We Need to Talk About Cryptocurrency Trading: a Cautionary Tale

During a recent webinar I held, I created a poll where I asked the attendees how their trading was going, with options from making good money to losing lots of money. There were a handful who have lost a lot, and I asked them to get in touch if they wanted to discuss it. A few people messaged me, some of whom have lost tens of thousands of pounds and one who had dropped hundreds of thousands, so I thought it would be good to write a cautionary post about investing in crypto.

I will give some examples of what people have done throughout the post but first some background and fundamentals.

Apologies if I sound like a broken record when I say do not invest more than you can afford to lose, but it is so important, and any trader worth their salt will tell you this too.

Since the very first email I sent out to my friends, offering tips on how to get into Crypto investing back in early ’17, to the blog posts, AMAs, podcasts and updates I send out on social media, I have always said the same thing: do not invest more than you can afford to lose.

I say it every single day: DO NOT INVEST MORE THAN YOU CAN AFFORD TO LOSE!

I say this because while Crypto investing can deliver impressive returns when traded well, the temptation is there for people to get carried away with the bubble. It is easy to get caught in bad trades, crappy ICOs or a bearish crash and lose a lot of money, especially if you are new to this.

I consider myself an amateur trader who has been able to navigate this markets and make good money, but I am pretty sure if I applied the same to the stock markets or forex, the results would be very different.

Like many, this Crypto bull market has saved me on more than one occasion, and I am yet to discover if I am smart or lucky.

Let’s Talk About the Opportunity First

Bitcoin has opened the door for a new investment asset class. Cryptocurrencies are now establishing themselves in our economy and financial markets. Outside of China, governments appear to be mainly supporting Crypto, yet figuring out the regulatory framework. As such, a market cap for all Crypto under $500bn is quite small, under $5 trillion, is relatively small compared to other investment classes.

Cryptocurrencies could be the most significant wealth creation and distribution opportunity within our generation. But this comes with specific warnings:

• It is still a speculative bet that Cryptocurrencies become an accepted and used store of value and medium of exchange
• It is still a speculative bet that the protocols upon which much of this decentralised network operates will become widely used
• It is still a speculative bet that the DApps being developed on these protocols will achieve scale and become economically viable

IT IS A SPECULATIVE BET. On the asset class as a whole, each sub category of asset and each asset independently.

Nothing is guaranteed and nobody knows what the fuck will happen; thus, investments are risky. Many, likely most of these currencies, protocols and DApps, will fail and be worthless. Only a few will survive, probably after some epic Dot Com style crash at which point there will be newer entrants, who will build upon the success of the survivors and the cycle will start again.

Right now, you are betting on which horses will not only win the race but will survive to race again, and during this race you might go from first to last in seconds. Someone might even run off with your horse while you are asleep, never to be seen again.

I have been mostly lucky, and I am happy to admit that. My timed entry into the market was just luck, some of my original investments which made good money were lucky guesses, and it is only during the last six months that I have knuckled down to take this seriously. If I had started a year later, Jan ’18, I would be likely facing masses losses in my first month.

When I started, I invested 20% of my savings, I wanted to do more but my Dad told me I was an idiot, I wish I had, but he was right. This 20% was extra spare money. Savings. Not total value.

Taking a mortgage out on your house is not using money you can afford to lose. Using 100% of your cash savings is not using money you can afford to lose. Using your kids’ college money is not using money you can afford to lose.

My investment was always long-term, a trajectory of 3–5 years, for me this was the amount of time I thought it would take for Bitcoin and Crypto to become established. I advise all others to do the same, mainly to allow your investment to ride through the volatile swings, but not everyone listens.

Crypto is not the place to stick a large chunk of cash and think in a few weeks you can buy a new house, a fast car or a new wardrobe. It might seem easy with all the Crypto millionaire stories you read, trust me, this shit is hard.

Now Let’s Talk About Risk

A registered financial advisor or wealth manager will tend to offer a structured approach to building an investment/pension portfolio, and for simplicity, we will use three levels of risk:

• Low
• Medium
• High

What they want to know is your appetite for risk, and they provide these levels with a strict warning that higher levels of risk might be for people with fewer dependents and who are looking at long-term investments. Ultimately the stock market rises over time but is volatile over the short-term. The higher the risk, the higher chance of big swings — higher rewards but the potential for higher losses.

Keep in mind a high-risk strategy aims for a 6% annual yield. With Crypto, people see returns of +1,000%, but the wild swings which give these returns also lead to swings down too.

Now if a wealth managers level of risk was based on 1 for low risk, 2 for medium risk and 3 for high-risk, crypto investing would be around 100 — insanely risky. Yes, we can see returns in the thousands of percent over a year but we can also see devastating price crashes.

When I asked my pension advisor to put my pot into Crypto, he told me there was no chance, they didn’t offer it, and it would be too risky anyway. He said you are gambling away your retirement.

The crypto market is mostly unregulated and offers little protection, so when ICOs fail, blockchain startups fail, and trading platforms collapse, your money goes with it, and there is no legal recourse that you can take. Whales and market makers can manipulate the market, insider trading is rife, and regulators are only just trying to figure out how to monitor it.

Now Let’s Talk About Mistakes

1. Greed

Probably the biggest mistake I have made, and that so many others that have contacted me is being greedy. Seeing 6,500% growth in 12 months and not withdrawing a significant amount of funds on the way up is fucking stupid. Yes, I am fucking stupid. I took out my original investment quite early and used to operate with a 5% drawdown, every time my portfolio went up 25%. Towards the end of ’17, I just went all in Crypto. Greedy bastard!

I’m not the only one who took a massive cut this last few weeks, and many people I have spoken to have said that they want to get back to their All Time High (ATH) before pulling out profits. Yes, emotionally I get this. You’ve seen your portfolio at a nice fat figure, so you don’t want to pull out at half that. Expecting things to go up forever is stupid though. You need to have targets along the way and pull out portions of profit as you hit goals. You hit 200%? Take out 50% of profits. You hit a nice round number that you set yourself? Take out a chunk. Whichever way you want to do it, remember, greedily holding can be as bad as panic selling. Take emotion out of it and be practical.

2. Future Spending

While you should not invest more than you can afford to lose, you should also not spend your gains until you have realised them.

Those chickens haven’t hatched yet baby.

Has your portfolio risen 1,000%? Great. But until you’ve turned them back into FIAT, it is virtually meaningless. One person I know had an offer accepted on a new house, days before his portfolio crashed by 60%. He is now fucked. He effectively spent money he didn’t have. So make sure your profits are in FIAT and back in your bank account before you order that Lambo or book that holiday.

3. Timing

Many people who got into crypto before last summer have probably made a decent paper profit — they timed it well and would have to be hard pressed to have not made a profit in such a bull market. However, since the middle of January, we have seen the market crash pretty hard with around 50% to 80% of the value of most assets wiped out. So for those who got in any time around November, they might be back to break even, and those who joined in January may have made a significant loss.

Let me play that record again:

• Only invest what you can afford to lose, remember me? Cool, then when the market dips, you don’t need to panic as you can afford this.
• Invest long-term, three to five years. Cool, you can ride through the volatility.

Am I starting to make sense?

As I have said before, if you buy a house, you don’t panic sell if prices dip, so why do the same with crypto? This was meant to be a long-term investment right? I bought my last house at the peak of the housing bubble, literally the month before the housing crisis shit storm nearly took down the global economy. The value of my home dropped 15%. It never crossed my mind to sell and limit my losses, and the same is true with Crypto.

As Luke Martin said in my first podcast, most people are trying to be traders and shouldn’t, why? Because it is fucking hard. They should be investors, taking out a few limited positions. So — buy it, sit on it and ignore it. This is an investment, you don’t get your house valued every week so why are you checking your Blockfolio every 15 minutes?

What Goes Up Will Probably Come Down

You don’t have to be an expert in technical analysis to be aware of the red flags to avoid. If anything goes parabolic and rises incredibly fast, it’s unlikely this is stable growth. It will almost certainly come crashing down again. So don’t buy during a period of parabolic growth, wait for it to go back down or stabilise before buying. You can learn more about TA and when to buy in and sell if you like but if you can’t be bothered that’s fine too — but just use your common sense. If the price of bitcoin has risen to an ATH, then it’s probably not the best time to jump in. If it has dropped 50% over a week or two, then that’s a safer bet.

Products go up based on supply and demand, but there are people controlling and manipulating the market, go to Google and read up on whales and marker makers. These people are there to make money off you and your stupid mistakes.

For simplicity, we will just stick with the basics of supply and demand for now. When demand outstrips supply, prices go up, this is when there are more buyers than sellers, this creates FOMO and new buyers come in. At some point, these new buyers will push the price up to a point where people who bought in earlier, will start to take out some profit. Supply grows, and the price goes down. Supply is now outstripping demand. Prices fall. But in Crypto, these swings are super volatile.

And remember you are never in control of the price of the asset. Did you go and read up on whales and market makers? Why not? These people are in control, they have patience and deep pockets, and they can pump or dump the price leaving you on the sidelines wondering what the fuck is going on. When prices drop and you have panic sold, they raise the prices again, so you jump back in. They are playing on basic human emotions, fear and greed, and are one step ahead of you the whole way.

In January last year, the entire market cap of cryptocurrencies was only $16 billion. By the end of the year, it had reached $813 billion, so yes, everyone’s crypto portfolio should have been going up. But new money isn’t going to pour in forever and, like with all markets, for people to make money, someone else has to lose money.

The Cautionary Tale

One couple who got in contact with me recently, invested $100,000 late last year. A couple of months later their portfolio was down to $20,000; I think we can all agree this is not an insignificant drop. It was the wife I spoke to on Skype one evening, a wife with two kids, telling me how she can’t sleep at the moment. She explained to me that they:

• Were told about all this money people are making with Bitcoin
• Moved all of their other investments which weren’t really growing into Crypto
• Bought lots of things but didn’t know what they were doing
• Invested in failed ICOs
• Panic sold when things dropped
• Chase traded to recover losses

All the silly mistakes we have all made. Yep, I have done all of the above too, but I learned these mistakes in 2013/14 when Bitcoin crashed, and I lost £20k leverage trading tech stocks.

Their $100,000 is now 80% down. They feel sick and are terrified. They have kids, a mortgage and certainly not enough money that a loss of nearly $80k won’t affect their lives.

Where did they go wrong?

I am not obnoxious enough to say I know the answers, but from my limited experience:

• Invest in the big ones
  Most likely you are an investor, not a trader so stick to the top tier coins — Bitcoin and other established assets: Ethereum, Litecoin, even bloody Bitcoin Cash if you have to. These are most likely to grow or at a minimum survive over a more extended period and are relatively less volatile. Don’t buy things you don’t know or understand. Do your research and start off slowly building on your portfolio as your knowledge and understanding grows.
• ICOs — Good or Bad?
  2017 was the year of the ICO and many people made a lot of money out of them. Others, including me, also lost money from scam ICOs. ICOs are essentially companies raising money from the public for their new venture. Mostly it is crowd-sourcing investment capital. When the company goes live, or their coins and tokens go on an exchange, the value of your tokens is expected to increase. However, mostly it doesn’t. Sometimes the companies aren’t even real, and the money just disappears. Sometimes the ICO has been bought up significantly by wealthy investors at a discount who then dump it on the market when it hits the exchanges, crashing the price.
• Remember, this is an unregulated industry in many markets. There is little to stop scammers creating a fake company and winding it up when you’ve pumped your hard earned cash in. While many are honest and have good teams behind them, the market is saturated, it is critical that you do your research and invest only a small portion of your total portfolio in these high-risk projects.
• Panic trading
  “My investment has dropped by 40%, quick sell, sell, sell before it drops further. Oh, it’s gone back up to our original investment price now”. You’ve just sold your assets at a 40% loss. Don’t make emotional decisions, don’t panic sell and DON’T INVEST MORE THAN YOU CAN LOSE. Over time, if this market is successful, there is a chance this dip will recover to a new all-time high. Remember, three to five years in assets which you believe will grow, then you can ignore the dips.
• Chase trading
  “I need to recover my losses, where is the next 10x? That coin has gone up 145% in the last 24 hours. I want some of that. Oh, it has now dropped 85% since I bought it.” Don’t try and chase something. Look for a good entry point and buy at a value you think it is worth. If something has grown 10x in the last six months, is it likely to do another 10x in the next? Maybe, maybe not. You might have missed that one. Hold out for something else.

Most people should not be actively trading; they should be investing. Investing is buying a portfolio and holding it for months and ideally years. Don’t try trading short-term unless you are confident you know what you are doing. You might hit a lucky spell and think you are good; I’ve done that. In January I thought I was a fucking genius then the market crashed and a simple look at the previous five years for Crypto would have told me that this is likely to happen again. Did I look at previous years? Did I implement a risk strategy and draw down profits? Did I fuck! Why? Because like most of us I am an amateur.

So what now?

I was very clear to her that I can’t give her any financial advice. Firstly, I am not regulated, and secondly, I could be wrong. But, if it were me, I would see my options as follows:

1. Continue doing what I am doing
   Nope! It isn’t working, and the journey to zero is getting closer.
2. Pull out
   Not the worst idea, it is a ‘sunk cost’, Google that. If I had lost 80%, it might be time to take out that remaining 20% and chalk it up to experience? I did this when I lost £20,000 leverage trading tech stocks. It was a painful lesson, but it taught me a hell of a lot. Even if you only invested money you can afford to lose this is still pretty hard to swallow, but if you need that money, you might not have much choice. You can take it out, delete your exchange accounts, forget Crypto and get on with normal life, in the end, it is only money and isn’t worth the stress.
3. Invest in smaller coins that might have a quick 5x return
   No one knows which ones are going to do quick fast returns, if we did we would all be super rich. And it’s likely this strategy will lead to more chasing trades and panic selling. If there is another dip, these coins would also be hit harder. I spend all day, every day learning, reading and trading to understand more but still I don’t know what might happen. Getting this wrong could be catastrophic.
4. Put it all into BTC and ignore it for a few years
   If this is money you don’t need access to and is money you can afford to lose, then just stick it in BTC, delete all your apps, crack open a beer and wait for a couple of years. To get your money back from an 80% loss you would have to hope that BTC reaches $50k. Is that possible? Maybe, maybe not, but it’s probably the safest bet you have if you don’t want to exit Crypto. It could also hit $100k one day and then you would be in profit with a nice retirement portfolio.

Rules

This is why basic rules are so important:

• Don’t invest more than you can afford to lose
• Don’t invest with short-term goals
• Don’t try and be a trader when you have kids to raise and jobs to do
• Don’t overtrade
• Don’t panic
• Don’t be a greedy idiot

They are rules for a reason. If someone wants to get into the space then make an investment, if it grows, take profits and diversify. Research, read, play the long game. Trading a hyper-volatile market is hard. Really fucking hard!

If you have any questions then please reach out to me.