The Cryptocurrency Trading Bible – Hacker Noon
The Cryptocurrency Trading Bible
So you want to trade cryptocurrency?
You’ve seen those eye-popping 3000% comebacks and you want in.
You don’t want some measly little 10% ROI after a year in the plain old stock market. That’s for grandpas and old people. You want quit-your-job with a middle finger, fuck you money! Am I right or am I right?
Or maybe your wanna be a baller, shot-caller? You want a gold-plated house, a yacht and rap movie supermodels jiggling around one of your six infinity pools in string swimsuits.
Well have no fear because the Buddha of Wall Street is here to help you with your wishes of crypto glory! Here’s my story: I was living in a one-room apartment and sleeping in my bathtub and now I fly my helicopter to work just because I hate traffic.
All of this, and MORE, can be yours!
Come closer and I’ll tell you the ultimate, super-secret ingredient to lightning swift crypto riches!
The secret ingredient is…nothing.
There is no secret ingredient to getting rich. Anyone who tells you different is selling something.
Oh yeah and I don’t truly have a helicopter…yet.
Of course, cryptocurrencies do have some of the best ROIs in history. And you do have a shot at making some good money. So let’s talk about investing in cryptos the right way.
I don’t hide the fact that I’m a long-term bull on cryptos. I believe they’re a game switching technology that will ripple across the entire world, remaking every aspect of society. Like my friend Chris Dixon, I believe Bitcoin could lightly be worth $100,000 a coin one day, albeit I’m not fairly there with perennial Dennis Hopper impersonator John McAfee’s prediction of Bitcoin going to $500K a coin, at least not in the next three years. It may take a little longer. I’ve talked about why in my articles Why Everyone Missed the Most Significant Invention in the Last five hundred Years and Reflections on the Best Blockchain Tweets Ever Written so I won’t rehash those reasons again.
Here we’re going to talk about cash money, y’all. Unlike many folks in this space, trading is not my primary interest, but like everyone I do love making money.
How do you make money with cryptocurrencies?
The very very first question you need to ask yourself is, do you have enough extra money to invest?
What does extra money mean?
Remarkably, the SEC has some good guidance here. Even tho’ they let Bernie Madoff get away with a massive pyramid scheme for a decade, despite someone telling them about it every year, they’re from time to time good for something! While, I’m not a big fan of the nanny-state accredited investor rules of the SEC that let’s only rich people invest as they see fit, nor of the “pattern day trader” rule that requires to you to have $25,000 minimum in order to day trade the traditional markets (which, by the way, does not apply to crypto markets…yet), there is some merit to the rules. Those numbers are arbitrary bullshit but I do agree with the sentiment that led to the creation of those laws.
They’re attempting to protect people from losing money they don’t have to lose.
And since the nanny-state is not here to protect you in the crypto markets you will just have to go ahead and take private responsibility and protect yourself.
While stories like I Invested All My Spending Money In Ethereum (And so Did All My Friends) are funny on some level (college kids can afford to take some risks because they have a lot of life left to recover later if they lose everything) they’re also utterly horrifying on another level. What if that damsel lost all her food money for the year? Not awesome.
I can’t find the tweet now, but just the other day I spotted a boy posting about how he mortgaged his car, lost it all trading cryptos and his wifey kicked him out. He was looking to get in on a “shit coin pump” aka where traders get together and buy like crazy to pump a penny-stock equivalent to the moon before dumping it on idiots. Not good. Do not be that fellow.
Only invest what you can afford to lose.
If you don’t have a lot of money, embark puny. Don’t go maxing out your credit cards or getting a “loan” from that dude your bother knows who sits on the corner outside the bodega on 156th and Broadway. You’ll only get burned.
The 2nd question you have to ask yourself is:
These are two very, very different things.
By a broad margin, the right strategy for most people is to just buy and hold. Get some well know cryptocurrencies like Bitcoin, Ethereum, Dash, or Litecoin, put them in cold storage, stick them in the sock drawer and leave behind about them. Don’t read the news. Don’t worry about the wild swings or the predictions of doom from the popular press. Just buy, hold and leave behind. In a year or two, dig them out and sell some of them and buy a little more with the proceeds. Wash, rinse and repeat until retirement.
If you want to trade however, that is a different animal all together. That means you’re looking to get in and out of the market. The rules of the game are plain:
Buy low, sell high.
Lighter said than done however.
There are two parts to this game:
Most people crash and burn on the 2nd part. Everyone makes money in a bull market and then most give it right back afterwards.
So does that mean you shouldn’t trade? No way. I love trading!
On the days you win, it’s the ultimate rush. You’re a Viking raider, swooping in on unsuspicious villagers and mowing them down with glee.
On bad days tho’, it’s brutal. You’ll lose sleep, hair, friends and money. You’ll be depressed, angry, and scattered brained.
So why play at all?
Because trading is the ultimate game.
You’re playing against other people, with incomplete information, on an occluded battlefield, as well as against the maniacal and sadomasochistic “mind” of the market, and against yourself. Your mental strength, emotions and belief systems are all working against you. That business school bullshit they trained you about rational actors with ideally distributed information making rational decisions in the marketplace is just that, utter and accomplish bullshit.
Anyone who spends five fucking minutes trading knows it’s crap.
The markets are not rational. Nor are people. We are fear based, emotional creatures.
Only an ivory tower academic economist would ever think something so utterly ridiculous.
Very first of all, the information is not even close to evenly distributed. We’re all playing with partial information and a fog of war. Even worse, we all have varying degrees of capability to process that information. Meaning all of us are kind of stupid. If you’re not that bright, it doesn’t matter how much info you have, you won’t be able to do shit with it. Go directly to Dunning-Kruger and do not pass go.
And most of us are not that bright.
If you ask a group of people how many of them are “above average” drivers, almost everyone will raise their mitts. This is unlikely. We can’t all be above average but we all believe we are.
Even if you’re a good trader, you’re not immune to this kind of mental insanity. If you think you are, that’s another magical belief. As I wrote this article, I made not one but two stupid BTC trades and busted out attempting to catch today’s insane $600 a coin rally late.
I knew this was a terrible idea.
I did it anyway.
I was writing this article (not focused) and I was late to the party, a dual whammy of stupid. Rule number one: If you miss a trade, stay the hell out of the market. Get ’em next time.
But did I listen? Nope. Because I am an emotional fear based creature just like everyone else. FOMO (Fear of missing out) got me. The force is strong with FOMO and not you or anyone else is immune to it. No matter how good you get, you’ll regularly and repeatedly shoot yourself in the foot.
When I used to trade the regular markets, I can’t tell you how often I witnessed good, professional traders (I’m looking at you Slope of Hope) telling “this makes no sense, the market is wrong.”
No, the market is always right.
You’re either in line with it and making money or you’re losing money and bitching about how the market should be more rational.
The problem is most of us are watching a movie in our goes about life, instead of what’s actually right in front of our noses. To the degree that reality doesn’t match up with what we want to think about it, we go with what we want to think about it. For most humans providing up their belief systems is the same thing as death. They would rather die, literally, than switch their mind.
That doesn’t work for the market. The markets are a lesson in humility. You will learn to see things as they actually are versus how you imagine them to be or you will get taken out to the woodshed and hammered with a rubber hosepipe. In other words you will lose all your money just like that idiot who sold his car to play the markets. The markets are economic Darwinism and they have no grace.
Let me give you an example of how your belief systems work against you in the game of coins.
One of the traders I go after closely is the Wolf of Poloniex. In utter disclosure, I am not a member of his “Wolf Pack” presently, which is his paid private trading signals group. I just go after the big market moves he posts about on Twitter. That’s because, in general, I choose to do my own research, trust my own eyes and live with my own calls, right or wrong.
The Wolf is a swift, aggressive trader and that matches nicely with my private style. His calls regularly make me tons of money. A question you have to ask of all traders is “are they right?” Nobody is right all the time. In fact, even the best of the best are wrong more than they’re right. The greatest traders make their money on 20% of their trades. The rest of our trades make only modest gains or loses.
So how can we know whether someone is right or wrong, objectively?
Either my bank account is going up or its going down.
It’s a ideal system. Binary. You win or lose. There is no in inbetween.
If my bank account is going up, and I’m following his calls closely, then he’s right. If I keep losing money on his calls, he’s wrong.
But most people don’t see it that way. Lots of folks think the guy’s calls are absolute shit. Why is that?
Because the Wolf has an in-your-face persona that massages many people the wrong way. He loves to stick it to people who say he’s wrong. Any time he posts a call, people are quick to pounce on him and call him an idiot, a douchebag and a shill hucking trading calls. They want him to fail.
The reason is because they’re incapable to disconnect his calls from his persona. They conflate two unrelated things. Whether he’s likable or not is utterly irrelevant. Personally I like the dude but that’s irrelevant too. Except people can’t and won’t see it that way.
People get very linked to their opinions. Burn your opinions! Your opinions mean nothing to the market.
If you thought a bull market was kicking off and it turns into a bear, your opinion was wrong. Period. Let it go! Budge on! But people love their opinions. They cling to them despairingly.
We’re just wired that way.
Our brains are littered with mental pitfalls.
Being “right” when you’re wrong is good way to lose money.
Do you know that at times as much as 38% of the population can’t tell you which party is more conservative in America. 38%! In fact, most people don’t vote based on actual politics at all. They pick who they like the most and then project their viewpoints onto that person, even if that person has diametrically opposed ideas to their own.
How fucking stupid is that?
Welcome to the human race.
We’re prone to all kinds of crazy-ass mental nonsense.
So with that kind of cracked grey matter, how the hell can we expect to get good at trading?
Is there any hope?
Getting Good at Trading
To begin with, you better commence reading.
We all have a lot to learn and the sooner we commence doing it, the better we get. Your aim is to learn something every day for the rest of your life.
My current dearest book on trading is the super plain Top ten Trading Setups: How to Find them, When to Trade Them, How to Make Money with Them. Like all trading books, I choose the paper copy, as opposed to the Kindle edition, as the chart pictures are lighter to see.
This book is brief and to the point. There are no stories of the author’s trading glory, or links to his special, ultra secret system that you can have for a mere thousand dollars more. It concentrates on plain, practical advise, for numerous market trends. Everyone makes money when it’s all going up but how do you deal with trades going sideways or down? It’s in there.
While the book is focused on traditional markets, most of the rules he puts forward can lightly be applied to the crypto markets. His reasons for why fresh traders lose money on the very very first page is worth the price of the entire book.
Fresh traders lose because they:
* Trade too big * Trade without an edge, or in other words — gamble * Over trade * Trade low price junk stocks * Use excessive leverage.
Trading with leverage in the cryptos is like bouncing Cobras. Don’t fucking do it if you’re not a professional trader. The crypto markets stir too swift and you can lightly lose someone else’s money that you don’t have to pay back. Not good.
That brings us to the one major difference inbetween the regular and the crypto markets.
Crypto markets stir at movie game speed.
When he talks about how a market might take weeks or months to play out, in the parallel universe of crypto trading, that could play out in days. We literally just witnessed the market crash out 40%, going total bear, and then recover in two days to fresh heights. That’s how prompt it moves.
This is one of the reasons the popular press does not understand cryptos. They regularly report that Bitcoin is over and dead for good. It’s hilarious. Check out this article from ninety nine Bitcoins. Someone writes Bitcoin’s obituary every day.
The problem is the pop-press is used to playing the game at slower speeds. It’s as if they were good football players in college only to go to the pros and have guys suck right past them. It’s a totally different level. This is the e-Sports universe.
Cryptos are the computer generation’s stock market.
It’s run by kids who never lived life without the Internet. To them it’s just like a tree, it was always there. The NYSE come from the days of ink and wood pulp. When Forbes or CNN or FOX reports on bear markets in the traditional stock world, they’re usually right for a reasonable period. That market will go cold for months. In crypto it could go nova hot tomorrow.
To keep up your need an edge. That brings us to book number two:
This book is a monster. It’s mighty and dense and packed with information. After reading it you’ll likely commence watching patterns everywhere, even when they don’t exist. Don’t worry. Probe them anyway. You’ll regularly see people drawing random lines on the chart on Twitter and calling it “technical analysis” but this book is much more disciplined and serious.
Technical Analysis (aka studying the chart patterns) works pretty damn well in crypto trading. My gut tells me it’s because most of the folks trading cryptos are geeks and we’re prone to liking TA because it makes sense to the engineer brain. That makes them a self-fulfilling prophesy. It also works because there’s lots of machine trading going on. You’ll be trading against bots regularly on the exchanges and they have no choice but to make decisions based on moving averages, pull backs, breakouts and all the other things that TA aficionados love.
The other reason it works is because TA is all about psychology. People want to take gains and cut losses. After a certain amount of rise, it’s going to fall. It’s just natural.
The markets are truly nothing but the collective hallucination of our collective unconscious, the projection of our hopes, desires and fears.
Recall however, TA is not a magic eight ball.
It does not work all the time. It’s often just junk voodoo. It’s hard to do right, effortless to do wrong and prone to all kinds of false signals. Still, it’s a useful device. It’s saved me a number of times and helped me avoid big crashes.
The last book on my list is one I’ve always loved: One Up on Wall Street, by legendary investor Peter Lynch. Yeah that Lynch, the one with his name on the marquee. He hammer the market for fifteen years. Statistically most traders bust out after ten years. A lot of the advice in the book, like making sure you buy a home before investing in stocks, is outdated. Homes are regularly a hefty money pit of debt for today’s youthfull people. But his investing advice is timeless and applies to any market.
How did he make his mulah? Like Warren Buffet, he focused on “value investing.” What’s that you ask? Excellent question, youthfull Padawan.
He invested in what he knew and understood. When his wifey or kids came home with a shopping bag from a fresh store, he’d research that company and buy it. He figured if people were buying from it, it was a good company.
Investing in what you know is a fine mental heuristic. Warren Buffet regularly turns down to invest in all kinds of companies, like the tech starlets everyone loves, because he doesn’t understand tech. Because he doesn’t understand it he can’t make a good call ahead of time, so he stays out. If you don’t understand the purpose of a coin, stay out. Don’t buy it because it’s going to the moon and some jackass in a Slack forum told you it’s killer.
In crypto, value investing means not buying a bunch of shit coins. ICOs happen all the time and fresh coins pop onto the market, promising excellent comebacks. Some of them will produce one day. But most of those coins will go to nothing in the next few years.
Personally, I tend to invest in “infrastructure” coins or coins that have a chance to be multifaceted and serve lots of purposes. I have a background in building systems because I was a systems administrator for more than a decade. I’m looking for the folks building the railroad tracks of tomorrow.
Ethereum, Bitcoin, QTUM, and Tezos have numerous purposes. Pot Coin does not.
Over the years, like all good traders, Peter Lynch made all his money on 20% of his “home run” trades and lost or made modest comebacks on 80% of his trades.
80/20 is the formula.
You will never do better than that, even if you manage it for a number of years. Eventually you’ll revert to the mean. That’s statistics baby. And math is God. It runs things around here and everywhere else.
And of course, even after you read all these books, attempt to reminisce:
There is no secret ingredient.
Actually, there is.
The secret ingredient is you.
It’s cheesy but it’s true.
The way to get better is to get in the game. There is no substitute for private practice. There’s an old telling in the ancient game of Go.
“To learn Go, very first lose one hundred games quick.”
This is true of everything in life.
You have to get into the arena. You’ve got to play the game. Without skin in the game you won’t learn a damn thing.
It’s one thing to read about something in a book, and another thing entirely to do it.
When the pressure is on and your emotions are against you and you’re watching thousands of dollars vaporizing in minutes and you’re fighting with your significant other and absurdly blaming her for taking you to dinner and “causing” you to lose money (magical belief) because you weren’t watching the trading screen like a hawk, then you’ll understand.
This ain’t no joke.
This is not hypothetical. This happened to me last week.
But every day I learn.
Oh and I did make money. I was just mad I didn’t make more. That’s when I knew I needed to take a break and do nothing for a day. I got up late, took a walk, ate a nice breakfast and apologized for being a jack to my beautiful lady.
You have to recharge. You don’t need to catch every damn run. Go out. See the trees, listen to the birds, play with your kids and your pets. In brief, do the things that matter in life. The markets will be waiting for you when you come back.
Here’s the deal: You’ll make mistakes. And you’ll learn. That’s the only way.
But if you let this amazing and legendary quote by the excellent Teddy Roosevelt be your guide to trading and to life and if you’re fortunate, you just might do OK in the world:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes brief again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows superb enthusiasms, the fine devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
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BONUS Trading Books that I like:
If you love the crypto space as much as I do, come on over and join DecStack, the Virtual Co-Working Spot for CryptoCurrency and Decentralized App Projects, where you can paw elbows with numerous projects in the space. It’s totally free forever. Just come on in and socialize, work together, share code and ideas. Make your ideas better through feedback. Find fresh friends. Meet your fresh family.
However, please know that DecStack is NOT a trading troll box. Most forums in this space quickly degenerate into dick measuring and meme sharing contests. We DO have a trading and investing channel and we ask that talk about trading go there. Other than that, come on in and dangle out.
Also, if you’re looking for a more trading focused forum, join the Coin Sheet Discord, which is run by the awesome Coin Sheet team, the only crypto mailing list I subscribe to presently.
DISCLAIMER: Be a big boy or doll and make your own decisions about where to put your hard earned money. I am not a financial adviser and this is not financial advice and if I indeed need to tell you this then it’s best to keep your money in your pocket anyway.
Here’s the list of traders I go after on Twitter. It’s a petite list. Your list should be petite too or else you will just get lots of conflicting signals.
A bit about me: I’m an author, engineer and serial entrepreneur. During the last two decades, I’ve covered a broad range of tech from Linux to virtualization and containers.
You can check out my latest novel,an epic Chinese sci-fi civil war saga where China throws off the chains of communism and becomes the world’s very first direct democracy, running a very advanced, artificially intelligent decentralized app platform with no leaders.