Cryptos – The Quickening – Risk Management and the Herd Mentality

Overview:

The crypto market is likely going through the final phases of a bear market. Similar to the dotcom bubble, which resulted in numerous websites going bankrupt, the crypto space may be going through a similar trend.

Nothing behooved me more than the death of “barbeque coin”.  As a southerner and avid smoker my heart sunk when this one was put to rest.  This added to the thousands of coins that were going to solve everything from buying diapers to feeding animals at the zoo.  Yet even projects that seemed viable like “legends room” have succumb to the demise of dead coins.

Money Flow:

Last year money flowed from the investor into crap coin development projects.  This created demand for coins like Ethereum, but like anything in life, it is a double edge sword.  Ethereum, the bankroll of many projects, is taking a huge hit as crap coins, in an attempt to survive, dump there stack back into a depressed market creating oversupply and lower valuations. 

Recently the ETC (Ethereum Classic) development team shutdown activities, and there are likely more to come.  As projects that were rich in Ethereum and Bitcoin just 9-12 months ago, are exhausting capital, fruition is taking hold, and we are likely entering the final quickening.

To add to the demise the battle of Bitcoin Cash probably hurt the case of “decentralization” more than anything.  A quick point on how market philosophy may be changing.

Case for Centralization:

Most of us drank the kool-aid of a world where decentralized platforms would be the epicenter of the new economy.  The reality is this is probably not going to happen at least outside of a handful of coins.  I bought my share of crap coins, and most of you likely owned a few as well.  Some were winners, others losers; some we exited in time, others like OMG and NEO we took our loss and moved on.

Moving forward it appears that coins like XRP and XLM are arising from the wreckage, and coins like TRX and IOTA will soon be added to the list of dead coins.  This is why risk management is important, which we emphasized yesterday to our premium members concerning ADA.

We do not need fundamental analysis to guide us in our decision, the chart tells the entire story.

Crypto Compare:

In our article “The Good The Bad & The Ugly” we outlined this chart, which is the “bible of fundamentals”.  I say this because one of the three Tenets of Technical Analysis is, “The Market Discounts Everything”.  This came from Charles Dow and his Six Tenets of Dow Theory.

All news, facts, data, emotions, expectations and known fundamental analysis at any point in time is priced into the market.  This is why traders do not care about fundamentals, and unless you dig deep into them you are likely to be more deceived than be enlightened.  The market is clearly telling us what coins have fundamentals and which do not.  This does not imply some may not rise up, but clearly it is priced where it is for a reason.

Based on this and other charts we reduced exposure to ETH and BCH, closing 40% of our Ethereum holdings and 20% of our Bitcoin Cash.  In addition we closed our NEO and OMG positions.  We want to deploy capital in coins that are showing strength on the chart, not coins we feel like owning.

Year to date, only two coins that we track, outperformed Bitcoin;  XLM and EOS with XRP, BAT and 0X just below.  After this it starts to become a little ugly.  Now this does not imply the market is hell-bound for zero.  It implies some coins are out of favor with the market.  Here within lies opportunity for those that again, understand how to manage risk.

Maybe there is a coin you like, a coin that has potential and has been beaten down hard.  You believe in the fundamentals.  This is where you must manage risk, but before we get into that, let’s take a look at BTC. 

BTCUSD:

Bitcoin is still the 800 lb gorilla in the space.  When the shit hits the fan, even the best in breed stocks, or in the case coins, are pressured.  Bitcoin was not the exception and 30% of its market cap was wiped out in the recent selloff.

The current trend is bearish, after several months of a range bound horizontal market.  We knew it would break out strong, what we did not know was the direction.  Is this a time to add?  Well again this comes down to the individual’s risk appetite and capital allocation here.  Again it is about managing your risk not timing a bottom. 

Nothing has changed over the past week in our analysis.  Those updating charts every 2 to 4 hours with new takes on direction are amateurs at best.  Initial resistance is at 4650 and this is the level Bitcoin needs to push through for us to lean bullish in the near term.  However in my opinion, until Bitcoin breaks through 6600 I do not consider this a bull market.

As we mentioned Monday, though Bitcoin is attempting to form a bullish structure, this could have been a short covering rally, and we see a retest of 3500.  With how the chart currently looks this is my short term take on price action.  Because of this I have adjusted my entry levels accordingly.   I do not care if I am right or wrong, if it hits my target I have a plan, if it rallies to 4650 I have one also.

Bottom Fishing:

One thing in any market, there are many weather forecasters, but no palm readers.  The challenge with timing a bottom is this.  At 6k we heard “4200 or 3500 is the bottom, I am a buyer there.”  Well it gets there, and those that forecasted a cold front, now have cold feet. 

This is evident with one of the TA’s in a group who was calling for 4k for months.  Once it got to 3500, he mentioned, there may be more downside ahead, and now is NOT the time to buy, hold out a little longer.  This is weather forecasting not TA, and the reason you need luck and courage to even have a chance of timing the bottom.

This is not new, and one of the Tenets of TA is “History Repeats”.  The human psychology does not change, and those that hoped for 4k, are now scared to enter the market when it gets there.  See we can make all the predictions we want, but markets psychology never changes. 

The Truth Hurts:

If you are waiting for the perfect bottom, you are not an investor you are likely a gambler.  Investing is about allocating capital in a way that manages risks.  This is why we allocate a capital amount BEFORE investing.  We break this capital up into reasonable position sizes and buy into weakness. No different than last year when we were trimming off our positions, building up cash reserves, into strength. 

In short if you are sitting with a lump sum of capital waiting for the perfect time to enter, it will never happen.  I know the Truth Hurts but here is how it plays out.

The market will reverse and push to 5400. You will say, “I’ll buy the dip”.  The dip happens, and just like 3500 you get cold feet again, “ohhh it will go lower”.  It then moves to 6600 after a shallow pullback.  You say to yourself, “It will pullback now” I’ll buy at 4500.  It doesn’t and after this internal fight with yourself, over and over, we are now at 12,500 and you are still sitting on your capital.

Finally, when you can’t resist the FOMO, you deploy after a nice rally, and are quickly in the red.  You then reverse your thinking, “ohhh it will recover”, and it slowly steps to the downside where you finally give in.  If this is your thinking, you are very likely just part of the herd. 

Strong Hands:

Strong hands manage risk, they understand that markets can move lower, but buy responsibly into the weakness.  They have levels they are looking to deploy capital not wondering if they should.  Most do not have the courage to invest this way.

They guise their ignorance with critiquing everyone else, but never seem to make an actual trade, or step in.  They are more worried about being right or wrong, than making money in the long term.  The Truth Hurts!

One of the difficult things about investing, or even poker, is knowing when to put chips on the table and when to pull them off.  Successful investors, like poker players get up when they can, not when they have to.  There are also times when you believe you have a good hand and you make a bet.  Not all bets pan out, but what keeps you in the game is managing risk.

Risk Management & Planning:

In the end it is about risk management and planning.  Dollar cost averaging is best served and outperforms lump sump investing in bear markets.  This also outperforms most market timers, who never seem to have the courage to step in when it hits their targets.  Planning to add at specific levels, and managing your risk is more important than being right or wrong all the time.

This is why we have a strategy and though we modify it, we stick to the overall plan.  Just like our AMD trade.  Initially we were beaten up, with AMD falling from 26.00 to 17.50.  We were aware this could happen going into earnings and mentioned, “if you do not have the stomach or means to see a drop to 17.50-20.00 close the position before earnings”.

After being assigned the stock, our strategy was to sell into strength around the 24.00 area.  The Monday market rally provided this opportunity and while the market shifted from pessimistic to optimistic on the heels of the G20 talks, we stuck to our plan and sold Covered Calls which have panned out nicely only a day later.

Overall we had a plan and managed our risk so we were not scared out during the selloff.  We understood this was a possibility and took the pain.   The herd is good at one thing, selling into a bottom and buying into a top.  How many sold at 17.50-18 because they had no plan or strategy, and did not understand the risks of a potential pullback?

Summary:

The space is likely going through consolidation through fruition.   What coins emerge winners and losers only the future beholds.  We have no control over the market forces, like manipulators and large operators which we went over in our recent podcast.  We have no control over the teams or their leaders.  We have no control over the success or failure of a platform.  The only thing we have control over is our risk capital and how we manage it.

In the end it is not about being the perfect market timer.  Just like poker it is not about having the nuts in order to win.  It is how you manage your risk in the form of a plan and strategy.  This does not mean you can not be flexible, but more often then not sticking to your original plan is the best form of action, not second guessing yourself when you get there.  If you only play poker with the nuts, you will likely throw away a bunch of winning hands.  In order to win in the long term, you must take some risks, including some short term losses.  Well unless you are an oracle.

Of course every strategy and plan must be flexible, and adjustments made.  If you can not sleep at night, are worried about losses, instead of accounting for them in your risk profile, you are simply a gambler.  The Psychology of markets never change, and history always repeats, only you have the power to change your thinking and actions. Only you can remove yourself from the herd mentality.

It is always important to recognize the risks of investing in any speculative sector.  Bitcoin is NOT the exception, and should only be done with capital you are willing and able to lose entirely!

3 Responses
  1. jlhequities

    I love you guys teaching. It’s taken me months and months to understand your views of the market but once I understood it it’s helped my trading tremendously. Yes I believe this is the cleaning out of all un-needed coins and only handful will survive. Which is really what this market needs to go mass adoption.
    I see it as an 800 billion MCAP has pulled all its money out and will reposition over the coming weeks/months into a handful of coins that will easily be 800billion plus over the next bull cycle. It sux for the teams that will loose everything they’ve worked for the last several years. Lots really had good intentions and good ambitions but only whats needed will survive. Yes we have all lost some value over the last 11 months but there will be people that loose not only everything cash wise but everything they’ve worked for and created over the last several years. I know this feeling very well and my heart goes out to those that will be affected by this readjustment.

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