Crypto Investment Strategy v3
I am an accidental Bitcoin and Crypto trader. I fell into this at the start of the year and am now trading full time. My portfolio is +3,983% (as of 27th Dec ’17) this year against just holding Bitcoin which would have been growth of +1,607% (as of 27th Dec ‘17).
Note: the following is version 3 of my Crypto strategy. A strategy which has evolved alongside my personal experience/trading goals and changing market dynamics. The previous versions of my strategy are available below for comparison:
Before reading my strategy, please note the following warnings:
- Warning 1: I am not the most technical, I have a growing understanding of how cryptocurrencies and the blockchain work but there are people out there who know way more.
- Warning 2: I am not an experienced stock market investor. The only time I have tried to trade stocks I lost over £20k. I have been able to use the mistakes of that experiment to be a better crypto trader.
- Warning 3: this site is not giving out financial advice. I am just sharing my journey. If you choose to be a crypto investor then you do so at your own risk. Please do not just copy me. I am yet to find out if I am smart or just another lucky investor in a raging bull market, only time will tell.
There are typically two types of Crypto strategy:
- Investment: taking long-term positions, focusing more on macro Crypto economics and asset fundamentals
- Trading: taking short-term positions, focusing more on market cycles and technical analysis
Most traders use a combination of the two but will tend to give weight towards one over the other. Chris Burniske, author of Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, covered this recently on Twitter, explaining that it is essential that you understand what kind of strategy is right for you. He shared a link from Investopedia, outlining the difference.
Investors tend to focus more on fundamental analysis with technical analysis used to support entry positions and portfolio balancing. Investing long-term enables you to benefit from the compound growth of both your portfolio and individual investments, enhancing this by diversifying profits from good investments into new opportunities. Where investing in stocks allows you to benefit from incremental income from dividends, with certain Crypto investments you can do similar by staking and receiving newly minted coins from block rewards.
Traders tend to enter in and out of assets more regularly, using technical analysis to identify opportunities to buy in low on an asset and trade out either partial or full positions when reaching specific targets. Trading requires a high level of technical analysis and discipline, utilising stop losses to limit losses on a bad trade.
It is important to decide what kind of strategy is right for you. One of the most important things which Luke Martin, aka @venturecoinist said in my first podcast is that too many people try and become traders when they should really just be investors.
I am a Crypto investor, I am not a trader. I prefer to focus my time and energy on researching and understanding the macro crypto economy and investing in those assets which I believe will exist over a more extended time-frame. As the inevitable market squeeze happens, I want my investments to be those that survive, similar to those who were invested in Google and Amazon when the dot-com bubble burst.
I tend, therefore, to focus my investments on the leading market cap assets, with a product in the market and not overvalued. I will though support these with speculative investments in disruptive Crypto assets which may deliver significant multiple returns.
While I may on the rare occasion make short-term trades, this is usually in response to specific and obvious opportunities to make quick returns, either when the market or an asset is particularly undervalued, usually in response to a specific market movement.
In preparing this strategy, I thought it would be important to outline some considerations with this new highly speculative asset class as I believe investing in Crypto is a calculated bet on two things:
- The acceptance, integration and normalisation of virtual currencies as a store of value and medium of exchange alongside traditional fiat currencies
- The successful deployment of decentralised blockchain technology applications which achieve scale and thus economic viability
My strategy, therefore, includes the the following warnings / considerations:
- Nobody knows what the f**k is going to happen
I wrote about this on my blog. The market is only nine years old, and thus, the Crypto asset class is extremely new, and while these assets have been traded for a few years now, market conditions are continually changing. Unlike the stock market, we do not have decades of trading data to guide us. What worked a year ago might not work today, even things which worked three months ago might not work now. As new investors come into the market and liquidity improves, trading patterns are not always consistent. We must accept that nobody knows that the fuck will happen, and anyone who says so is purely speculating, and as such, it is essential that all ‘expert’ advice is taken with a pinch of salt.
- The market will crash
It will micro crash many times, and almost certainly there will be a significant crash but timing this will be difficult. The market could crash tomorrow, in a week, in a month or two years. When it does, it could be 30%, 50% or even 80%. The crash could happen very quickly or drag on slowly over a more extended period. While I don’t expect a 2-year bear market like durung 2013/14, one is entirely possible. I think the market dynamics are very different from the last bear market, where the ecosystem was in its infancy.
- Crypto assets are super volatile
Due to the relatively low liquidity of crypto markets, the ease of market manipulation and the relative inexperience of traders, the market are super volatile. What might be considered a market crash within the stock market is a regular movement in Crypto? Entire market movements of +/-20% are entirely possible, and individual assets can drop -50% or grow +100% in a day. The stock market crash of 1987, known as Black Monday, saw +22% wiped from the Dow Jones, causing waves across the world. 22% movements in Crypto are normal.
- Aggressive bull runs can’t go on forever
The market has grown 3,284% this year; it is not possible for the market to grow at this rate year on year continually. The current bull run could continue for up to a couple of years but can crash at any point or may start to slow down. It will be important to invest knowing this and adapt to the changing market.
- Crypto asset valuation is a developing model
How assets are valued is a changing model, and the quoted market cap of a coin is an excellent tool for benchmarking but can be misleading. Chris Burniske wrote about this on Medium. As currency use increases and utility tokens bring products to market, the economic models will be tested and as such valuation models will change. This could go either way; assets could be either under or overvalued. I believe that currencies are undervalued, and utility tokens are overvalued, hence my preference for investing in coins over tokens.
With the above five points, I, therefore, approach crypto investment conservatively. This third version of my strategy contains the following fundamental changes:
- My long-term goal is to be able to sell Crypto incrementally to fund my life
- My primary objective is to increase the size of my Bitcoin position
- My secondary objective is to increase the size of other key trading pairs which I believe will exist after a crash and perform better than or similar to Bitcoin
- Bitcoin is, therefore, a portfolio tier on its own
- Other trading pairs are an individual tier too
- Other investments are split across new categories and traded to grow tier 1 and 2 positions
- I now track altcoins against both dollar and BTC value
- My cash position of 5% for 25% is now a fluctuating 0% — 50% depending on how bullish/bearish I am feeling
- I support my investments with incremental income from mining and staking
Okay, onto the strategy…
Step 1: Investment Tiers
To help support trading and identify patterns I split my investments into specific tiers; you can see my old tier structure here, the main difference now is that tier 1 is only Bitcoin:
- Tier 1: Bitcoin
- Tier 2: Primary $ trading pairs such as Ethereum, Dash and Monero
- Tier 3a: Currencies such as Verge, ZCoin and Dogecoin
- Tier 3b: Protocols such as EOS, 0x and Komodo
- Tier 4: Utility tokens such as BAT, Civic and Metal
- Tier 5: Micro-Caps such as PoSW, NEBL and Hush
I am particularly interested in the following:
- Privacy coins
- Low cap protocols
- Blockchain 3.0 protocols focused on scaling
- Trustless staking
- Atomic swaps
- Decentralised exchanges
- Lightning network
- Zero fee coins
Step 2: Investment Strategy
Remembering that my goal is to grow my entire position in BTC and other trading pairs, my strategy is as follows:
- Bitcoin long-term hold: 20% of my portfolio is always Bitcoin, except when extreme market conditions cause me to sell off. I have done this three times this year:
- When Bitcoin scaling issues were giving rise to the flippening
- When China banning Bitcoin rumours peaked (I sold off the day before)
- During the Segwit2x drama (I sold off the day before the cancellation)
- Bitcoin v alt balancing: my BTC v altcoin positions are balanced relative to how Bitcoin market dominance is trending, you can see this chart on CoinMarketCap. If Bitcoin market dominance is at 50% but falling, then my Bitcoin position will be at less than 40%. If Bitcoin market dominance is 50% but rising then my Bitcoin position will be over 60%. The reason I keep it ahead of the trend but never 100% of one is that BTC v altcoin market cycles change, there are times when they trade inversely and other times where they rise and fall together and as such this gives a more even growth trajectory.
The difficulty is knowing when the trend has changed, as such, I hedge altcoins and BTC against each other and make changes in my portfolio when a change in the trend becomes more obvious. When BTC dominance is falling, altcoins tend to perform better and vice versa, but this is not always the case, when they rise together, my gut instinct tells me that significant volumes of new capital are entering the market.
- I invest in altcoins to grow my BTC position: as such; my altcoin positions are medium to long-term, which is 2–6 months in crypto. As altcoins are traded on most exchanges using the BTC pair, I trade altcoins with the goal of selling the altcoin for more BTC than I paid. This is a new part of my strategy as I historically always tracked investments against fiat but spending time learning from Luke Martin and crucial other Crypto traders have shifted this for me.
Most altcoins will reach a specific peak during a trading cycle, and the goal is to exit as close to the top as possible, the difficulty is identifying the top. I monitor these positions regularly and try and determine momentum. Depending on the coin and speed of growth, I will look to remove my original BTC investment as quickly as possible, for example, with 3–4x I will take out the initial investment, maintaining my original BTC position but, essentially freerolling the rest. From this point, each 100% move will lead to a 25% reduction in position until I feel that a coin has reached a peak, at which point I will exit the entire trade.
- To manage risk, I maintain a cash float of between 0% and 50%: depending on how bullish or bearish I am. Initially, I had a 5% for 25%, but it was never consistent because the market presents opportunities when the cash is better in Crypto. Maintaining some % of a cash position is essential though for two reasons:
- Ensuring money is off the table should a crash happen
- Guaranteeing a cash reserve is available to take advantage of any specific market correction
- I rebalance my BTC and primary trading pairs based on particular spikes in an asset. Say for example Dash goes on a run and Monero has been trading sideways for a while, I may switch some of my Dash position into Monero. I may use TA for this and look at specific Fibonacci extensions but this is a skill I am learning, and more often than not I make the change based on a gut feel for something having moved quick.
- I choose my investments wisely: based on those which demonstrate the most stable growth and most likely to exist after a market correction.
I am always keeping an eye on specific market conditions which affect my decisions:
- Recognition of active market cycle and ensuring I trade with the trend:
- BTC trading inverse to altcoins
- BTC rising or falling alongside altcoins
- BTC long-term channel, altcoins dropping
- BTC sideways, altcoins growing
- Other trading pair moves, usually preceding the growth of smaller altcoins
- Recognising the change in a market cycle and establishing positions in advance
- Recognising corrections and minimising losses
Step 3: Investment Rules
Investing in Crypto requires discipline and I operate with the following rules:
- I never invest money I can’t afford to lose. Doing so can create panic and cause me to make emotional decisions. The best way to invest is to do so as neutral as possible, both with gains and losses as decision making becomes more rational. I wrote a piece in my blog explaining how to trade without giving a fuck, it is worth a read.
- I don’t panic. Crypto can be highly volatile, portfolio swings of +30% are possible in a day, individual coins can go down 50% and up +100%. It takes time, but the longer I have traded crypto, the more comfortable I have become with this. Patience is one of the most important things you can learn with Crypto.
- I don’t short. I don’t have any fundamental issue with shorting; I think it is a good tool within all markets for driving accurate pricing, whether stocks, Forex or Cryptocurrency. I just don’t do it within crypto for a couple of reasons. Firstly we are in a very long bull run, so I don’t want to trade against the momentum and secondly, these assets have a greater % upswing potential than down.
- I don’t margin trade. Margin trading is where an exchange will give you a multiple against your investment. Say for example you are offer *10, then as a price moves up your gain is *10, but this also works when the market moves down. Margin trading for me is investing money you don’t have which is rule no.1.
- I don’t invest in things I don’t believe in or agree with, however good the potential returns are. BitConnect is an example of this, I am of the belief that it is a Ponzi scheme and I have no interest in it.
- I don’t chase the market. I have, and I have been burned. FOMO is not part of my strategy and I covered this in my blog. When a coin is making a parabolic move, and you chase it you can easily be caught as it drops back. If something goes up 20x in a short space of time, it has to do another 20x from the original position for you to achieve a 2x. There are always other trades out there.
- I am careful with the advice of others. I will use them as an opportunity to research something new but I won’t blindly buy. I use Twitter and Reddit all the time to follow news and opinion, but I ignore the idiots who are claiming a coin is going to the moon, or something is undervalued. Most opinions are based on what people want to happen.
- For each trade have a target entry and exit price including a negative exit, these aren’t hard limits, rather points at which I will reassess an investment.
- I do not ever operate with stop losses. In Crypto I have seen far too many positions get liquidated during flash crashes. Instead I monitor positions and trigger a warning when an investment is within 10% of an exit. I still might hold on to an investment if it is undervalued and I belive it will come good.
- I do not day trade, as mentioned above and I have written about this specifically, it is an easy way to over trade and chase the market, few day traders turn a profit.
Step 4: Identifying Investments:
Historically my investment research was based on the size of my investment, but my portfolio is now of a size that no investment is small, as such, I now consider each investment equally. Before making an investment, my research is split into the following layers of activity:
- Layer 1: I happily invest in and out of assets I know and understand, but for new investments I use Twitter and Reddit, where I admit I stand on the shoulder of giants and look for key signals from other traders as to specific trades and opportunities they have identified. I have two lists which I use on Twitter which you can follow below:
- Decent Crypto traders
- Elite Crypto traders
- Layer 2: once I have identified assets I am interested in I do my own research, which falls into the following (some taken from Chris Burniske’s book):
- Project history: this is dependent upon how old the project is — the roadmap, news, PR announcements, GitHub updates. I don’t though read the white papers as more often than not I do not understand them:
- Old projects: over six months then I am interested in how much progress the team has made and how good their communications are
- New projects: less than six months old I am interested in what the status is of the product and how well the community is developing around it
- Team: I am less worried here, I do a little research, but teams without experience can do great things. Also, I am not experienced enough to judge a team, that said, a project supported by a key person in the industry will always be a tick for me
- Objective: do I understand what they are trying to achieve, do I think the world will care and does it even require a blockchain?
- Roadmap: more critical with new projects, hopefully, there is a product which can be seen and used
- Adoption: is it being used? This becomes more relevant the older the asset is
- Intrinsic value: of the asset, as such, is it under or overvalued?
- What are the use cases and potential market size? I am looking for the broadest use case which is why I prefer currencies over utility tokens
- Issuance model: do I believe this is fair?
- Price history: this is relevant if I have made the decision that I want to invest. If it is an established asset I will be looking at its long-term price history, does it move in cycles (see Siacoin as an example), if so, which cycle is it in right now or does it have stable growth (see DASH)? If growth is stable I am less sensitive to the current price as I believe in long-term growth, I will only avoid if it is in a spike and will wait for the price to settle. If it moves in a cycle, unless it is early in a cycle, I will wait until the end of the current cycle before investing.
- Specifically, with ICOs: I care about the size of the raise, projects such as Filecoin have raised a concerning amount of money
- Layer 3: if I conclude that I want to invest in the asset I will look at the price and find a good entry point. I will not chase a coin; I am looking for something trading in what I call the ‘boring zone’, where the price is trading sideways for an extended period.
Step 5: Developing Incremental Revenues
I have decided to diversify my portfolio to allow my investments to work for me in other ways:
- Mining: I have invested in mining by purchasing some S9 miners to mine Bitcoin which I am working on with my friend Chad in America. I am keen on mining as minted coins are 100% profit once costs are paid, compared to trading, where an investment is only in profit when it’s price is above the price you initially paid it.
- Staking: I have started staking specific investments to receive newly minted coins from the block rewards
Step 6: Keeping Records
To support my trading, I keep very detailed records which I refer to daily:
- Active investments: tracking both an individual asset, tier and portfolio performance on a daily and monthly basis to identify specific patterns and track performance against BTC
- Opportunities: tracking of other coins and tokens I am interested in investing in, looking for entry signals
- ICOs: tracking upcoming ICOs and monitoring sentiment in these ICOs across Twitter, Reddit and other crypto websites
I keep the following records per investment opportunity:
- Category of asset:
- Utility token
- Investment vehicle
- Sub category:
- Privacy focused
- Blockchain 3.0
- Trustless staking
- Atomic swaps
- Decentralised exchanges
- Lightning network
- Zero fee coins
- Market cap:
- Micro-cap: sub $10m
- Low-cap: +$10m — $100m
- Mid-cap: +$100m — $1bn
- Large-cap: +$1bn — $10bn
- Mega-cap: +$10bn
- Calendar: key dates and events for the crypto market and specific assets
- Sentiment analysis: primarily across Twitter and Reddit
I have developed this strategy through my Crypto investment experience; you should by no means copy it. If you are investing or trading you should develop a plan which works for your lifestyle, risk profile, goals and experience.
I am yet to find out if I am smart or lucky, we are in a raging bull market, and when it levels or crashes, it might tell a different story. Please do contact me if you have any questions, I will do my best to respond, but I won’t tell you what to invest in.