The Cryptobubble is bursting — How to learn from it and improve
You can check out my earlier stories and you will find a reasonably long explanation as to why the Oct-Dec 2017 price moves are a bubble. To use a slightly arrogant quote (if used by other people, including me) of Satoshi that is being plastered by all the bitcoin pumpers from time to time:
If you (still) don’t believe me or don’t get it, I don’t have (any more) time to try to convince you, sorry.
For those of us that have experienced investing through the .com bubble or have accepted that great new technologies often come along with a hype that makes us overvalue these in the short term (bubble) but underestimate their value in the long term (way down the line for bitcoin) or at least those that are open to the idea of the bubble bursting, I am writing down a few learnings from my own trading experience. Note that none of this is financial advice.
My Learnings from the .com bubble
Chartists will always find a positive spin & don’t listen to gurus
If you think about it rationally, most chartists involved in crypto currently are trading a lot of cryptoassets themselves. Some of them are running paid groups for people to get their analyses. They are not neutral bystanders. Rather both through their personal investments as well as their paid group participants (or even just their twitter followers) they are heavily incentivized to portray a Bullish scenario at all times. I am truly not saying they do not have the best intentions, but if you have any kind of trading experience you will know that it is very difficult to look at situations you are invested in yourself neutrally. This works completely subconsciously.
The entire crypto community on Twitter or Medium is invested. I recently saw a lot of twitter polls asking if bitcoin will see another All-Time-High in 2018 and none of these polls was below 75% Yes. I encourage you to find a Trump-bot on Twitter and look at their surveys regarding the US president. They are being followed by Trump die-hards and they always end with fantastic resume scores for The Donald. Search for polls of lefty-activists and you get the opposite. This is the same that is happening in crypto — if everyone around you is Bullish all that means is that all these people are already invested. They cannot buy more, they can only sell.
The same goes for any of the crypto celebrities that you follow and listen to. All of these people, be it the Wiklevoss twins, Nick Szabo, Crypto Ed or even good old Andreas — they all have a subconscious incentive to talk up bitcoin. No bad intentions at all. Just beware of that.
You need to take a step back from every newly announced support level and “turn around candle” and ask yourself what will attract NEW money to the space at this point. For me that answer currently is twofold: (a) a true real-world application of the blockchain aside from money transfers that we all start using underpinning the value (ideally running on bitcoin) or (b) a new All-Time-High in bitcoin that starts the “fear of missing out” (FOMO) again. Note that this will take people making 100% or more on a trade so it does need a new ATH. Nobody brags about 20% they made to other people and makes them jealous. See what happened to “Buy Bitcoin” on google when the market tanked…
Beware of your fear and greed monkey: Always sell on the way up in small steps and buy on the way down; never go all in, never go all out
This is a very valuable lesson. Basically it helps you beat your inner greed and fear monkey. That is a very powerful monkey and all of us have it. When the market goes up and you are not invested you will be experiencing FOMO (usually causing you to buy at the top) and when the market goes down and you are fully invested you will be experiencing panic (usually causing you to sell out at the bottom).
If you have a technology or similar that you are fully convinced of for whatever reason and you want to invest in it, the best solution (that I have found for myself) is to never enter with your full amount and to then be able to add on every stronger dip (in small amounts) and similarly sell any larger upmove. I have found this to be an enormous help to ensure I never succumb fully to my fear and greed monkey. Whenever the asset dives I can feel good as I have room to add; whenever it rises I can feel good as I am part of the move up. If you are a (novice) trader and go all in on all of your calls, you will be beaten by the monkey more likely than not.
Follow the pain
There is something called “the pain trade”. The pain trade is the trade that benefits from whatever the majority of traders in the asset you are looking at would not like to see happen. When everyone is Bullish, the pain trade is down and vice versa.
You have a much better chance of having positive performance if you benefit from the pain trade or are at least able to take advantage of it when it happens. Remember that when you read what most people are hoping for.
Think of trading costs beforehand
When you trade anything there is always a cost associated. Some of that is psychological, but a lot of it is actual fees. The biggest one of these always gets ignored until it is too late — taxes.
When you trade in any kind of asset each time you sell you are generating a taxable transaction. For example, if you invested in bitcoin in November 2017, doubled your money and, at the end of December 2017, switched into altcoins, you now have a taxable gain in US Dollars on the bitcoin gains but by now your altcoins have lost so much value that you likely no longer even have the assets in crypto to pay those taxes. That is a very serious issue — especially for those people that invested their life savings.
Don’t ever ignore traditional valuation methods
If I learned only one thing during the .com bubble then this is it. When the .com stocks all traded at ridiculous ratios according to any established valuation method people came up with new ways to value these kind of stocks. As I mentioned in a previous article, this went as far as having an internet stocks dedicated chapter in the standard volume “Valuation”. The chapter was later deleted under much ridicule.
Today that is exactly the same thing. Because we do not know what the blockchain is truly worth right now and because the promise seems endless, all kinds of sane valuation methods go out the window. Just always try to remember that once the entire blockchain space (2 months ago…) was worth, c. 750bn USD, would you have rather owned all those useless token or would you rather have owned all of Apple or Google, which deliver 10–20bn USD in profits to your pockets every quarter? Thought so…
I gave traditional valuation methods a shot, though I am not sure it was a good one.
I am not sure if the above learnings can be of help to anyone reading this, but I know that if I had read these and believed them prior to my .com bubble experiences they would have helped a great deal. Happily enough they did help me in the crypto bubble. Note that all of the above is only my personal experience. This is not advice — you can take from it whatever helps you.
I want to just add one chart to this post, which is a chart where the large letters A, B and C had been inserted prior to the recent drawdowns. I actually posted in a couple times on Twitter in between and an early version in one of my earlier posts here. This is literally the very first time in c 20 years of trying to make sense of Elliot Waves that my chart seems to be almost 100% accurate ex-ante and ex-post, so please please take this with a grain of salt. Don’t trade on it…
However, what I think you can do is identify what I call (and wrote about) the “bubble roof”. That might be the last learning actually. It started when bitcoin exited its uptrend on the upside and it is almost always a sign that a bubble has formed in my experience. Usually, these bubbles then overshoot strongly to the downside. Maybe next time this happens you can spot it too.
If you enjoyed this, maybe clap and find me on twitter (http://www.twitter.com/dke82).
Some further reading:
Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. This is not investment advice. Crypto assets can fluctuate widely in value and all of your capital can be lost. Any negative views expressed are solely aimed at the token in question, never at the development teams behind them. And for the record: I am a blockchain enthusiast.
