Ten Rules for Trading Bitcoin, Ethereum, and Other Crypto
#News 4 July 2017: I am recording my Crypto Trading Notes in another Medium story on an ongoing basis.
[This essay has been#1 Story in both Investing & Finance on Medium for a week or so. Please click on the Green Heart if you love crypto. I tweet about crypto trading: BambouClub ]
The Ten Rules
These are my self-imposed rules for trading cryptoassets. I am not a professional trader but I have done well since my first entry in June 2014. My portfolio is 8x, i.e. has increased 700%. My average Bitcoin buy price (June 2014 to December 2015) was $540 so Bitcoin (at its current $2,470) is x4.6, increase of 360% .
These notes are mainly for my own benefit so I can refer back to them and improve them. I will therefore be updating this essay from time to time.
- Build the Portfolio on Bitcoin
- These are Early Days. Be Bold!
- Index Track the Top 10 Cryptoassets
- Use Discretion in Index-Tracking
- Scale Out (Take some Profits)
- Buy the Dip (BTFD), and do not Sell the Dip
- Do not Over-Trade. Lock up Coins
- Let Profits Run. Cut Losses. Watch 7d Price Change not 24h or 1h
- Avoid ICOs and other Examples of Herd Mentality. Move Ahead of the Herd. Research Ultra-Low Caps like Dotcoin. I buy them at Cryptopia.
- Leveraging has a Role but Be Careful as Hell. Use Stop-Limits, not simple Stops. Most traders use Bitmex Exchange.
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 $40 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.
Trading Volumes/MCap Ratio
The deep liquidity of Bitcoin is even more striking when we examine the ratio of Volume to MCap. The higher the ratio the better.
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) 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) 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: Be Bold in these Early Days
Something extraordinary is happening. The cypto space in June 2017 is like the Internet space in 1995. It is a great opportunity, a Black Swan.
Certainly a bubble will form. (It has not formed yet.) I have lived through various real estate bubbles in the last thirty years, and the DotCom bubble of the late 1990s. 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 apply the brakes and get the hell out when it appears to be the later stages.
So be bold!
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 was applying a misguided 70–30 70–30 rule:
70% of cryptoasset portfolio in Bitcoin, 30% of portfolio in alts
Of that 30% in alts: 70% in high-cap alts (i.e. 21% of portfolio), 30% in low-cap alts (i.e. 9% of portfolio).
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 207, the results of index-tracking have been great.
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.
Rule 4: Apply Discretion in Index Tracking.
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 have also been underweight in NEM throughout.
I am also currently underweight in IOTA in that I own none although it is Number 8 in the Top 10 list of Cryptoassets. I shall keep an eye on it and add it to my index-tracking portfolio if it keeps its place in the Top 10.
I have also been going underweight in Ethereum in the last couple of weeks 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 5: Scale Out (Take Some Profits)
Anyone who has lived though a bubble knows this.
I have lived through 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.
In all cases 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 these cases 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.
Rule 6: Buy the Dip.
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.
I have found 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. Most crypto traders 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.
n.b. 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.
Do NOT Sell the Dip
This one I learned from my former, pre-crypto life. In 2008 when the Great Crisis hit I panicked and sold my flat in London. (I was expecting an increase in interest rates and a subsequent property crash. No one told us about the QE that the banking shysters would soon execute.) Its price is nearly triple now.
I did however BTFD a much nicer flat in the Belfast Docklands a couple of years later. Belfast is a far more lovely city than London. It cost £135,000 when at the peak of the boom it was £350,000.
If it is an established, secular bear market then face the music and STFD.
Rule 7: 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 Poloniex or Cryptopia (applies only to Dotcoin). This gives you the added benefit of earning interest on coins at astonishing interest rates that just do not exist outside crypto.
Rule 8: 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 9. Avoid ICOs and other Examples of Herd Mentality.
I am sceptical about the Initial Coin Offering (ICO) craze. I have participated in exactly one: Humaniq $HMQ.
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 started trading. He was ahead of the herd.
On the subject of avoiding ICOs, I also admire 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.
We have now learned that Coinbase is making good these losses to amateur Ethereum traders. This is foolish, introduces Moral Hazard into the game, and invites greater and greater speculative activity. It will not end well.
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