Ten Rules for Trading Bitcoin, Ethereum, and Other Crypto
#News 12 September 2017: The Smart Token Exchange pre-sale is live. They plan to aggregate exchanges’ liquidity reducing liquidity cost (also known as slippage) to traders. The key is fast API execution, in which they are world-class with their KeyCaptcha business. This project is under the radar but will gain traction. I have invested in the STEX Pre-Sale. (The terms are much better than in the ICO that will follow.)
#News 10 September 2017: I just published Are you in the Bitcoin 1% ?
#News 26 August 2017: This essay is top of the Google Search for crypos. Please clap for this essay if you are passionate about crypto. I tweet about crypto trading: BambouClub .
#News 26 August 2017: I keep a crypto trading diary that I regularly update with trading recommendations.
The Ten Rules
15 September 2017: Performance of my Portfolio:
Since Entry June 2014: Portfolio is x12.4, i.e. has increased 1,140%. My average Bitcoin buy price (June 2014 to December 2015) was $540. Bitcoin (at its current $3,709) is x6.86, increase of 586%.
Year to Date (YTD) 2017: My portfolio is x5.8, i.e. has increased 480%. Global Cryptomarket is x6.89, increase of 589%. (From $17.7 billion to $122 billion.) The main successes in my portfolio have been $BTC, $ETH, $EOS (ICO), $XTZ (Tezos ICO), $ZRX (0X ICO), $NEO and $BNB (Binance Coin). These calculations apply to my trading portfolio, and exclude my pension which has been fully invested in a Bitcoin fund since June 2017.
These notes are mainly for my own benefit so I can refer back to them and improve them. I will update it from time to time.
- Build the Portfolio on Bitcoin
- ‘When you See it, Bet Big.’ George Soros
- Index Track the Top 10 Cryptoassets
- Scale Out (Take some Profits)
- The Honeybadger Trade: Buy the Dip
- Do not Over-Trade. Lock up Coins
- Let Profits Run. Cut Losses. Watch 7d Price Change not 24h or 1h
- ICOs are a Great Opportunity. Do Your Own Research.
- Research Micro-Caps that might rise by Orders of Magnitude. (I like EquiTrader $EQT, only available at CoinExchange.)
- Leveraging has a Role. Buy (and Sell) Bitcoin Futures at Bitmex Exchange. Use Futures if you want greater, faster returns (at a higher risk).
Rule 1: Build the Portfolio on Bitcoin
Bitcoin is the mother lode. It has been good to me and will always form the main part of my crypto portfolio.
Those (mainly low-income copy & paste journalists) claiming Bitcoin is in a bubble are too lazy and/or stupid to become informed. There is no Bitcoin bubble for these reasons.
Bitcoin has had phenomenal growth in its price and MCap since inception. If we exclude other cryptoassets, Bitcoin has been the best performing asset in the world every year since 2009 through to June 2017 with the exception of 2014. It has beaten all global currencies, equities, commodities, bonds, ETFs, real estate throughout that period. Bubbles are by definition short-lived, they do not keep bubbling for eight years.
As a result it has achieved a MCap of $56 billion and this place in a global table of iconic assets.
Volumes indicate the liquidity of an asset. The greater the liquidity the easier it is to buy and sell, even when there is turmoil, and the lower the Bid-Offer spread and therefore the cost of trading. You want to avoid assets with tiny liquidity as when the shit hits the fan it will be costly to exit. Bitcoin has world-class liquidity. I run a crypoasset analysis site named Blocklink.info. Here is a screen-grab of the most liquid assets in the world.
Source: Blocklink.info. Volumes for cryptoassets are fetched from the Coinmarketcap API using the CRYPTOFINANCE Google Sheets Add-On. Volumes for stocks come from Google Finance. You can check the US stocks volume at the NASDAQ site.
Bitcoin’s trading volume is up there with the great iconic American stocks.
Bitcoin’s price will continue to be volatile, but Bitcoin is travelling along a secular bull trend road, and that spectacular volume is not going to evaporate overnight.
Every month fees are ever higher which is watertight evidence of ever greater demand to use Bitcoin. That is, people want to send transactions across the blockchain, not just trade on the exchanges.
Tx fees time-series data is maintained at Blockchair.com
Bitcoin and My Portfolio
Bitcoin holds a dominant place in my cryptoasset portfolio. As a result of recent changes in UK regulations I have allocated my entire personal pension (like a US 401k or retirement account) into Bitcoin via the XBTProvider ETN.
Be more cautious about investing your 401k into Barry Silbert’s Bitcoin Investment Trust $GBTC. The (European) XBT Provider ETN is an open-ended fund which means it maintains a premium to the NAV close to 0% at all times. The Bitcoin Investment Trust is an inferior investment vehicle because it is a closed-end fund (it does not increase its holdings of the underlying asset when demand for the product increases) which means it is subject to wild swings in its premium, which has been as high as 150%. So you could make the mistake of buying when the premium is high and suffer swingeing losses even when the Bitcoin price is stable.
Rule 2: “When you See it, Bet Big.” George Soros.
Something extraordinary is happening. The cypto space in June 2017 is like the Internet space in 1995. It is a great opportunity.
Stanley Druckenmiller has written about his dealings with George Soros whom he quotes as saying ‘When you see it, bet big’. The funny thing is, I was mocked by a Hedge Funder on Twitter named Sarah Cone (@impcapital ) when I revealed that I had seen it and I had bet big. I bet big with my entire fucking pension.
Here is Charlie Munger expressing a similar though:
Rule 3: Index Track the Top 10 Cryptoassets
Until 18 May 2017 I held very little Ethereum and zero Ripple in my portfolio.
I made a great mistake in not buying Ethereum and Ripple in 2017 until 18 May. My mistake was Bitcoin Maximilism. I refused to have anything to do with Ethereum and Ripple because I didn’t like them. As a result I missed these returns.
I came to my senses on 18 May, 2017 when I underwent an epiphany. I then made a new (self-imposed) rule : broadly track the Top 10 cryptoassets in my portfolio, regardless of my opinion about their individual merits.
I have applied a flexible, discretionary form of index-tracking since then.
I execute index-tracking manually off this Google Sheet:
At the time of writing, 20 June 2017, the results of index-tracking have been pleasing.
YTD 2017 returns for Cryptocurrencies, 18 May 2017:
My portfolio was up 106% YTD.
YTD 2017 returns for Cryptocurrencies, 20 June 2017:
My portfolio was up 281%. So in one month (18 May to 20 June) it has raced past Bitcoin, $GBTC, and Monero, and has made good ground in catching up with Global Cryptocurrencies.
I ruled myself free to apply discretion in my index-tracking. It was very clear early on that Ripple was in a secular bear market against Bitcoin from 18 May and I quickly became and stayed underweight in Ripple.
I also went underweight in Ethereum in mid-June at $350 — $360.
Is Ethereum in a bubble?
I don’t know. Applying the same metrics used above to $ETH it does pretty well, but not as well as Bitcoin. But there are clear risks and as a result I am underweight in Ethereum compared to its share of the global Cryptoasset Market Cap.
Growth (Price & MCap): Ethereum has outstanding growth in its short life, but it was only created in August 2015 so it lacks the 8-year track record of Bitcoin. This is significant. Ethereum’s explosive performance in 2017 could indeed fit into the time-frame of a bubble.
Trading Volumes & Volume/MCap Ratio: Great. Similar to Bitcoin.
Transaction Fees: All good. They are rising quickly indicating true demand for this cryptoasset.
Metrics aside, Spencer Bogart makes great sense in this thread where he describes the regulatory risk and other risks that might bring the Ethereum house of cards down. It is possible that the SEC will rule that the ICOs are illegal sale of securities. People might go to prison. It is for these reasons that I am under-allocated.
Note: If Governments decide to put a stop to the cryptoasset economy, there is a crucial distinction between Bitcoin and Ethereum. Bitcoin is truly decentralised. It has honeybadger, even cockroach qualities and is resistant to such measures. Ethereum is a registered commercial legal entity in Switzerland and can be shut down overnight.
Rule 4: Scale Out (Take Some Profits)
Anyone who has lived through a bubble knows the value of this.
I have experienced several bubbles, namely London housing 1984–1988, DotCom in 1998–2000, London housing again 2002–2008, the Bulgarian property market (seaside apartments and ski apartments) 2004–2008.
It’s human nature to be cautious at first and then progressively relaxed, even reckless. My observations suggest that it is best to behave in the opposite, counter-intuitive way: commit yourself to the market with reckless abandon in the early days, and then start the scaling out process, applying the brakes and get the hell out when it appears to be the later stages.
In all those bubbles I made great paper profits that disappeared in a matter of months. The paper profits were more than 2 million Euros in the Bulgarian property market. In none of them did I take profit off the table in the run-up. Christ did I regret that. I am taking profit off the table in the cryptoasset market.
Finally, at the end, you must scale out completely. Jesse Livermore’s advice for a bull market:
It is not my opinion that we are near the last eighth:
Rule 5: The Honeybadger Trade: Buy the Dip.
Lots of influential actors — Governments, banks, regulators — fear Bitcoin and try to kill it on a regular basis. Bitcoin takes massive hit after massive hit, but it has always rode the punches and bounced back. Experienced traders have noted this and the advice is to buy the dip. This is the Honeybadger Trade.
I like the idea of BTFD, as I truly believe in Bitcoin. BTFD! people on Twitter yell. But it has puzzled me for a while.
There is a solution. Buy on margin at the dips. The beauty of this is that you do not need to add funds to your account, you merely avail yourself of the leverage already available. Use Bitmex Exchange.
I permit myself to use margin in the specific case of BTFD.
You need to get the timing of BTFD right. Beetcoin on Twitter provided this great analysis (thread) demonstrating that you should stay out for the first 48 hours of a dip and then BTFD.
Do NOT Sell the Dip
You need to be clear, is this a dip or is it a secular bear market? I BTFDd relentlessly in the DOTCOM unravelling in 2000 and lost every penny in the end.
If it is an established, secular bear market then face the music and STFD.
Rule 6: Don’t Overtrade. Lock up Coins
I over-trade stupidly at at tiny whims when I am bored or drunk. A solution I have found is to lock coins away out of reach.
One way is to keep Bitcoins and others in your hardware wallet. I use Trezor. It can store Bitcoin, Ethereum (+ all ERC-20 tokens), Ethereum Classic, ZCash, Litecoin, and Dash.
Another way is to lock them into terms deposits at Cryptopia (applies only to Dotcoin). This gives you the added benefit of earning interest on coins at interest rates that just do not exist outside crypto (about 18% p.a.).
Rule 7: Let Profits Run. Cut Losses.
This guy turned $10,000 into $6 million by letting his profits run during the Ethereum run-up in the first half of 2017.
Run profits Cut Losses is hard to do exactly. In my P&L Sheet I focus on the 7d (Price Change over 7 days) to decide whether to re-allocate my portfolio according to this rule. I largely ignore 1 h and even 24 h .
Rule 8. Treat ICOs and other Examples of Herd Mentality with Care
In general you are better off holding Ethereum than going through the mad, greedy, FOMO process of buying ICOs.
But ICOs or coins newly released on the exchanges can be great investments. Beetcoin played the IOTA new release on Bitfinex like a master. He turned 10 Bitcoin into more than 200 Bitcoin. He bought the $IOT Over the Counter (OTC) some time before Bitfinex listed it. He was ahead of the herd.
Rule 9 Do Your Own Research. Examine Micro-Caps.
I respect this strategy.
I bought Elastic $XEL at the obscure Heat exchange. It was rather difficult discovering how to buy it because I was in this case ahead of the herd where the path was not well defined. In the end I bought it at a high price (average 31,367 Satoshis, should have got them at 25,000 Sats) as I got scammed over at Heat by a predator (Arsonic @Ars0nic on Twitter) playing the order book. We’ll see how that plays out. I think the excessive price I paid will not matter too much.
Rule 10 Be Careful as Hell with Leveraging
Obviously leveraging can work, as with the guy referenced above who has made $6 million relentless buy Ethereum on leverage since December 2016.
I take out the rare leveraged position at Bitmex Exchange.
It can also go horribly wrong when margin calls occur across the mass market.
That said, those who lost everything were not the brightest traders. They could have avoided that by using judiciously set Stop-Limit orders, rather than plain Stop orders.
So that is the Ten Rules.
I keep a crypto trading diary that I regularly update with trading recommendations.
If you liked this please click on the Green Heart and follow me on Twitter: @ BambouClub