Happy new year! Well, we’ve made it through what has to have been one of the toughest years in Crypto. And so a new year rolls over, and already we’ve seen the beginnings of what may turn out to be a macro turn-around in this space.
I thought I’d kick off this year’s series of articles with a more general one that outlines my over-all approach toward investing and trading Bitcoin and the alts. This article will first look at a general review of how the over-all strategy of the ‘Fool-Proof System of Trading’ [and Investing] has played out so far. I’ll then go on to outline the way in which such a strategy would have you positioned going forward.
As those familiar with my approach are no doubt aware, I’ve always advocated staying long a core position in Bitcoin [preferably bought at lower prices]. This is the foundation from which rises the whole edifice of the ‘Fool-Proof System’, a hedging strategy which allows for the actual taking of profits whilst also remaining long Bitcoin.
In my opinion, such a strategy serves to avoid two equal and opposite errors that traders/ investors are prone to. First, the error of the ‘investor’s’ mindset - the never taking/ skimming of actual profits into real assets. Second, the error of the ‘trader’s’ mindset - the never establishing of some trades for the longer-term, that is, letting them run in a bull. What the over-arching strategy aims to do is strike a balance between both of these extremes, where the trader/ investor manages to remain long while also realizing profits along the way [on volatility].
In practice, this has worked outrelatively well for me [perfection, always an illusory idea, is not our aim]. In buying Bitcoin at lower levels [establishing a core], I now do not need to concern myself with buying/ re-entering at some ideal level. On the other hand, in seeing a massive correction of the price from 69K to 15K, I do not need to beat myself up - my core is still in profit and expecting a market recovery, while profits have been taken in the more volatile alts [and more lucrative for the trader].
And of course those profits are to be taken in USD, in order to counter-balance your exposure to BTC and other alts you might remain long, to re-bolster your USD balances, and in turn to skim off profit into real assets. Keep in mind that those that simply trade alts/ BTC risk never actually take profits off the table, that is, out of this space altogether. For that matter, those that simply trade BTC/ USD for the accumulation of BTC, even on the grand time-frame of cycles, also never actually take profits. Though some might disagree here, this comes back to the ultimate purpose as to why we trade and invest, indeed, comes back to the very point of money as a means to an end.
It’s in what I call the swing trades proper that profits were taken, and where one wore for the moment in the heat of euphoria a somewhat sceptical hat. Rejecting a ‘monistic’ frame of mind, where the animal spirits would get the better of us and one must beeither a bull or a bear, the ‘pluralist’, focused on both volatility and uncertainty, held their nose and bit the bullet and sold some of their best-performing trades into USD [the natural trading partner because most volatile]. Some paper profits [if not all], or rather some digital profits, were realized. Here the reader might object that taking profit in USD is still only a paper/ digital profit. And they would be right if a solid portion of that accumulated USD was not in turn skimmed off into real assets.
For those with their eyes on the prize, of both recovering prices and even new all time highs in the relative near future, and with the LGC model in mind, they would have no doubt looked to maintain some exposure to alts [and of course core BTC]. The swing trades [where one wears the dollar bull hat] would have enabled the re-building and maintenance of a USD fund in stables. Double up swing trades, on the other hand, would have helped to keep alt positions solvent. Even if some particular positions bought high were underwater, the aforementioned tactics would have done much to mitigate losses. Besides, with the LGC model in mind, underwater trades are expected to recover. Add to this that the most speculative trades are [or should be] also the lightest in weight, and losses are well-contained without one being rekt. Remember, the aim is not perfection but good enough, and for those with a strategic approach in mind, it’s balances in the aggregate that are of primary importance.
As for buying going forward, the same tactic of buying in tranches over a reasonable period of time at what looks to be the base applies. Some will put some funds to work on a capitulation, others will look to buy into burgeoning strength, others will look to see a breakout from the base, and others will look to see a solid uptrend established. And yet others will look to combine all of these tactics in the initial time-based strategy, where they effectively average in at reasonable levels.
That all said, does this mean that one can go ‘all in’. No, not at all. With a strategic approach, which is based fundamentally on the uncertainty principle, cash/ stable balances are always to be maintained [note, counter balance]. Ideally, it is always a case of raised cash through volatility [swing trades] that is to be put to work again. Further to this, a portion of cash profits was also siphoned off into real assets when the going was good. With this strategy in mind [of uncertainty], come what may, you will always come out relatively unscathed, and relatively well off.
Of course, this does not mean one has to be a complete cynic toward Crypto in general. Remember, there is no capitulation to a monistic frame of mind, where one is either for or against something. This is the debating mindset of pure theory, and not at all applicable to the practical activity of trading/ investing in currencies in real time. Actual trading/ investing in the real world entails the entertainment of various outcomes - the realistic trader/ investor has ever an indeterminate future in mind. That we tend to think future events are determined by past events is a classic example of hindsight bias - we look backward, after the events, and see a series of events… and imagine there could have only be one such series. All of which is highly illusory and detrimental to most market participants… because of their outlook/ approach to markets.
A concrete example of the above [of various outcomes] is the LGC model. It is taken as a hypothesis not a certainty. Because it is not a certainty, the investment in it is accordingly weighted/ balanced to an appropriate extent - enough is invested that you’d do well enough if it eventuated; if it did not eventuate, you wouldn’t be bankrupted. The swing trades/ and re-establishing of cash balances [and taking of profits] have the second part of this very much in mind - negative capability.
Markets have a way of making fools of us all. Or should I say, we are all potentially fools when it comes to the market. This is because we are just as much social animals as we are rational ones - we are susceptible to getting swept up in the hype [and then the equal and opposite despair]. Of course, most of us get burnt on first entering the market. From there, we’d do well to learn the lesson going forward. Either we learn that lesson or we don’t - some will always be ‘once bitten, twice shy’ and steer clear of all speculation going forward; and then there are those that having learnt the lesson, become a little less enamored with the object of their speculations. They gain some critical distance to them… while continuing to speculate.
And I think this is the crucial concept here, an awareness, as far as we are concerning with market prices, that they are not a function of rationality but of speculation. And this is not to be considered in a negative light - I’ve always considered speculation the means by which Bitcoin becomes capitalized [and where the volatility of that speculation is ‘leveraged’ in the alts].
As to what I term ‘fool-proofing’ [and I consider myself a potential fool], I think we can go somewhat toward that goal in a bundled triune policy involving a contrarianism, the uncertainty principle, and a hedging strategy as discussed above. The over-riding strategy involved in such should put the trade/ investor [the speculator] in good stead going forward, where they can maintain solid investment and also actually realize some profits.