The Trading Ethos


1] the social force that binds you to the courses of action demanded by that force

2] the proper sphere or extent of your activities

Dear Readers,

I think as good individualists, we’d agree that the second definition above, regarding responsibility, is more relevant to us, especially as it relates to our investment activities. And yet I wonder, with social media in mind, whether the first definition gets the better of us at times.

Too often today we hear of trading as a decadent activity, especially if much of our attention is taken up by Crypto Twitter. We’ll often find the apparently more responsible frowning on the activity as if from a moral high ground. The intention of this article will be to dig a little deeper into this, with the aim of arguing the exact opposite, that sometimes trading can be the most responsible of activities. The crux of the matter will be that pragmatic investors are responsible toward the uncertainty principle whereby exposure to their investment of choice is either limited or mitigated in having some wider hedging stratagem at work. My aim will be to expose the anti-trading generalization at work by the moralists that will be seen as really just a ‘strawman’ argument [easily blown over]. This will be done by examining the activity of trading in a more circumspect manner.

The Anti-Trading Narrative

An extended bear market in Crypto has no more sure effect than purging the trader come gambler of their decadence, whereby, in more straitened circumstances, they get a form of religion. Yes, that’s right, they see the light and convert to maximalism. Of course, it has its attractions - it is simple and easily understood, it has a coherent worldview, it has stood the test of time, and it has its influencers to perpetuate the doctrine in all its purity. Don’t get me wrong here. I think Bitcoin is great, perhaps the best thing since sliced bread, but I stop well short of buying into a worldview and becoming a maximalist. Rather, I consider myself a BTC centrist.

In the maximalist narrative, alternative more volatile coins are seen as speculative and risky, and yet what can get lost here is the fact that all investments and trades are risky per se, with some less risky than others. Risk needs to be factored in always and everywhere as a relative term, with risk never being completely eliminated. However, what tends to happen with narratives of whatever kind is polarization. The way this plays out in maximalism is that Bitcoin comes to be thought of and located at the ‘risk-off’ pole, while alt coins are, alternatively, relegated to the other polar extreme of ‘risk-on’. This is effectively a nice language game that simplifies risk, indeed seems to eliminate it. Yet the reality is something more complex, for risk can never be eliminated from any investment, just as it can’t from any trade. The best we can do is manage our risk, and this is where a certain kind of trade may serve to actually help us in our management of risk as opposed to exposing us to it further.

The Narrative Becomes Blind to the Phenomenon of Global Risk

In associating risk with alts [and dissociating it from Bitcoin], the maximalist narrative willfully insulates itself from risk toward an investment. Just as consumers in the surrounding suburbs can point to Disneyland and say that is fantasy [while they live in reality], so too maximalists can point at alts and say there is risk [while they are in the risk-free zone]. Notice the polarization at work here that is the basis of any language game. However, the reality is quite different. Risk remains hanging like the sword of Damocles over any monetary asset - conceivably, anything could happen. That we have acquired the ability to insulate ourselves from this reality, one way or the other, is nothing to celebrate. That we have acquired an ability to avoid ‘cognitive dissonance’ by a language game that can provide cognitive closure is nothing to take pride in. In the real world of pragmatic investors, that are not prone to enthusiasms of whatever kind, this reflects mental weakness not strength. Mental strength, that is based resolutely in the real [not the wishful] world, takes as its over-riding axiom, around which all else revolves [poles included], the uncertainty principle.

A Trading Ethos Based on the Uncertainty Principle

Given realists will reject a comforting narrative, and still see risk lying at the heart of their most valued investments, they must continue to manage the risk that comes with exposure to those investments. To continually focus on how something else is riskier relative to their own investment would not be a management of that risk. Rather, it would simply serve as a distraction. Management of risk here may involve various tactics. The right idea to have in mind here is one of warfare in the field [as opposed to bunkering down underground] - there are various tactics to be employed within an overall strategy. Why? Because future outcomes are unknown, and accordingly various contingency plans should be made. Investors will firstly be wary of their exposure, always keeping something in reserve. They will then diversify to some extent, opening up various ‘fronts’ if they can. They will always look to win a few battles [take profits] even if they lose the odd one, with the aim being to win more in the aggregate. And they will always be vigilant in making the most of opportunities that arise in order to strengthen their position. It is in regard to this last point that trading as a positive ethos comes to the fore in my opinion, as something that in certain circumstances ought to be done, as opposed to something to be frowned upon by the more doctrinaire in the abstract.

Volatility as Opportunity

Despite the way we often like to think, in terms of a nice neat narrative, the world is irreducibly messy…. especially the future one. In the world of Crypto, we see this as radical volatility. What if this volatility could be used to the investor’s advantage? First, have some confidence in staking a solid core position in Bitcoin. And as confidence is not certainty, as it still entails some risk [as anything could happen], trade the extra volatility of alts for USD. Notice the hedge here, which primarily resides in a complete demarcation of mind. Investor/ traders are here motivated to take profits off the table, and to counter-balance their exposure to Bitcoin. They are not looking to maximize their gains in trading alts against BTC. Not only does this hedge the risk of a solid exposure to Bitcoin, it provides a policy whereby one can actually take profits in the real world… into real assets. In contrast to a supposedly reckless and irresponsible activity, trading has now become a more responsible one. Of course, not all trades are created equal. What is meant exactly by this is that a discrimination between various types of trades is required, to which I’ll lastly turn.

The ‘Ethos’ of a Trade as Risk Management

Here we have the identification of a trade on the risk management side of the ledger, quite the opposite of leveraged day-trading [the strawman]. Yes, any trade is risky, and yet the rationale of this trade is one of risk-off, in order to build cash reserves on Crypto volatility. One riskier way of attempting it is leveraged day-trading [where often exposure to BTC is lacking], but the odds become more favorable once you introduce a decent time-line into your technical analysis while avoiding leverage. As I’ve argued earlier:

If time were to be placed on a spectrum, with the shortest of periods at one end and the longest of periods at the other, randomness and possibility would belong to the shortest periods, while pattern and probability would belong to the longest periods. There would be varying degrees of probability/ randomness depending on what point of the spectrum you were dealing with - at the one end, minutes would be near completely random, at the other end, years would have a much higher degree of probability. Just as with any science, where momentary observations only start to make sense when accumulated into a mass over a longer period of time, so too with T.A. It applies most effectively to longer time frames, where lines might be drawn, and trends discerned.

The apparent paradox of a trade landing potentially on the risk-off side of the ledger is resolved on assuming volatility will be an ongoing given of the market going forward, on considering the lengthy time-frame of the trade, and on recognizing the fact that the trade is an outright hedge against core BTC. Yes, it is a little complex with a few moving parts, but that is the nature of the beast, of the messy monetary world we are dealing with. Messiness and complexity facing us in the world is matched by a strategic frame of mind… in contrast to the simplicity of a single theory [no matter how good that theory appears].

Investment Ultimately Trade; Trade Bordering on Investment

The reader might still be thinking that because investing and trading are such incommensurable activities it would be better to stick to one and avoid the other. In response, pragmatic investors always recognize the principle that investment is a means to an end - the investment must at some point convert to a profit, which in turn purchases real assets by which real wealth [as opposed to digital/ potential wealth] is enjoyed. In other words, an investment [or a greater part of it] is always to be traded in at some point. To lose this distinction between means and ends of money is the error of the gold bug [or potentially in our case, the error of the digital gold bug/ maximalist].

And on the other hand, a trade borders on an investment. Most of us think of a trade existing on a relatively small time-frame, and yet this need not be the case. A trade can be engaged in on a much longer time-frame, indeed multi-years, which in the Crypto world can coincide with cycles. It is this multi-year trade that becomes a near investment, especially as considered by the mindset of Crypto-traders. If we are at the bottom of the market, that would be the time to stake some longer-term trades in the more volatile alts, which in a future manic market one could average out of. This gives rise to a potential win/ win situation - the taking of large profits, in the relatively short-term, while remaining invested in Bitcoin for the even longer term. Contrast this to the maximalist, who often has no profit-taking policy. The point here is that the activities of trading and investing are not so clearly and simply isolated one from the other as some like to think.

The Hedge as the Most Responsible Activity of All

Lastly, the notion of hedging comes into play. The non-hedging maximalist will want to engage in a debate of either/ or, essentially a language game with its own self-contained truths and certainties. The hedging investor will avoid this either/ or fruitless debate, and replace it with the hedged this and that [core BTC and trading alt/ USD]. Of course this does not mean ‘anything goes’, but may involve a graduated scale of values that can incorporate more than the singular and monolithic valuation that can be placed on BTC. Hedging here is a strategy that takes place firstly in the mind, in the field of valuation, and based on the uncertainty principle that opens up an ‘epistemic gap’. This provides some critical distance from what we think we know [logically speaking, we could all be completely deluded], which is then reflected in the strategic trades and investments that we make.

I’ve hoped to have outlined in the course of this article why an antithetical/ polarized approach between investing and trading may not be at all helpful, indeed detrimental, in the sphere of Bitcoin investment and Crypto speculation. It’s been my aim to show that the dynamics and realities of these activities over-lap to some extent, and should therefore be thought to lie together on a spectrum of sorts that accounts for varying degrees of risk. The crucial thing you want to avoid, as a pragmatic investor, is a rigid mindset convinced with a set of self-evident truths. But of course, therein lies the rub - is one a pragmatic investor or a doctrinaire enthusiast?

Until next time,

Stay, relatively, safe out there,

Dave the Wave.