Fundamentals: Opportunity Cost
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Fundamentals: Opportunity Cost
Comic Describing Opportunity Cost
I would like to preface this article by saying that while basic, this is a highly relevant and important concept in current times, and it was inspired by the stETH-ETH debacle. If you don't know what it is, here's a good explanation by Cobie. Now, let's begin.
Opportunity cost is a fundamental concept that anyone, no matter their profession, should be familiar with. Investopedia defines it as representing the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
Simply put, it is the idea of choice and sacrifice - choosing something almost always means sacrificing something else. You want to change jobs? You have to give up the comfortable position you're in now and risk making less. You want to buy X stock? You'll have less dry powder to deploy if prices go down even more. Sacrifice doesn't always have to be tangible - it can be something abstract like happiness, growth, etc.
But in the context of financial markets, opportunity cost is counted quantitatively and is one of the many ways of framing investment decisions. More specifically, I would like to talk about how in a bear market, many people say that "You shouldn't sell X token because it's already down -90%, so how much lower can it go".
Just because it's gone so low doesn't mean it can't go lower. So if you have $1000 left in shitcoins, in Scenario A where you continue holding it, there's a high chance it goes to say, $100. Alternatively, you exit at $1000, and so the opportunity cost here is $900.
On top of that, account for the fact that in turbulent times, $1 in a bear can net you far greater returns in the future - having maximum liquidity on your side to deploy can often lead to generational wealth. As the old adage goes, bull markets make you money, but bear markets make you rich.
This idea doesn't just apply to freeing up your assets - it's also relevant in the stETH debacle. The idea is that you're locking up your ETH for an unknown period of time and with that comes opportunity cost. Some might realize after locking that they much rather convert to fiat instead of holding ETH, hence they would take a loss on their positions for the comfort of instant liquidity.
If you're a long-term believer in ETH, the price of stETH doesn't matter much. But the price of stETH is a good example of how there is always a cost in locking up, which is why I don't advocate in locking up tokens for years, especially if it's a sizeable amount. In such a volatile environment, locking up your liquidity seems counter-intuitive unless you truly believe in the asset (i.e ETH maxis).
With this, I hope you re-evaluate your portfolio and seriously consider selling your alts for the inevitable next bull run, be it in 5 years or 15 years. Personally, I've sold almost all my alts at a ~95% drawdown, but I know that holding them will cost me much more.
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