Revealed Capital Management Strategy of Mining Pool F2Pool's Founder
In the ever-evolving world of cryptocurrencies, managing risk and maximizing security has become paramount for investors. One strategy that has gained traction is the Four-Wallet Rule, a method of dividing cryptocurrency holdings into four types of wallets to balance security, accessibility, and convenience.
The Four Wallets
- Cold Wallet: This offline wallet, such as a hardware wallet or paper wallet, offers the highest security by being disconnected from the internet. It stores the majority of the cryptocurrency, keeping it safe from online hacks or theft.
- Warm Wallet: A compromise between cold and hot wallets, warm wallets are connected to the internet but secured with strong protections. They are used for assets that need to be accessed occasionally, balancing security with accessibility.
- Hot Wallet: These online wallets, such as software wallets or exchange wallets, allow fast and easy access for day-to-day transactions or trading. However, they carry more security risk due to their constant internet exposure.
- Fiat Wallet: This holds traditional currency (USD, EUR, etc.) outside cryptocurrency to provide liquidity for immediate or emergency use without needing to convert assets.
Benefits of the Four-Wallet Rule
The Four-Wallet Rule offers several advantages:
- Security: Most funds are kept offline (cold wallet), minimizing the risk of hacks.
- Liquidity: Hot and warm wallets provide quick access to funds for trading or spending.
- Flexibility: Diverse wallet types protect against different risk sources and allow varied use cases.
- Risk management: Splitting holdings reduces exposure to a single point of failure or compromise.
Typical Strategies
A common strategy for asset allocation is to store the bulk (60-80%) of assets in a cold wallet for long-term holding. Keep 10-20% in warm wallets for occasional use with moderate security. Allocate a small portion (5-10%) to hot wallets for frequent trading or spending. Maintain a fiat wallet to cover immediate expenses or to capitalize on market opportunities quickly.
Each wallet uses different security measures: hardware cold wallets use private keys offline and recovery phrases; warm wallets use secured devices or multi-factor authentication; hot wallets depend on trusted software and strong password policies. Fiat wallets typically involve bank accounts or prepaid cards.
Shen Yu's Approach
Shen Yu, one of China's largest Bitcoin miners and co-founder of F2Pool and Cobo Wallet, recommends this approach. He invests in key assets like Bitcoin and Ethereum through gradual purchases and stores them in cold wallets for long-term holding. Shen Yu also maintains a trading journal to document emotions, reasoning, and predictions for later analysis.
Shen Yu focuses on "core" assets and does not move a token from the "entertainment" category until it has endured several market cycles. For experimental tokens such as NFTs, Shen Yu advises a cautious approach with a small portion of capital to explore market potential.
In November 2023, F2Pool, along with several other mining pools, blocked transactions involving addresses from the OFAC SDN list, demonstrating the importance of security measures in the cryptocurrency industry.
Reflecting on failures promotes growth, according to Shen Yu. His experiences have taught him the importance of careful planning and diversification in managing cryptocurrency assets. The Four-Wallet Rule is a testament to this philosophy, offering a balanced and secure approach for investors in the ever-changing world of cryptocurrencies.
- To safeguard his investments, Shen Yu employs the Four-Wallet Rule, keeping his primary assets like Bitcoin and Ethereum in cold wallets, while utilizing his hardware wallet's private keys and recovery phrases for added security.
- Practicing careful risk management, Shen Yu allocates most of his investments to cold wallets for long-term holding and establishes a small portion in hot wallets for occasional trading or spending, emphasizing the importance of balancing security and accessibility.
- Amidst the exploration of innovative technology such as NFTs, Shen Yu advocates a prudent strategy, allocating a minimal amount of capital to experiment with the market potential, whereas he focuses on enduring "core" assets after observing several market cycles.
