Volatility And Taking Advantage of It

Longer term no certainty

Dear reader, though we all too naturally want to know which way the price of bitcoin will move, there is no certainty in the shorter term. You might as well ask in which direction a drunken dog will go such is the randomness involved. As for the longer term, there is still no certainty. Though we may be able to depict a probable trend, over the longer time-frame, putting that wayward dog of random volatility on a leash, so to speak, giving it some general direction in the aggregate, still uncertainty plagues us - the walker, the composite man with a will of his own, is not a preprogrammed robot. At best we can be said to have confidence in our investments, on the basis of those trends… and then accordingly hedge given the epistemic gap that exists between confidence and certainty. And yet there is another kind of near certainty involved here. As we become increasingly unsure of price direction, as we move down the time spectrum toward shorter-time scales, so too we become increasingly sure of something else - price volatility, where price moves randomly in both directions. This article will focus on the way in which the most certain of all things in an extremely speculative market [volatility], can be utilized to your advantage in hedging your longer term positions/ investments.

So with the near certain fact of volatility on the table, the next most probable thing to bring to the mix is the long-term trend. As I described in this article, the greater probability of a trend continuing is to be found on the greater time-frame:

Time placed on a spectrum

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 TA. It applies most effectively to longer time frames, where lines might be drawn, and trends discerned.

Subscribers and followers of mine would be well familiar with my long term trend, which is little less than the logarithmic growth curve [chart below]. Here we have a relatively narrow and converging channel leading to eventual price discovery, the rationale of which is a nascent currency in the process of capitalization. Where that curve plateaus on the zoomed-out chart and price action moves from exponential appreciation to relative stability, the emphasis here is on relative. This is because when zooming in again, and to a later date, you’ll see that the plateau still leads to relatively volatile prices [the 1x]…. just not the kind of volatility seen at an earlier date [the 17x for example]. What price will not exhibit, should this theory and trend be correct, is the kind of radical returns/ ROI that have been seen at previous dates. This is the well-known thesis of diminishing returns that has also been observed by a few other commentators on the market. What has marked the difference in my model is a converging and plateauing channel. That said, though macro volatility may be diminishing as compared to previous, price is still very volatile at this stage of the developing curve.

Play the hedge - long bitcoin and major alts while swing volatile

With both this greater trend, and the fact of volatility on the table, we can now play one off the other in a hedging strategy - go long BTC and major alts, while swing trading the more volatile alts [for USD] as your hedge. Crucial here is to keep USD as the trading partner for the alts not BTC, for the idea is to keep up to half of your funds out of Crypto altogether. Ideally, you would be wanting to see the appreciation of your swing trading alts account keeping pace with the appreciation of your long Crypto account, the two serving to counter-balance each other. Notice here the potential to remove near all anxiety insofar as you’ll never be over-exposed to Crypto, while taking advantage of its volatility. Of course, this kind of hedging almost requires a dual mindset, or rather not a mindset at all. The investor/ trader must be capable of ‘wearing two different hats’, of entertaining a ‘negative capability’, which is only possible with first having the uncertainty principle foremost in mind. All certainty must be abolished, which is something I explored further in some conceptual detail here:

For hedging is based on the uncertainty principle, and that is something that both Rationalism and Irrationalism, as [often unconscious] ideologies, or theaters of the mind, inoculates people against. We can now say that hedging first involves a recognition of the uncertainty principle, and that this principle is a natural attribute of someone not having subscribed [or capitulated] to some self-contained and apparently self-evident ideology. The ‘hedger’ is in fact an enlightened sceptic, wary of all certainties and ultimate explanations. Explanations might be true [and certainly useful at times], but they also might not be true. The hedge here involves a ‘negative capability’. For the hedger, an explanatory idea [ideology] is only ever a provisional and pragmatic ‘truth’. As no particular idea is entertained at the exclusion of all else -opposite ideas might happily co-exist, and find themselves jostling side by side [this and that is the motto of the hedger, either/ or, the excluded middle, is the motto of the rationalist, and this the motto of the irrationalist]. They are in this sense also ‘hedged’ in that the various ideas also provide lines of demarcation or limits to each-other, just as properties with hedge-lines have.

Increase your odds

But Dave, the reader asks, are you saying trade Crypto… with all the trials and tribulations this entails? To which I’d say yes and no. Yes, swing trade [not day trade] some of the more volatile coins on the relatively longer-term time-frame, where that longer-term increases your odds [as per the first quoted passage above]; and no, sit on your long Crypto positions for the even longer-term. What’s required here is a conceptual division of time into short-term, medium-term and long-term time frames; short-term trading is to be avoided as more random/ risky, medium-term trading is to be encouraged as relatively less risky and a hedge, long term positions are your investments… to be mostly sold at your discretion when it would represent a substantial ‘level up’ in your real wealth [in terms of real assets].

The aim is not be perfect but good enough

In practical terms, what this has meant is the buying of volatile alts on the lows, even quite some time ago [medium-term time-frame], and the selling of some of them on a suspected top with the accumulation of a USD cash position. It does not have to work perfectly, the aim is always one of good enough, with the main aim being to realize some profit along the way while staying long other Crypto positions at large. The picture here is one of a high-wire balancing act above an abyss, and not one of a retreat into some comforting cave of certainties. Here is an example of alt swing-trading on the medium-term time-frame that has helped to mitigate, or off-set, the risk involved in holding alts for the longer term… not to mention a core investment in Bitcoin.

And here is a hedging example [against the chart above] of a trade I just sat on for the longer term [having though first swung traded.. effectively lowering my entry level].

As you can see, I’m still macro bullish with both of these charts, and am looking for those greater gains that may eventually come in a manic market. Is it a certainty? Need we ask?^^

A sound approach in the wild west of crypto

I hope this article has helped to clarify in the minds of readers, followers and subscribers my own approach, and what I think is a sound strategy in what is essentially still the wild west of the Crypto markets. As in any frontier, there are great opportunities to be had… along with equally great pitfalls. The challenge is to deal with risk in a realistic way, neither under-estimating nor over-estimating it. This article has essentially looked to further explain the principles involved with what I consider my foundational article - The Fool-Proof System of Trading. I think that further explanation [and repetition] of the perspective of this article is required as it can be at times be difficult to understand. This is because it deals with a modality of thought that cuts across the way in which we habitually think. As opposed to certainties [or the lack of which where we then ‘outsource’ our intelligence to rely on ‘experts’], it keeps the radical fact of uncertainty squarely center and foremost before us. In this sense, it is also a subjective, or existential position, which is entirely appropriate as we are dealing always with concrete decisions that we as investors/ traders must take having entered into the fray of [at times] a savage market. Each one of us has to inescapably deal with the risk we take. As much as these articles are about the continued opportunity that exists in Crypto, they are also about engaging with that risk management at the individual level.

Until next time,

Stay [relatively] safe out there,

Dave the Wave.