He’s often looking for insane 100x to even 1,000x gains, and he’s willing to stomach the kind of volatility that could wipe out three-quarters of his portfolio’s value over a couple of weeks.
And while everyday investors might be bewildered by those concepts, it’s not too surprising for Woo, given his background.
While now best known for his innovative philosophies on cryptocurrency, Woo got his start in the trading world buying derivatives during the run-up to the 2008 financial crisis — he started shorting bank stocks right before the banks collapsed. And that experience gave Woo a pretty solid understanding of how to trade markets when they’re at their most volatile.
Plus, with a background coding as a teenager, it’s no wonder Woo was drawn to cryptocurrency.
It was right around the time bitcoin hit the $1 billion mark that Woo got interested in crypto, shortly after moving to Bali, where, as he describes it, he “went down the rabbit hole.”
While his first foray – much like other investors just getting in – was bitcoin, he’s since changed his tune, deciding the real action is in altcoins (alternative cryptocurrencies).
“My particular portfolio is very, very high gain, high risk. It’s highly volatile,” said Woo.
But, even still, he’s got a pile of data to back up those risks as the right decision.
“Under the data that I have is that most coins when they launch that are successful, they create a particular graph,” he said, pointing to the Falcon 9 rocket launches as a visual. “The photos show the rocket launching up with this steep trajectory and then it levels off and continues moving steadily up.”
Although, looking for those breakouts comes with some gnarly lows, too.
But to Woo, “We’re not trading here. We’re investing. We’re going to put it in a drawer like a venture capitalist does.”
For him, investing in cryptocurrency isn’t about short-term trading gains, but about longer-term investments. Because of this, Woo primarily focuses his attention on the “early launch” of cryptocurrencies, where the trajectories are steepest, hoping to get the 10x to 100x trajectory that some of the best coins have had during their initial run.
Woo believes that chasing those kinds of returns will be far more lucrative in the long run than the “boring” 300 percent to 400 percent annualized returns that bitcoin is now generating.
And then, once the coins mature – typically rising to the range of around half a billion dollars – that’s when he starts looking to exit.
But even without that investment thesis, Woo has data that shows considerable returns even if you’re just investing blindly in all altcoins.
Woo told CoinDesk:
“Even if you weren’t filtering the shit out of and buying everything under the sun when they launched – all 700 or so coins – even the scam coins, actually it’s near a 50/50 split where 50 percent was underperforming bitcoin, but around 50 percent was outperforming bitcoin.”
Math behind the madness
But it’s the data behind Woo’s investments that would make most crypto investors salivate, as his strategy takes inspiration from an even deeper set of calculations than just market cap.
For instance, Woo is a serious consumer of blockchain explorers like Blockchain.info, using stats like mempool, connection rate, trade volume and miner income to judge the health of a network.
With that in front of him, he then visualizes the data and looks for patterns to emerge.
Woo typically works in metaphors and analogies, looking for ways to compare the cryptocurrency to other things. For instance, he might ask himself: if bitcoin fulfills a similar role to PayPal – facilitating digital payments – what are the metrics one can use to measure bitcoin’s potential?
Woo has been searching for a key benchmark ratio for cryptocurrency for some time, one that will provide the same kind of insight that the price to earnings ratio (P/E) provides for equities. While an investor can analyze the market capitalization of a coin as the price, the key second component, the earnings, isn’t available in the cryptocurrency space.
The next closest proxy, according to Woo, is sales – or, in the case of PayPal or bitcoin, the total value of the transactions that ride on their networks.
“I treated that as the closest thing we’ve got to a price to earnings [ratio],” Woo said.
By using that kind of P/E, he continued:
“You can just start to look at it to see if it’s valid. Does the valuation track the transaction going through it? Once you understand that data, you can look to see where it’s pumped and where it’s dumped in the past.”
While that’s a good starting point, Woo doesn’t stop there – not when there are other data points that can be mixed and matched, creating new ratios and new data metrics, looking for the golden ticket that will allow him to predict with more certainty how to invest.
“I’m just trying weird stuff, here’s some data here, what if I messed with it in this way?” he said.
Rails over train cars
All that data crunching has left Woo focused primarily on cryptocurrencies as protocols.
“For the first time, we can invest in these protocol stacks and any app that’s built on them, you get a [kind of] cut,” said Woo, adding:
“You can buy the real estate in which people plant down their businesses.”
And with that thinking, Woo doesn’t worry much about investing in applications. In his mind, the applications that ride on blockchain protocols are starting to look more and more like Silicon Valley startups – where nearly 10,000 launch per year and only a handful succeed, with only one becoming a unicorn like Facebook.
That, he thinks, is a much more speculative play, than investing in the base-layer protocol cryptocurrencies.
This risk also keeps Woo away from most initial coin offerings (ICOs) as well, a not often heard strategy in today’s crypto space. But instead of long-term investments, Woo sees most application specific tokens as merely “FOMO-nomic” (playing off the acronym “fear of missing out”) hype.
Plus, as more and more token sales offer privileged buy deals, those investments become even higher risk and even more work.
So for Woo, it’s all about the long-term “HODLing” pattern with tokens that provide the rails for application train cars.
And sure it takes some initial due diligence – Woo advocates researching the founders and advisers to see whether any big names are willing to put their reputation on the line for the project, as well as spending time in related social channels and forums.
But in the end, Woo’s philosophy after buying is simpler.
“Once you’ve done your due diligence, you pretty much sit on it for six months to two years and ride out the bumps.”
Image via Willy Woo