What I’ve learnt so far trading and investing in Cryptocurrencies
I had ‘buy some Bitcoin’ on my to do list since about early 2016, but I only took the plunge at the end of July 2017 — so as of writing this I’m not yet two months in.
How late to this party I am? I have no idea. I’ve got what I’d consider to be a very digitally savvy network, many of whom have made a mixture of sound, varied and interesting investments over the time I’ve known them. But I’ve never heard anyone I know mention having dabbled in this area. So I’d be really interested to hear from people I know who have.
What have my journey and experiences taught me so far? Well a lot of it just comes down to tried and tested investment basics.
Being sensible. What I did with my own money.
Only invest what you can afford to lose. That’s the perceived wisdom. Although does anyone ever really want to lose money? I invested because I found myself in a position two months back where I needed to stick some money away for a bit, and by the time I’d done with all the sensible options (which will generate very little in actual returns, because they are sensible) I had a bit left over, on which I thought I’d take more of a gamble, with a view to aim on getting an annual return of 10%.
It’s important to set a target. Lots of people have made lunatic returns with crypto — but quite a few have lost a lot too, through risky trades, or by losing their wallets, or through theft. I’ve not gone into this because I think I can make £1m from £20. That said, since I bought my first bit of coin my Facebook feed has become inundated with ads telling me I can do just that! But in reality I just want a chance of a better return than I might get elsewhere.
Know your market. Well, actually, I really knew (and still know) very little about this whole evolving asset class. Which has made it a great learning opportunity. It’s given me a chance to see how the whole fintech sector has moved on since I last signed up to something new to do with money online. It’s made me think a lot about my personal data. About what a pickle a lot of organisations are going to be in when GDPR kicks in May 2018. So that’s all useful.
As far as crypto specifically goes, I’ve read about blockchain, ICOs, paper wallets and lots about paranoia. Doom mongers, prophets, crooks and charlatans are abound it seems. I’ve questioned the whole morality of it, but I’ve reconciled myself to the belief that all money has the potential for evil. Crypto is new, it’s unregulated, it has, already, too many moving parts. I’ve quickly reached the opinion that the whole thing is way too volatile — like rowing a bathtub through a storm in the Pacific. And with that in mind, I decided I had to know when to take a loss, as well as take profits quickly and regularly, with a view to protecting my capital as quickly as possible.
Diversification was also key. Given I really had no idea what I was doing, it made sense to spread my investment around a number of different coins — 13 in total. Also, I didn’t invest my capital all at the same time.
So how have I got on? Well, as of today, about seven weeks in, I’ve made a 28% return. So I’m above my target for the year. And, more importantly, over that seven weeks, I took profits regularly enough to the extent that I’ve withdrawn all my capital — so that’s safe — meaning my worst case scenario is a return of 0%. It took me a good few hours messing about on the trading platform I use to generate that, but for now, I’ve got a little portfolio of alt coins I can just leave and see what happens.
That all sounds great eh? Yes, but I didn’t stop there…
Being not so sensible. What I did with my company’s money.
I noticed I had a margin account. I knew roughly what this meant, but had never spent time getting my head around leverage and opening, closing and settling long and short positions. But by practicing with a few trades I got the hang of it, even it was a lot of effort for not much reward. It occurred to me the higher amount of a coin I brought, at the greatest leverage, the smaller percentage movement I’d need to make modest gains, or to ensure, if I lost, that I lost small. Also to monitor smaller movements would take less time. I got quite excited by this prospect. In some respects, this is a bit like buying money by betting on (supposed) dead certs. Like putting £100 on Celtic to win their home games to make a tenner. But with, it seems, less chance of losing the whole £100.
At about the same time I thought it might be worthwhile me investing some of my company’s money into crypto. We have a reserve account, into which surplus funds sit, which aren’t needed as regular cashflow beyond about an eight-week window. So it tends to have money in there sitting idle for long periods of time. Consider the returns you get these days from regular savings accounts. For business reserve accounts it’s much worse. So I thought if I could replicate what I’ve done at a personal level, then why not? As such, I decided to put 5% of our reserve account into a crypto account specially set up for the business, but throw a bit of trading long and short into the mix as well to try and increase my gains.
I’m only a week in, but what’s not worked with this strategy so far relates to the Celtic example. Football is a market I know well. Games run over a fixed time window, to set rules, with it being easier to spot who’s good and who’s not. By comparison, it’s much harder to bet on the movement of an unregulated cryptocurrency when you have no idea what makes it move and when — or what’s propping it up.
I found this out last Monday morning. At 6.30AM I bet on a currency going up. It didn’t, it went down a bit, and so I took a loss on a quarter of my position. Well done me! I got on a train and went to work. In the intervening period, something happened in China about ICOs getting banned, and the price fell off a cliff. By 10am, I’d lost about 25% of the 5% of our reserve account I had put in. Ouch!
So, what did I learn from that? Well, there was some basic stuff around ensuring you always take the time to place stop-loss or buy-stop orders (even though the platform I use is unable to offer the latter just now). But there was some softer stuff too. Like learning how to take the loss. I couldn’t afford to let this derail my day. So I didn’t. I also found myself surprised about how I felt about it. Had it been my own money I’d have been gutted. And that’s not to say I have a flippant approach towards my company’s money, because I don’t. I’m extremely prudent. But I felt differently about losing company money. Why? Well, it occurred to me that as the owner of a small business I’m effectively opening, closing and settling positions all the time. Making gains, making losses. Taking different levels of risk. And having varying degrees of control over all of these. On its own the loss was bad. Next to everything else, it was just part of the swings and roundabouts.
So where am I now?
My first big trading loss has come with a bunch of learns, which philosophically were worth the money it cost me.
In my opinion, it’s in trading in, rather than investing in alt coins, that people are likely to get burnt the hardest. There are a lot of trading exchanges just now chasing people’s savings hard, suggesting vast riches are around the corner. Of course the whole area is so volatile, and so unregulated that the desperate, vulnerable, greedy, or ill-advised will have nowhere to go if they lose all their money.
The strategy I took with my company’s money was going to differ from the one I took with my own, in that I would have kept my capital invested to give my margin account more buying power — even if that capital was kept in an exchange as a fiat currency. But right now, as I’m trading/investing at a loss, I don’t have the option to protect my capital anyway. If I continue to invest via opening long and short positions, then in living by the sword, I might die by the sword. And while I know I can tweak my trading strategy and limit my risk, I’m still working in a volatile market I know little about.
What I have shown though, with my own money, is that if you apply sensible, time-honoured investment rules, then you raise your chances of success. Of course, I could still have come a cropper to volatility and a lack of knowledge. Luck sometimes comes into it too.
And it made me think. How much do we ever really know about how sound our investments are? In 2003 I put £1000 into RBS shares and about £200 into a Ladbrokes sports betting account. I lost my first bet on Ladbrokes and my account never again topped £200. But by 2009, I still had about £40 left. My RBS shares? Even though I’d invested five times the amount, my holding was worth less than my betting account.
What, in 2003 would have seemed the safer bet? The global bank? Or gambling on sport. In the end I knew more about the latter. Perhaps that should make me more wary about crypto. But you know what? I think it needs to be understood, because whatever happens from here will be significant. I think you best understand something by getting stuck in. So for now, I’ll carry on with my somewhat limited exposure to what is a very exciting asset class.
