Some Reflections On My Time In Crypto
Ethereum has finally crossed above $2,000 again (or at least it did for a while). The Ethereum merge narrative is really running strong and the bulls are returning to crypto Twitter. Now, let's see if it's a bull trap or if we continue the climb.
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Why did I end up in crypto in the first place?
I read a tweet the other day that made me think:
I'm from a middle-class family. My parents separated when I was 7, and I was raised by my mother alone with 2 younger brothers. We lived in a small house in a relatively wealthy neighborhood, and I remember all through my childhood and teens I felt jealous of the other kids because they always had the newest toys, brand clothes, bigger houses, etc.
When I was 9 years old I convinced my mother to buy a book called "How to make a million dollars per year" from TV Shop (a shopping channel on TV). Obviously, that book was rubbish, but it tells you something about my mindset. I was looking for a way out, but I didn't know how at that time. None in my family knew anything about investing, and as a consequence, I didn't learn about this until I stumbled upon it way later in life.
I learned about risk management in the board game Monopoly. I think I have an inner degen inside of me because friends that are playing against me think my playing style is very aggressive. I always buy as many properties as I can, and I'm a hard negotiator.
When I said I learned about risk management from this game it's because it's so easy to see that your strategy in the game may leave you bankrupt if you risk too much or too little. Since it is a game only I tend to risk too much, but it's always a calculated risk analysis behind it. Would have played a little more conservative if my PnL was at stake.
I think I've always had a dream about being free. When I was 14 I started with odds betting (soccer, hockey, basketball, tennis). At that time I thought that $500 per month in profit was enough to live off. I was 14 and living at home, so my expenses weren't that big.
But this dream about being independent of work followed me ever since. I continued with odds betting regularly until I was 25 years old. In the end, I don't think my overall profit was that big, but at least it gave me some nice side income.
Odds betting taught me about the Kelly criterion and to always bet on things with +EV (positive expected value). Let's say the odds for Real Madrid to win against Barcelona was 2.10 (47.6%), but after your analysis, you find that Real Madrid should have a probability of 55% to win the game.
The odds should be 1.80 (100/1.80 = 55,5%). The difference between 2.10 and 1.80 is your +EV, and in the long run, you should be able to make a profit betting on value. This kind of thinking was valuable for my further journey in the equity market.
I wrote about +EV for crypto in this thread:
Discovering crypto and stocks for the first time
In 2017 I discovered stocks and at the start, I stuck with index funds. Then gradually moved over to tech stocks, $ARKK and also crypto.
My real breakthrough was March 2020 when I decided to borrow money both from my local bank, and also took out a margin loan at my stockbroker.
My thesis was that if the markets would collapse I could always start over and maybe get back to the same spot in like 5 years. But if I was right, I would be able to retire.
Luckily for me, the FED was on my side and printed more dollars than ever before. This led to the wildest recovery in history and I retired from my 9-5 at the start of 2021.
My first meeting with crypto was when I started selling some e-books in 2018 and someone asked if they could pay with crypto. I didn't pay enough attention to crypto until 2020 when I started following it daily.
From May 2021 I was trading crypto regularly (mostly Ethereum), and another life-changing win happened by betting hard on $ETH on the July 21' low ($1,750). 1 month later the price was at $4K.
I discovered NFTs last summer, and this led me deep into the DeFi-rabbit hole. I fell in love with the concept of Anchor Protocol and made some nice gains from that one too (mostly leveraged stocks with Mirror Protocol). I got out 3 days in advance of the crash.
Until 2021 I was mostly a passive investor, but several things changed and I gradually evolved into a 100% active investor. Especially after discovering crypto which still is a very inefficient market.
When news appears in the stock market it is reflected in the price only seconds later. For crypto, it still takes some time.
Some of the reasons for this are that the institutional traders aren't plentiful in crypto + more retail interest + you can always buy fractional amounts of any crypto which makes it more accessible for the masses.
Inefficient Markets
One example from this week:
On Wednesday when the new CPI number got out the price pumped immediately. To catch this candle you had to be long in advance of the news or have a bot that traded at the exact time of the news.
As you can see the news led to an 8% increase within 45 minutes.
But even if you were 5 minutes late to the news you would be able to catch a 5% move, which is still fantastic in a 40-minute periode. This is without leverage.
How I wanted to play this in advance:
CPI above 9.1% = I go short
CPI between 8.7% - 9.1% = sideways (do nothing)
CPI below 8.7% = I go long
CPI came in at 8.5%.
Well, actually I "cheated" because I went long 15 minutes before the meeting on a gut feeling. I had a 1% stop loss on this, so I would have a 1% loss if I were wrong, and then still have time to go short directly after (follow the short-term trend).
On July 27th (the last FOMC meeting) I was short into the meeting, got stopped out quickly, and went long directly after. Still made gains. I'm not saying this is easy, because sometimes the market just goes sideways on news. What I'm talking about here is that there are inefficacies that we don't see as much in other markets. Remember crypto is still a small market compared to stocks and bonds.
The Way From Here
After the market crashed big time in May/June with Terra, 3AC, Celsius, BlockFI, Hodlnaut+++ led to the end of easy mode in DeFi.
As my readers have noticed I haven't tweeted much about DeFi lately. Not because I don't believe in it going forward, but because there aren't that many good opportunities right now.
Sure, you've probably read about "real yield". That is DeFi projects that make more than they spend. There are some good projects out there: GMX, SNX, MKR, but since the words "real yield" is a trend now I guess there will pop up a lot of projects that aren't healthy. DYDX for example has insane revenue, but the token emissions/dilution is higher which means that this is net negative.
My point is, just be careful.
Don't follow all shilling from Twitter blindly.
So since I haven't deep dived into some crazy new DeFi projects, I've been focusing a lot on trading instead. You've probably seen it already that I have focused on it both on Twitter and in the newsletter.
A reader of this newsletter named James is helping me creating/backtesting a trading strategy that focuses on short term mean reversion combined with EMA (exponential moving average). If it is successful you'll probably read more about it. The idea stems from something I wrote in an earlier newsletter issue:
Let's see if we can get anything out of it :)
Other than that there's more optimism back in the market now, and it's good to see the prices creeping back.