Overview:

The phrase “Losers Average Losers” was made popular by Paul Tudor Jones, and it is one of the great statements in investing and trading.  There is also the phrase “buy when there is blood in the streets”, which on face value is contradictory to PTJ’s statement.  So what is the difference and do both statements apply?

What truly separates great investors from the rest is an understanding that both these statements are intended to be reflective.  Bitcoin looks horrible right now, so should we just cut and run, after all it keeps losing right?  Or is this an opportunity to look to add for the long term?

Holding on to losers:

One mistake many investors make during depressed markets; they cut their winners and hold on to their losers.  “Ohh it is so low now I will just hold on to that one, and I’m going to get rid of this one that is only down 20%”. 

When markets fall apart, it is important to look deep and rationally acknowledge, is this just a temporary setback, or is this just bad money getting worse?  The entire reason we cut out our position in OMG and NEO is our belief they are the later.  With Bitcoin my personal belief is this is a temporary setback and long term it moves higher. 

Gold Comparison:

I have brought this up in previous articles, but the current capitulation is evidence that Bitcoin is acting like gold did after the 1980 Hunts brothers market.  For those that remember gold and silver rallied after the end of the gold standard, up to a high of 800 and 40 respectively.   It was followed by a 20 year market that resulted in similar pattern to what we currently see in Bitcoin.

Fortunately for Bitcoin holders the pattern is playing out much quicker, at about a rate of 2-3 gold years equal 2-3 Bitcoin months.  Now this does not imply Bitcoin must follow gold, but there is no denying the pattern is so far similar, just at a much faster pace.

We all know what happened from 2001 on, Gold rallied from 265 to 1800 in about 7 years.  So did it matter that you cost averaged, monthly including through the peak of the market around $800?  Nope especially if you dollar cost averaged.  Believe me there are as many that think gold is a pet rock, as there are that think Bitcoin is a fad.  Neither have value to Warren Buffet after all.

Bitcoin:

Bitcoin still looks like crap, but we must keep in mind two things.  First, for every seller there is a buyer, and second, we are at an extreme low and volume is picking up.  Can we move lower?  Absolutely, and a break of 3970 brings 3100 into play.

There is also the potential for a breakout where Bitcoin needs to push through 5200 to put the odds in favor that we have seen the final flushing of weak hands.  In short Bitcoin is simply in no-man’s land and can go either way.  We could guess, and if we had to, we likely move lower in the short term.  But this has not changed our broader view of the market.

Personally I believe this is a final flushing of weak hands, as Wyckoff explains in his 1937 book on how large operators work.  This is an unregulated market and we always have to be aware that any market can be manipulated.  If you do not agree to these terms, complain about it constantly when the market moves against you, CD’s are the answer.  This is no different than understanding in poker the cards are not over till the river.  We all hear that guy, “ohhh I was killed by the river” or the infamous “what a donkey”.  News flash the river is part of the game and so is playing with large operators.

Summary:

In the end, you must ask yourself are you averaging into a loser, or buying into weakness?  Are you able to wait out the storm and buy when others are giving up?  Do you believe Bitcoin moves higher in the future?  Or is the space simply the end?

After a 2017 rally where Bitcoin went from $1000 to $20,000 and now back to $4200, new investors get discouraged.  The biggest hurdle for most to cross, not getting discouraged when the market moves against you, or you are on a losing streak trading.  I know of not one poker player, baseball, football or hockey player that has losing streaks.  How the losing streak affects you determines the character of trader you are.  This is why we emphasize risk management and created a position size calculator to provide a gauge of trade sizes.  In the end if you can trade another day, the winning streak will hit, what will be in your wallet?  

8 Responses
  1. Dan Weber

    Great article. Appreciate the insights into the market you guys are providing. Especially with all the “despair” articles or the “moon in December BTC ATH” extremes being written up right now, it’s nice to see some level headed analysis that uses TA but isn’t a slave to it.

    Bitcoin is most of my holdings but do have some NEO and OMG that I am adding to. Of course time will tell and the charts do look awful but I think the fundamentals for both are better than just bad money getting worse, at least from what I’m hoping to see in the next 5+ years.

    Thanks again for the excellent article!

    1. Kevin Meiner

      It appears as if the fundamentals are in line for large institutions to enter the space. And yes, it seems almost too convenient that the U.S. stock market is at a transitional point right when Bitcoin runs into a bloodbath phase. Almost seems like a set up for retail investors to buy the stocks that the whales are dumping and pick up crypto that the retail traders are panic selling. I may be wrong, only time will tell. 2019 will be interesting.

      1. Andrew Gonci

        This is the 3rd time the crypto market sold off with the S&P going back to the February correction. The large operators and investors are almost always on the opposite side of the retail trader.

    2. Andrew Gonci

      Hey Sergey, often patterns repeat, does not imply they have to follow, but the similarities are to obvious to avoid. Time will tell if we get a nice rally like gold did from 2003-2012. Thanks

    1. Andrew Gonci

      HI Istvan, keep in mind news does not drive markets as often as we think, except in the very near term. Sentiment is the key driver of markets. We saw this develop in the GBP trade where we were short, news came out on a EU British deal, the GBP spiked temporarily but is now resuming its down trend.

      Also keep in mind large institutions and banks have connections we do not have. So they almost always have inside information. Just like the study that showed increased taxi rides between major banks and the fed reserve in NY just before the fed meeting minutes. They can manipulate the market in their favor ahead of the news, which like BAKKT or an ETF would be a fundamental change in the space. The FUD surrounding BCH received more attention than BAKKT and retail investors focus more on that news.

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