The following text is compiled from the series Twitter Space #DialogueTraders, hosted by FC, founding partner of SevenX Ventures, Twitter @FC_0X0
Guest of this issue: Amanda, Chainup Investment CIO, Twitter @WuWei_BeWater
About Amanda
Amanda, in February this year, her personal options trading BTC-based return was 10 times, and this month it has been nearly 5 times. Her annual US stock return is twice that of Nasdaq.
Who is this legendary woman?
Currently the CIO of Chainup Investment, he built a panic index option trading model on Wall Street. In 2011, he joined SDIC Capital, engaged in primary market investment and secondary market transactions, and led the listing of Essence Securities.
She entered the cryptocurrency circle in 2017. The investment concepts and trading experience accumulated in the traditional financial market made her clear about how to make money in various financial segments. After her own thinking and adjustment, she summarized the investment and trading methodologies in the traditional financial capital market that are suitable for the crypto industry, and shared them selflessly.
How to develop your own investment strategy?
Let’s start by asking ourselves a few questions from two perspectives.
The first is to think about 5 aspects from a personal perspective:
1. Total investable asset volume, premise: not subject to loan repayment and time liquidity restrictions
2. Investment goals and expected returns: If it is 6%, it is enough to buy U.S. Treasuries (credit bonds) with leverage; if it is 20%, it is enough to buy quantitative arbitrage; if you want higher returns, you need to look for high-growth stocks.
3. Risk preference and tolerance: What is the maximum loss/volatility you can bear? If you can only bear 20% volatility for this asset, do not increase leverage to more than 5 times.
4. Investment time: When will I need this money, when I retire? Next year?
5. Liquidity arrangements: Calculate the balance sheet and income statement as if you were a company, and consider your personal life and bill payments.
The second is from the market perspective, pay attention to two aspects:
1. Market cycle: When in the middle of the market cycle, does it match my investment time and position control?
2. Position control: Don’t deliberately pursue diversification, but see clearly where the risk exposure comes from, and then diversify your assets. Otherwise, you will find that although the names of the assets are different, the sources of risk are the same category.
What strategy can outperform BTC?
Outperforming BTC mainly depends on timing and coin selection.
Let’s first talk about how to choose a currency
The volatility of BTC is much narrower than before, and it seems to be in a stable development in the mid-to-late stage. Smaller currencies that have the potential to cause trouble have stronger growth potential than BTC.
So how do we define the indicators of project growth?
Amanda: “When I choose assets, I usually choose those that have growth logic, the ability to make money, and the ability to tell a story and create something.”
- Growth: Different protocols and Dapps’ functions determine their growth indicators, such as TVL, number of token holders, transaction volume, storage and other quantitative growth indicators.
On this basis, we have innovatively chosen to use such quantitative growth indicators, combined with the currency's circulating market value, similar to the PEG indicator in stocks, to calculate the relative valuation of a project, monitor it over the long term and compare it with similar projects, and screen assets with better growth cost-effectiveness.
Also, monitor supply and demand, and factors that affect supply and demand, such as halving, staking, and staking rewards; - Ability to make money: such as analysis of protocol revenue, profits, and on-chain transaction analysis.
- As Fisher said in his book “How to Select Growth Stocks”, public opinion should have both connotation and comprehensive extension capabilities, and public opinion is the embodiment of the extension.
How to practice deliberately and train your ability to select coins?
To develop your ability to select coins, a simple way is to pay attention to the relative exchange rate of small coins to BTC. You will form a matrix with two coordinates, one for rising and falling, and the other for outperforming and underperforming. This will form four quadrants: outperforming BTC when rising, underperforming BTC when rising, outperforming BTC when falling (less loss), and underperforming BTC when falling (more loss).
There is a type of asset that can outperform BTC when it rises and underperform when it falls. This is the best asset choice, but it is unstable.
What you need to practice is to monitor and judge such statistical relationships over a long period of time, so that you can find those targets with high growth, good quality, market attention, and the potential to outperform BTC. The crypto market is not a weakly efficient market now, so technical analysis can still generate excess returns.
Let’s talk about how to choose the timing of BTC
Buy when no one cares, sell when everyone is talking. Amanda bought BTC at $16,800 all in on December 26, 2022, leaving liquidity. When it later fell to $15K, I knew it was an acceptable normal fluctuation.
There were short-term event-driven transactions in the middle, such as the sudden rise of BTC during the banking crisis, and the short selling and reduction of positions on the day when the BTC spot ETF was listed in January 2024, including option trading. Therefore, the amount of coins has increased so far, and it can be said that it has outperformed BTC.
Long-term configuration regular selling
To outperform BTC, you need to choose the right time and the right coin. If you don’t have the ability to choose the right coin, you can choose the right time and make long-term allocations. If you buy near the 200-week line, you can sell regularly from 12 to 18 months after the halving. This way, you can basically get most of the profits in the market.
Don't underestimate the timing of selling. This is also compared in "The Turtle Trading Rules". Among various exit strategies, regular selling is the best. What is the most difficult point? It is that everyone is in a hurry. If you care about short-term gains, you are destined to get very limited gains.
When is a good time to sell?
Many technical indicators have recently shown signs of peaking. Admittedly, historical data is a good reference, but I don’t think every cycle is the same as the last one. Those who know how to buy are apprentices, and those who know how to sell are masters.
- From a quantitative perspective, we know from calculus that the second-order derivative can be used to find extreme values, and the maximum value is when the second-order derivative = 0. It is a concept of rate. In other words, the growth rate is gradually slowing down, which means it is approaching the top.
- In the cryptocurrency world, the reflexivity theory is fully demonstrated. In the book "Alchemy of Finance", it is said that the reflexivity theory states that the market fluctuations from the beginning to the end cannot be sustained, which is actually the result of the positive feedback from everyone's expectations to the realization cannot be sustained, and the market has reached the top.
- From a qualitative perspective, the market will rise and fall for the same reasons.
- During the bull market of 2016-2017, the cryptocurrency circle was excited about the possibility that Wall Street institutions would enter the cryptocurrency market. However, when CME launched Bitcoin futures in December 2017, the public reaction was that Wall Street was shorting Bitcoin, and the market sentiment was panic.
- In the last bull market in 2020, after the outbreak of covid, the massive QE brought about liquidity overflow, causing all risky assets to rise, so after the Federal Reserve announced that it would stop cutting interest rates in November 2021, it reached the peak of that round.
- In this round of the market, from a macro-cycle perspective, the real starting point of volatility is the expectation for ETFs. On January 10, the day of the launch, prices began to fall. The selling power came from Grayscale's large amount of GBTC to be sold, which led to a net outflow of ETFs. If you simply look at the positive impact of the Trump election, the recent growth rate has indeed slowed down, satisfying some signals of the peak of the cycle. But my judgment on this market cycle is that this rate cut is slow, and the massive adoption of large institutions is also being pushed up little by little, so there will inevitably be a slow bull trend in this market.
What is the driving force of the market? ——Crust Theory
The cryptocurrency market is unpredictable, but the volatility of the market remains unchanged. If you want to capture the volatility, you need a framework to capture it and understand the underlying emotional drivers. Like the center of the earth, it is the starting point of energy. The driving force of the market must come from emotions. It is the core, sometimes panic, greed, or confusion.
Adding to it, the project's fundamentals, price performance, and a short-term event driver are the mantle.
Then, the prices shown during that period of time together reflect the prosperity of the market, which is the surface.
Therefore, the Earth's Crust Theory provides a deep insight into the changes in a market, such as what it starts with, what it ends with, and what percentile level the market sentiment is at.
The most core market momentum must come from emotions, which is the core of the crust theory. Just like an earthquake, there is a change in energy at the center of the earth, which is then reflected in the movement of the crustal plates, and finally there are violent fluctuations on the surface, layer by layer. You have to sense where the market sentiment starts, iterates, and then develops to the point where it can no longer be sustained.
How to judge emotions and what are the indicators?
Simple indicators, such as the Fear and Greed Index. For example, when it is below 20, you probably won’t go wrong buying it, and when it is above 90, you won’t go wrong selling it. But behind it may be an open position (open position: refers to an unclosed position in the futures or options market, at which time the commodity is still waiting to be traded in the market and is still affected by market price changes).
There are many ways to judge emotions:
First of all, ETF deposits are a typical change of sentiment;
In addition, there are continuous price changes outside the U.S. stock trading hours, so you can feel the pulse of changing market sentiment by looking at the hourly and minute lines, the market's opening interest, perpetual premium, and funding rate.
The general conclusion is that the market is still very positive and optimistic. In other words, the market is paying real money and has a strong bullish sentiment.
How to continuously discover new Alpha?
First, consciously and proactively accept and understand these new things instead of being afraid of them. Soros told his apprentices to invest first, then analyze, and then see if it can be sustained.
Second, we cannot limit ourselves to the small scope of the cryptocurrency circle. To solve current problems, we must use a higher perspective and interdisciplinary thinking, and have a conscious understanding of all major types of assets.
Third, invest with an open mind to gossip about the world. Prices often react faster and more timely. Follow the price to explore what force is behind it. There must be traces. If you follow the clues and dig deeper, you will find that there is a new story behind it.
Regarding the self-growth of traders, can you recommend a book that can help you change yourself?
Amanda: Every year I read 1-2 books that I can find a lot of room for improvement. I read Tao Te Ching twice in 2022, and The Art of War in 2023. Then I finally read Mr. Munger's Poor Charlie's Almanack, which shocked me.
If we only talk about trading, the best books are "Reminiscences of a Stock Operator" and "The Alchemy of Finance".
Every day I have an iterative upgrade on my personal version, from 1.01 to 1.11 to 2.11. It is a process of constantly improving my cognition, and you never know when it will be reflected in your transactions. Because only by seeing yourself and the whole world can you understand the truth of the market and get long-term, stable and certain returns from this market.
Last words
It is not necessary to outperform BTC. If you find a trading strategy that suits you, and then keep practicing it, and keep getting better, the joy brought by this growth is actually the core motivation that supports every trader to move forward better than monetary returns. This is why I think it is very important to do "Dialogue with Traders", and I also hope that everyone can find their own trading strategy as soon as possible, and be able to experience closed-loop growth every day.
