How to build a successful crypto portfolio in 2022 | Interview with Scott Melker

What's up, everyone? I'm your host, Giovanni. Welcome to another Cointelegraph interview. Today I have the pleasure to be joined by Scott Melker, a veteran trader and podcaster. In this interview, Scott gives us his outlook on Bitcoin and Ethereum's next price movements. He also breaks down his crypto investment strategy and explains why layer one protocols should be part of everyone's crypto portfolio. But before we start, don't forget to smash the like button and subscribe to our channel. Let's get into it. Okay, so Scott, let's start looking at the bitcoin chart. What are the key levels that you're looking at in terms of resistance and support? What is the current situation in the bitcoin market in general?

I think bitcoin is looking really good right now. Of course it can humble us and change at any moment, and looking at any chart is just an idea of what could happen. But I think that we finally exited sort of this long term accumulation, much like we saw last summer. The 45,500 area on the weekly chart to me was key. That's sort of where we kept finding resistance and topping out. And just last week we finally closed a candle above that. That's really the key area that I'm watching right now. I expect to trade around it for a while. Below that, of course, the same obvious areas that we've been contending with before. 42,000. Right. I mean, 42,000 is where Bitcoin topped January of 2021 and it was still there again in January of 2022. So we know that that's a key level below that, around 39,600 to the upside. Now, assuming that we've actually flipped this 45,5 level to support, I'm looking for a move to about 52,000, 53,000 before I would consider really reevaluating. But right now, I've been saying it already kind of for weeks and months. I really thought the bottom was in already when we went down to around 33,000. I still think that's true. We're making higher lows and I see no reason right now why we would drop down and make new lows.

What are, according to you, these levels where emotions, mass emotions start to come into play and either to panic, sell or to FOMO in massively into the bitcoin market?

That's a really good question and it's hard to predict. I think that if we start to get back above 50,000, that becomes a major, major sort of psychological level. And People will start to FOMO in. But of course, as we get higher, we know that retail loves to buy higher and higher and higher. They're not looking to buy the dip because they're generally panicking at that time. So as price gets higher, we start to talk about 65,000, 69,000 new all time highs and the media starts to kick in. I think really see a ton of fomo. I think if we drop now back into the mid to high 30 thousands, people would start to become very skeptical again. And certainly if we start dropping back down to the bottom 30s, I think we could see a pretty quick push down into the 20 thousands on some panic.

In the first quarter of 2022, we saw a pretty quiet crypto market in general, like bitcoin has been trading sideways for a long time. So I was wondering if you can give us some perspective on the longer term. So Mike Novogratz a couple of weeks ago said that we shouldn't expect bitcoin to rally this year because the reason for that is because the Fed is raising interest rates. So what do you think? Do you agree?

It's hard not to agree, although I would push back a bit on that. I do think that bitcoin is more of an uncorrelated asset and still has a chance to perform well even, even in the face of sort of these macro headwinds. But then again, there's a very famous statement in all of markets which is don't fight the Fed. Right. And for most crypto traders, don't fight. The Fed has always meant in the past to just buy because crypto has existed in a market where there's always sort of reduced interest rates and more inflation. Well, now don't fight the Fed means maybe they're saying they're going to be more hawkish, interest rates are going to go up and it's going to be harder for assets to rise. But frankly, I don't see any major reason to be concerned about the macro right now. I do think that bitcoin is largely an uncorrelated asset. It goes through times where it trades with other markets when they're risk off. But generally we see that it sort of is a market of its own. And so I think that we can go higher than that.

I was curious to ask you, when you say that you consider bitcoin to be largely uncorrelated to stocks, what is the historical data that you are referring to in order to make this kind of statements?

Well, over the last 10 years, I mean, you can zoom back to 12 or 13 years. But I consider the first sort of few years of Bitcoin's existence to be not particularly compelling when you're comparing it to other markets because it was so nascent. But the correlation for talking about Markowitz modern portfolio theory is about 0.16, which is basically utterly uncorrelated. Right. If you're at a 1, then you're completely correlated. You expect a 10% move in one market to equate to a 10% move in the other. Negative one is inversely correlated, of course. So if one goes up 10%, you would expect the other to go down 10%. If you're anywhere near zero between maybe negative 0.3 and 0.3, they're utterly uncorrelated markets. And that's what Bitcoin has been historically. If you consider the same way that I talk about the target of 100,000, a zoomed out investor who's willing to wait. I don't care if assets seem to be correlated or if that correlation goes up to 0.5 or 0.6 for a month. It's irrelevant. To me. That's a very temporary correlation. It's something that happens all the time between any two assets. If you give enough time, there's going to be periods where any asset, whether they are correlated actually or not, seem to travel the same path for a while. Right. It's like a random walk in the park. Do I think when the market goes risk off and people panic that they also sell their Bitcoin? Of course. I just think that those correlations are temporary and short.

Last time you were on our show about six months ago, you told us about your portfolio construction, your crypto portfolio construction, which is made, which back then was made 70% of long term holdings, 15% cash for buying the dips and 15% for trading. Regarding the long term holdings, you said that 75%, about 75% in Bitcoin and 25% in Ethereum. So has your portfolio changed since then? And how.

The portfolio is constantly changing just because of the performance of the assets within it. But I do like to try to at least get keep a balance relatively close to what you just said. Every six months or a year or so, Sort of the traditional every two times a year you rebalance your portfolio to get it so it doesn't go too far out of whack. Very hard in crypto because you obviously can be holding an altcoin that does a 50 or 100x and becomes a much larger part of your portfolio than you expect, which is a very, very good problem to have. That said, I always try to stay around the 70, 15, 15 in general, what changes for me often is what's in that 70. So as you said, maybe I was 75% to 25% Bitcoin to Ethereum before. I would say it's more of a now 60% Bitcoin, 30% Ethereum and maybe 10% other things. Right. Huge amount of random other things that have either been sort of the dust that's left over from a great trade, something I invested in early and performed well, so I don't feel compelled to sell the entire position. But generally, and we've talked about this before, my investment portfolio, if I have something that I trade and it goes up 20x 30x 50x, the last 25% of that position, 15% goes into my long term holds forever because I never know where it's going to be. I'm willing to now see what happens over the next 10 years with that asset. I'm playing with the house's money in general though, more Bitcoin, Ethereum, second, a basket of other things. And to generally view 70% of my portfolio as investment.

And so apart from Ethereum and Bitcoin in these long term holdings, are there any other assets, like any other cryptos that deserve a kind of permanent place in your long term holdings that you can mention right now?

And this is a strategy that's changed for me a lot over the last year actually. And I've kind of been beating this drum in interviews. I believe that people, if you have the capital and are willing to wait, I believe that people should be invested in all of the major layer ones. Listen, now you can choose, there's a lot of them now, right? But you can choose your favorite three or four. We know that nothing's going to kill Ethereum. I believe Ethereum is here to stay. I believe it's an extremely important asset and one that everybody should have exposure to. Only second to Bitcoin. And it's really close. But after that we know that Ethereum and no layer one frankly can scale, right? If we have a billion people using crypto, no single chain is going to be able to accommodate that ever, right? So I believe my premise is that we will live in a multi chain world. You want to be invested maybe in the projects that make them interoperable. Things like Cosmos are awesome, obviously Atom, but knowing that maybe one chain becomes the DeFi chain and one chain becomes the gaming chain and one chain becomes the NFT chain or that any of these small projects could absolutely go nuts. But you're going to have trouble choosing what they are. You should just own the layer ones and the infrastructure that they're all built on. Right? You may not capture the 100x upside of some small project you've never heard of that comes out of nowhere, but you will benefit from it being built on that chain. I mean, you may not own a bored ape, but Ethereum holders have certainly benefited from the success of bored apes.

Okay, so that was an overview of your crypto portfolio, but talking about your investment portfolio overall, how is it constructed now?

Interestingly, until about March of 2020 when Covid hit and we saw the nonsense with the Fed, I believed you shouldn't have more than 10 to 20% of your money in crypto. Right. So that would have been my portfolio, the way that I structured it within that 15 or 20% that was crypto and 80% was still stocks, land, hard assets, some gold, all of those boring bonds, all the boring things that we invested in. After I really, I was already somewhat orange pilled but after I really saw what happened with stimulus and inflation, I just stopped rebalancing basically and let crypto run and become a much larger part of my portfolio. I mean now it depends on the day, But I'm probably 60, 65% in crypto of my entire portfolio. But the rest of it is still all of those other assets, I believe very much long term in all of these other markets. And that markets continue up into the right. If you zoom out enough, I have a robust stock portfolio. I have my IRAs and my retirement accounts that I've been contributing to absolutely forever. I dollar cost average into those and I don't think I'm a huge, huge fan, especially in the last year if you can afford to and if it makes sense of buying land as I talked about before.

Now I would like to talk about Ethereum precisely that you mentioned already. So we are all waiting for this transition that Ethereum is going to perform into the proof of stake which into the proof of stake system which should happen already in quarter 2 or at the latest quarter 3 of this year according to the statements made so far. So what do you think? Is it going to have a significant impact on the price of Ethereum and is it a good idea to buy Ethereum prior to this transition that is going to happen?

I believe so. And I dollar cost average into Ethereum quite regularly. As I said before, I'm extremely bullish on the asset. I think it's important and I don't think it's going anywhere. As for trading the merge itself, it's hard for me to predict what, what's going to happen. Right. We often see these sort of buy the rumor, sell the news. I wouldn't be surprised if price pumped massively right after. I also wouldn't be surprised if we saw a dump when it actually happens just because people have been buying in anticipation of that. Right. So it's hard for me to make a prediction on which one of those will happen. And once again I say zoom out. I think that this is a massively bullish event for Ethereum. I think that the eyes of the world on it, I think it will be a better chain, more usable after this happens. So when you zoom out over the long term, I think that we will see massive price growth as a result. Sort of like you look at the bitcoin halving, right? The having happens. It's this event you all look forward to and everybody talks about but price doesn't react the minute it happens. Right. You need to give it some time for that supply shock to sort of kick in, for difficulty to adjust and for traders to react. So I think that we'll see something more like that. That said, I love what Arthur Hayes recently wrote was at five ducking digits was the medium piece I think that he wrote about what was happening how you can basically start to view Ethereum as I believe he said it was basically a commodity linked bond that you'll be able to earn yield by parking your 32 Ethereum in the contract, 10 to 15% people are saying which means you could take a low interest USD loan, buy the Ethereum, earn the yield, eventually sell, pay back that loan and capture all of the spread in between. Which makes it a trade that institutions are likely to take because it's so obvious. So I think it'll be big for institutional, for institutional involvement here. Listen, everybody is hunting for yield. This will be the most obvious, I believe and secure way to do it while securing the Ethereum network at proof of stake, 10 to 15% on an asset that's generally rising over time is nothing to sneeze at, especially in a secure environment with a name as big as Ethereum. So I think it's going to be a massively, fundamentally bullish event. I just wouldn't say you should be trading around what happens within five minutes of the merge.

There are certain rumors about the risk implied in this merge. Some people are saying that the blockchain will not merge, but it will create a fork and that would create massive turmoil in the whole market. But I think that you are quite skeptical that that would be the case, right?

I'm skeptical. But you have to believe that anything's possible, right? I don't think that will happen. But there's, I mean, this is probably technologically, fundamentally the largest, most complex event that we've ever seen in crypto. Right. Short of launching the bitcoin blockchain for the first time. So it would be naive to not believe that something could go wrong. It certainly can. But I would imagine that with this many years of build up, this much anticipation, this many delays, that they're prepared for most of what could happen.

Yeah, for sure. And what about the price target for Ethereum? I saw that in your latest stream you were mentioning Ethereum to $10,000. Can you clarify this prediction?

I thought Ethereum could go to $10,000 last year, right. Without even talking about Ethereum 2.0. I was obviously wrong. But it got halfway there. It got to five almost. Right. I'm just an Ethereum bull. Like I said, it doesn't matter when it happens. That 10,000 that was mentioned in the video was specific to Arthur Hayes saying that he thought it would go to $10,000 on the back of Ethereum 2.0 and the merge. I think that's a conservative price target, frankly. I think that we will eventually see Ethereum at 20, 30. Why not $40,000? I'm not scared to say that because I truly believe that that's likely and I'm willing to wait for it. But $10,000 this year? Sure, why not? I'm not saying it will happen. I'm saying I would be not shocked in any way, shape or form if it did. So I think that 10,000 is a very reasonable target for investors.

Okay, cool. That was Scott Melker, trader and podcaster. Thanks a lot, Scott, for coming on our show.

Thank you, man. It's always an honor and always a pleasure. I love talking to you guys.