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“Everyone has a plan until they get punched in the mouth” —Mike Tyson
Recently, Bitcoin and altcoins have been all moonbois and lambos. Bitcoin has gone from $4k to $60k in 12 months and alts have printed in the range of 10x-1,000x.
But it hasn’t always been like this…
Veterans of the 2017 bull cycle are familiar with the pain of a collapse, but that wasn’t the bad part… what was worse was the 3 years of staring at 90-95% losses day after day.
Sure I did everything I could to grow my stack during that time, but the losses always ate at me.
The pain didn’t stop when the market turned either, but why?
Volatility wasn’t the problem. We’re crypto investors – we get paid to wake up and get punched in the face by volatility day in and day out. If you can’t stomach that, crypto isn’t for you.
It’s the missed compounding that hurts.
Even taking a bit off the top at the 2018 high would have meant exponentially more portfolio growth in this bull cycle.
To put it simply, I got greedy in 2018 and it hurt long-term performance.
If you want to last in crypto you need iron-clad risk management paired with monk-like discipline.
Time is money
Time preference is the key to determining your risk profile.
Low time preference – you place emphasis on your well being in the future = long-term thinking
High time preference – you place emphasis on your well being in the present = short-term thinking
If your time horizon for a crypto investment is greater than 5 years your risk management strategy is surprisingly simple: buy and hodl.
Why? The Halving Cycle influences Bitcoin’s price movement and that governs the altcoin market. At 4 years in average length, investing with a 5 year time horizon puts you beyond the bull/bear cycle internal to the halving cycle. If you believe in crypto, investing on a 5+ year time horizon is the closet thing to a no-lose bet you can make.
If your time horizon is less than 4 years things start to get more complicated.
In this time-frame, your biggest enemy is cyclical risk or simply getting caught at a bad time in the Halving Cycle.
This would be akin to buying at the end of December 2017 and eating a 70% loss a year later…
If you’re trading under the 4 year mark, knowing where we are in the Halving Cycle is critical – show up too late to the party and you’re gona have a bad time.
Fortunately, I covered how to understand the halving cycle a few weeks ago.
Trading on timelines of less than 1 year becomes a game of indicators, technical analysis, and on-chain data. While these are all things I use (and write about!) to inform my decisions I don’t trade in this time range because it doesn’t match my investing style.
Like every good Irishman you have to plan your exit. Hodling is a great plan but eventually you’ll need to sell or at least pare back a position.
In 2018 the warning signs were clear, crypto was overheated, but acting on that information was near impossible (at least for me).
As an example — my Siacoin position had gone 3,000x, it didn’t make any sense, clearly Siacoin was not going to win the decentralized data storage race and wasn’t worth $3B. I was blinded by the crypto can only go up narrative and eventually rode that one back down to 50% below cost. Ouch.
Human psychology and emotions are tough to understand and in the moment don’t make any sense, especially with investing. To protect against this you need a system.
This can take the form of a target multiple, scheduled selling, price targets etc. but the important piece is that you need to stick to it.
Two things you’ll need:
A target (price, multiple, indicator, sentiment etc.)
An action (sell everything, sell a set percentage etc.)
A destination (fiat, crypto, gold etc.)
I learned my lesson in 2018 — and in response built a set of risk management protocols specifically designed to protect capital and create compounding opportunities for the next cycle.
My target is a combination of Bitcoin’s price and time. Currently my threshold is $100k or November 2021, whichever comes first. The price level is derived from the stock-to-flow model and the time target is derived from the Halving Cycle.
If either of these conditions is met I will begin selling 30-50% of the portfolio.
My destination is stablecoins (and fiat to cover tax liability). Unlike US Dollars, stablecoins like USDC will allow me to generate yield via DeFi during the multi year bear cycle.
Partially de-risking the portfolio is a way of preserving capital while still maintaining a long term hodl view. This also allows assets that are locked up in liquidity pools to continuing yielding – providing cash flow.
Even with a plan and an exit strategy there’s still plenty of “gotchas” that can tank a portfolio.
Crypto is a nascent technology and it is full of risks that ultimately boil down to “let’s hope it doesn’t happen”.
Financial markets are classically full of “fat tail risk” – which is just a fancy way of saying really bad stuff happens more often that you think it should.
In traditional finance, these are things like the housing crisis, oil embargo, global conflict, debt crisis, flash crash etc.
In crypto these would be things like:
Governments banning cryptocurrency
Ultimately you have no control over these events. It’s possible to get creative and attempt to hedge some of these things out of your portfolio but you’ll probably just end up dragging returns with little actual downside protection.
Ultimately in crypto these risks become binary blockers to investing in the asset class.
If you think Bitcoin (or any crypto) will be banned by governments globally you’re probably never going to buy anyway.
The hedged fund
Hedging is a strategy used by investors looking to offset long positions and minimize downside risk.
Hedging can be useful in a risk management framework but if done improperly it will just drag on gains. It also requires that an asset useful for hedging exists inverse to your long position.
The crypto market is almost impossible to hedge internally because altcoins are still highly correlated to Bitcoin. In the future this will likely change, but for now big movements in BTC filter down into alts — the market moves as one.
Externally, not many good crypto hedges exist. One could make a case for longing USD but if you really need a short the best bet would be CME Bitcoin futures.
I do not actively hedge my portfolio, but I do use liquidity pools via DeFi to offset downside risk via fees.
During periods of volatility (upswings or downswings) market-wide trading volume increases which means increased fee revenue for liquidity providers (me).
These fees can offset losses in the broader portfolio and reduce the magnitude of a drawdown — basically functioning as a hedge.
You need a plan. When the market turns (and it will turn) we’ll quickly be looking at another three year bear cycle. Preserving capital is key to being able to buy the cyclical dip and ultimately tap into compounding as the next bull cycle comes around.
An exit plan should be comprehensive. It should have…
A trigger – what triggers selling? When and what. My triggers are:
Bitcoin crosses $100k (subject to revision based on S2F)
A target – how much do you sell? My target is:
30-50% of the portfolio
A destination – what do you sell into? My destinations are:
US Dollars – to cover tax liability
USDC – to preserve capital and to lend via liquidity pools
When the plan is set into motion via a trigger it is critical to stick to the details and execute as intended. In the middle of an 80-90% drawdown emotions can run high and ultimately impact decisions. Making those decisions ahead of time and trusting in the system is the core of risk management.
Long term, stick to the hodl. Short term, take a bit off the top to keep in your pocket for the next cycle.
Forward and upward.
The Portfolio Rundown
$60,000 is the story of this week. Bitcoin can’t seem to break that psychological level and it’s starting to show signs of another coil:
The $60k level has become a strong resistance point for Bitcoin and true to form it is coiling. The key elements of a coil are a tightening trading range on falling volume. The endgame of this formation is a breakout — to the upside or downside.
Given the recent March pullback, I’d expect a breakout to the upside. This is obviously bullish for Bitcoin but also for altcoins as the increased weight in $BTC gets cycled back into alts.
Speaking of alts we’re also starting to see signs of #altseason returning:
The altcoin market cap has reached an all-time-high of $817B and Bitcoin dominance is in steep decline:
Alts are finally beginning to take market share from Bitcoin and the growth we’re going to see will be explosive.
At the peak of the 2017/2018 altseason Bitcoin dominance bottomed out at 36% — a roughly 20% difference from current levels.
Ethereum has crossed the $2,000 level and is now in price discovery looking for a new high. As the leader of alts, this is extremely bullish and should be taken as further confirmation of an upcoming altseason.
Overall, the March dip has concluded and the market is starting to turn upwards. All signs are pointing towards a very exciting Q2 market-wide.
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Nothing in this email is intended to serve as financial advice. Do your own research.