Confused by crypto? Do this...

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Welcome to another issue of Passionate Income.

Today, we’ll be discussing a proven method for succeeding in crypto by following the natural flow of capital (aka money) through the crypto ecosystem.

Before we dive in, please remember this is not financial advice. Crypto is an extremely high risk asset class and it’s common for projects to lose 100% of their value.

Let’s dive in.

As you may have noticed, crypto is finally heating up after a multi-year bear market. It’s still early, and there are no guarantees. But for now, things are looking good.

The other thing you may have noticed is a spike in crypto content on social media (and email cough cough). The result?

FOMO on a scale we haven’t seen in years.

Which, if you don’t know how to handle it, can cause you to make some very serious “investing” mistakes (I put “investing” in quotes given most crypto is degenerate gambling, but that’s an entirely different conversation).

So the question becomes: How can you actually succeed with crypto?

Easy: By understanding how capital flows through the markets. Here’s what I mean.

The above quote describes what I’m trying to explain here perfectly.

See, most beginners invest into crypto based on what’s already happened. A behavior known as “chasing pumps” is the perfect example of this.

Chasing pumps involves buying a coin that’s already exploded. But if you know anything about investing, you know you’re supposed to “Buy Low, Sell High.”

Only problem is, when you chase a pump, you are by definition “Buying High.” You’re going where the puck was instead of where the puck is going.

So unless you have some kind of insider knowledge, or so much capital you can move the market yourself, you’re at a disadvantage. Why?

Because everyone else (and their mom, dog and gerbil) is seeing the same thing you’re seeing: That a coin just exploded. But let me ask you, who’s going to make more profit:

The guy who got in BEFORE the coin jumped? Or the newb who jumps in AFTER?

Hopefully I don’t need to explain to you it’s the guy who got in before (given he by definition “Bought Low and Sold High”).

Where most people struggle is knowing which coin to invest into before it explodes. You, however, are a Passionate Income reader. Which means you are not most people.

See, capital flows through crypto in a fairly predictable way.

First, money flows into base layer blockchains known as L1s (which stands for Layer 1s).

Similar to Bitcoin and Ethereum, L1s are self-sufficient ecosystems that may or may not interact with any other crypto projects / L1s. Examples include Polkadot, Ripple, Cardano and Avalanche.

Interestingly, this first phase is where we’re at right now in Q4 of 2023.

As crypto heats back up, we’re seeing major inflows into projects like Solana and RUNE (both of which are base layer blockchains).

The problem is, most of these projects are huge already.

As you can imagine, for a $7.5B project to do a 10x, it would have to see inflows of an additional $75 BILLION dollars. Assuming that kind of gain is even possible, doing so would take a very long time.

On the flip side, a project worth $1M can 10x to $10M virtually overnight. Happens all the time.

Which is why the second phase of our flow involves smaller projects built on top of L1s. Because we’re talking about blockchain-based money, 99% of tokens fall into a handful of categories:

1. Trading Exchange

2. Staking

3. Utility

4. Pure speculative investing

What you want to notice is that I put these four categories in this order for a reason: This is the order capital tends to flow in.

First, it flows from the main chain (L1) into Trading Exchanges. Why? Because there’s no way to get involved with smaller projects unless you can trade the base layer token for tokens from smaller projects.

From there, capital flows into Staking protocols because - similar to bonds and treasuries - they pay a passive yield. And because of that, they’re the closest thing to “income producing assets” the crypto world has to offer.

Third, capital flows into Utility coins.

By definition, utility coins have to offer some kind of utility (duh!). While most of their use-cases are pretty weak, some do offer real value. An example would be a token that provides you trading discounts in exchange for holding it, e.g. $DXDY.

Last, capital flows into purely speculative investments. AKA memecoins / “shitcoins.” These projects have no utility, may or may not offer staking, and are typically used for nothing more than speculation.

Admittedly, I just glazed over some pretty advanced concepts in like 40.7 seconds. So if all this sounds like gibberish, relax. We all have to start somewhere.

What’s more important is that once you understand this flow, it’s not that hard to predict which crypto projects have a high(ish) likelihood of performing well in a bull market.

Let’s use the highly popular Solana L1 to illustrate.

Here are some examples of coins based on which category they fall into and their returns over the last 30 days:

Phase 1 - Base Layer

Solana ($SOL) - 100%

Phase 2 - Trading Exchange

Orca ($ORCA) - 110%

Phase 3 - Meme Coin

Bonk ($BONK) - 790% 🥵

As you can see from these examples, the base layer project Solana - which is red hot right now - is up 100% since early October.

Next, the main trading exchange on Solana - Orca - is up even more (110%). Last, the purely speculative meme coin $BONK exploded a whopping 790%.

Now, if you understood this flow a few weeks ago, you could have anticipated this movement as soon as the market started heating up.

In particular, you could have allocated most of your capital to the larger and therefore “safer” base layer token (Solana).

Second, you could have allocated a much smaller portion to the smaller and riskier trading exchange (Orca).

Last, you could have made tiny investments into five or ten highly speculative meme coins like Bonk. Most of which have exploded over the past two weeks.

Admittedly, the above illustration is somewhat flawed.

The fact crypto just started heating up a few weeks ago means not enough time has passed for this A to Z flow to play out in full.

But even with how little time has passed, the above examples are undeniable proof this flow is still playing out.

So if you’re stuck figuring out how to get involved in this space, use this as your jumping off point. Do research into base layer projects, then dig deeper and study their trading exchanges, staking platforms and meme coins.

And if you don’t feel comfortable putting actual money down yet, create a free Watch List on a site like CoinMarketCap or CoinGecko. Make imaginary investments in your head following this strategy, then watch over time to see how they would pan out.

Finally, when you do put some real money down, make sure to email me back when you hit it big and disappear off the face of the earth.

💡 Takeaway: Unlike hype trains, which in many cases are driven by influencers trying to manipulate their followers, the above flow is based on the rational movement of capital through a crypto ecosystem.

I'll leave you with this quote…

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