB Chain. Between Binance’s market dominance and BNB Chain’s growing popularity, BNB has established itself as one of the top coins in crypto.
But from the very beginning, investing in BNB has carried a significant amount of risk. For much of Binance’s early history, it operated in the regulatory shadows. People from all over the world could use it easily. But it was hard to tell if regulators would ever embrace it.
That seems to be changing. Over the past few years, Binance has shown a great deal of skill in terms of gaining regulatory approval. Regulators in 15 countries, including seven European Union member nations, have authorized Binance to offer crypto trading services.
Binance still faces uncertain footing in the U.S., though. Binance.US is regulated by the U.S. But it is a poor imitation of the full Binance exchange that investors around the world can access. On Binance.com, investors can trade almost any coin in the world. On Binance.US, people can trade fewer than 300 coins.
The limited options are a result of Binance trying to stay on the good side of regulators (and the law). But despite Binance’s best intentions, the Department of Justice is currently investigating the company. Actually, it’s been investigating Binance since 2018. And officials are split on whether or not the DOJ should file charges against Binance and its founder Changpeng Zhao.
Binance’s problems don’t end with the DOJ. In an effort to improve transparency and calm investors after the FTX debacle, Binance issued a proof-of-reserves report. But the report was so bad and raised so many red flags that the accounting firm that provided the report decided to exit the crypto business altogether.
Binance is also trying to buy bankrupt crypto lender Voyager Digital through Binance.US in a $1 billion transaction that includes a $20 million cash payment. A bankruptcy judge has approved the sale, but it will still need to pass a U.S. national security review and overcome SEC objections.
Binance also suspended U.S. dollar withdrawals for international customers after running into problems with its banking partners. The move does NOT affect Binance.US.
And just this week, Binance’s stablecoin (BUSD) came under fire.
Let’s be clear. Binance doesn’t operate BUSD. BUSD is operated by Paxos. And this week, the SEC notified Paxos that it was considering enforcement action against the stablecoin operator for securities violations and the New York State Department of Financial Services (NYDFS) ordered Paxos to “to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.” NYDFS also said “Paxos notified customers of its intent to end its relationship with Binance for BUSD” in response to the order.
Paxos promised to fight the SEC action in a press release.
Paxos categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws. This SEC Wells notice pertains only to BUSD. To be clear, there are unequivocally no other allegations against Paxos. Paxos has always prioritized the safety of its customers’ assets. BUSD issued by Paxos is always backed 1:1 with US dollar-denominated reserves, fully segregated and held in bankruptcy remote accounts. We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.
Even though Binance didn’t operate the stablecoin, it carries the Binance brand. And it’s becoming increasingly clear that the SEC is coming after centralized exchanges (it’s already taken action against Kraken) and is unhappy with Binance.
All of this is what makes investing in BNB so risky. It’s down 10% over the last seven days, mostly on the BUSD news. And Binance is taking steps to mitigate the damage. Binance has distanced itself from Paxos and hired a former Gemini executive as its chief compliance officer.
The smoke swirling around Binance should concern everyone in crypto. Binance is the world’s most dominant crypto exchange. If Binance goes down, it will set crypto back years (if not a decade). And for those of you who can’t imagine that happening, I recommend watching “The Last Days of Lehman Brothers” on Amazon Prime.
And if something does happen to Binance, it will be difficult to cash in on any BNB gains (if there are any left).
That said, I believe it’s unlikely that Binance will collapse under its own weight. If a bankruptcy judge is signing off on a $1 billion transaction, the company’s books are likely in decent shape. If it runs into any U.S. regulatory problems, the most likely outcome is Binance sells Binance.US and withdraws from the market completely.
If that happens, investors will likely be able to either hold or sell their BNB.
Investing in BNB carries risk that goes well beyond the normal crypto investment. But I believe the upside justifies the risk right now.
BNB is trading below $320 right now. That’s well below its all-time high of more than $650. From August 2021 to April 2022, it largely traded above $400. And during crypto’s next bull run, I believe it’s reasonable to expect BNB to top $400.
So if you can stomach the risk, this is a decent spot to add a BNB position.
Remember: Crypto is an inherently risky investment. And BNB is at the high end of the risk profile. 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 (buy a small, fixed amount each week until you’ve bought as much as you want to).
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 BNB provides an attractive risk-reward ratio.
BNB can be acquired on Binance.US.