In the 2010’s, I spent a few years as an equities, options, and commodities trader and gleaned a few insights along the way particular relevant to those who are trading cryptocurrencies for the first time. Mistakes are part of the process, but foregoing as many as possible will contribute to your net worth. Once you've sold a large position to a thin order book with a market order, as I did when I first got rolling, when you meant to do a limit order, and made some market marker's Christmas, it tends to stick with you!
The media attention firmly affixed on Dogecoin and other meme assets has brought a lot of attention to crypto as a befitting interplay between social media, memes, Reddit, Instagram, and all of the tools of the trade of the modern millennial. The vocal narrative is that equities are stale, complicated, convoluted, and that crypto offers a departure from this habit going on for generations of throwing a few grand into IBM, 3M, or Walmart and waiting until one’s retirement to live off the dividends.
The excitement of one's contemporaries profiting from visible assets is all too alluring, especially for impressionable young adults with minimal baseline financial literacy or due diligence skillsets.
At my local bitcoin meet-up groups, we would have 50% of the people who would come in to discuss the technology underlying blockchain, the exciting possible use cases, and the potential impact on the world fiat markets. The other 50% were comprised of people who were more interested in the price action and picking-up an asset for a $0.01 and having it compound to $50,000+ without any intellectual curiosity as to how it would ignite such growth. Essentially, the same type of people that might approach one at a dinner party asking for a tip on the new Bitcoin or Ethereum.
In answering questions for those who have reached out to me, students who are utilizing their Solidity coding language to pivot into blockchain tech, or just coworkers who pepper me with questions, I have a isolated the top 5 of understandings that is imperative to absorb before you throw your hat into the ring of being a cryptocurrency trader, but the themes transcend into all trading.
1) When you double up, sell half.
There’s nothing more frustrating than having been early on an exciting investment that enjoys a swift and aggressive run-up only to be left holding the bag when it crashes and burns.
Paper profits are only meaningful if converted into cash.
Some of the wisest investors, who dipped this toes into options trading in the 1980’s, wisely once told me that when you have an investment that doubles, always remember to sell 1/2. If you bought $100 worth of X and it’s now worth $200 then selling 1/2 would provide you with the entirety of your initial investment back for safekeeping. Now you can mentally and emotionally distance yourself from those assets as your cost basis for the remainder is 0.
Some of the most savvy crypto traders are able to practice “diamond hands” and not sell quite valuable airdrops of Uniswap, PoolTogether, and others because they tell themselves that while these are 5-figure assets, they were given them for free, as a token of appreciation by the project’s developers for being an early adopter. When Uniswap ran up from $3 to over $40 these individuals did exceptionally well, assuming they pulled the cash register even a bit.
Discipline is often handsomely rewarded.
2) Recognize your pain points.
People often see Dogecoin going up 40% in a day and put two-and-two together that if they can utilize leverage, assuming they’re in an approved jurisdiction, they can light-up their returns much faster than just owning the underlying asset. Leverage is a double-edged sword and you don’t want to have to grab a falling blade. The market is inherently emotional, reflecting the fear and excitement of the humans behind the terminals inputting commands. It’s only by recognizing that almost no assets are buy-and-hold forever and that business environments are rarely static that you can appreciate that what was an exceptional investment a short time ago could swiftly transform into radioactive sludge in need of an immediate dump.
Trading also requires being honest with one’s self. If you’re investing $5,000 and you know that $100 loss will represent more emotional energy than you’re willing to exert, and will linger with you for days thereafter, then you may be better off with a risk-averse asset like a CD or something with a guaranteed principal component or capital-preservation types of investment strategies.
For almost all traders, it hurts far more to lose money than it feels good to make it. The pain I feel of a 10% loss is higher than the elation from a 30% gain, in my experience. Once you are at peace with this discomfort then you can proceed with your investing.
3) Margin Trading May Not Be For You
So many investors like the idea of compounding their returns by using margin, but unless you have a hedge already in your portfolio that eliminates the real possibility of getting a margin call or closed out, it might not be necessary or even practical.
If you think a particular equity will go to $1000 or 10x or see some highly improbable growth, you may be better off just buying a deep out-of-the-money call and for a comparatively small amount of money you can cover to enjoy the windfall profits from this run-up should your prediction come true. That way you shield your investment from losing value should you be wrong.
If your investment thesis is that any asset will 10x then there are all sort of ways to gain strategic coverage. Consult your financial advisor for bull-specific option strategies that suits your investment thesis, and you can very likely achieve exactly what you’re trying to do without exposing the lion share of your investment capital to serious vulnerability.
4) Fundamentals Are Always Important, Even for Technical Traders
So often professional traders are consumed with the technical indicators and an asset being overbought or oversold as displayed by their TradingView window that they forget what underlies the company. You could have a sizable folder of research and be incredibly keen on a project and five minutes before you do the trade the founding team nefariously organizes an exit scam. Your trade will have catastrophically failed through no fault of your own.
The fundamentals of the business matter a great deal, irrespective and independent of the technical indicators. There is no chart-specific indicator that can detect malfeasance, an FDA trial coming back a disaster, or management saying something devastating damaging under their breath on a conference call.
For assets that are highly speculative, especially tech stocks, the Price-to-Earnings ratios sometimes hit 50x, 100x, or 200x, if the company is profitable at all. There is a high probability of “noise” movements abound as the market sifts through all publicly available information to determine a company’s collectively agreed upon worth.
5) Insiders Define a Project's Stability
While many companies are protected by broad patents with a long reach to create a formidable moat, many tech–and especially blockchain–companies operate around the world and are not constrained by such issues. If a project delivers a new innovation to the space that is well-received, very swiftly it is reverse engineered and released to all of the customers of every other similar project.
For the longest time the thinking was that the first movers and companies distributing the most cutting-edge tech would be ruling the marketplace. The reality, as it has unfolded, was that the technology is very often commodified, and it’s the community of developers, blockchain enthusiasts, and influencers that deliver the real value. It’s this epiphany that lead many successful projects to reward early users with these airdrops for their spreading the word about their project and, in so doing, further ingratiated these users to this project, creating a loyalty loop.
Users in crypto, however, are fickle. Very often once all of the rewards have been farmed off a platform many will abandon ship and bounce to another organization offering juiced returns. This is with the understanding that this new project has audited smart contracts and Solidity professionals from a respected technical auditing firm have passed along a seal of approval of the code, although some foolheartedly forgo this imperative step with the allure of a higher return.
While the Decentralized Autonomous Organization is gaining steam, the discussion on Twitter largely centers around visible founders as demonstratively defining a project. Often their personality and suitability as a representative for their project is paramount when determining a project is worthy of being invested into. Many angel investors prefer to invest in people over products. As far as I've seen it in my experience in a large angel investing tech network, this is has proven effective. If the leadership is bad or duplicitous then even the most promising businesses can trip themselves up.
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The information in this newsletter is for educational purposes only and is not intended to be a substitute for a financial advisor. Please consult your advisor before making any investment decisions.