Please click the link below to listen to the 42nd episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Comments and critiques welcome.
External Podcast Links
Two Minute Crypto – Riding the Bull (Part 4 of 5)
Welcome to Two Minute Crypto and part four of ‘Riding the Bull’. To date in this series, we’ve looked at the importance of establishing reliable sources of crypto-related information, the need for planning market engagement and the role that a coherent rule-set and the exercise of discipline play in achieving sustainable returns.
Next, we turn our attention to the weakest link in any trading or investment strategy – ourselves. Generally, people are poor investors and even worse traders – the whole process goes against our natural need for immediate certainty. Many of the traits that make a successful non-market professional are actually a liability when trading. Self-belief is all very well but the market cares not one bit for your ego, IQ, social status and the like.
So, self-awareness of your own particular strengths and much more importantly weaknesses, is the core pillar of trading or investing successfully over an extended period of time. We are all different and fail or succeed in the market in our own way so there’s no one size fits all set of traits that lead to market success. However, there are some behaviours that are fairly likely to lead to poor returns.
A lone wolf dies in the wild but prospers in the market.
You are the herd and it’s damned hard to leave it. Sectarianism is a key trait of a herd member. A sign you belong as you band around a project to the exclusion of others. Tribalism is for the herd – the folks usually on the wrong side of a trade.
Sectarianism’s twin is bias – we think to decide and once we’ve made up our mind, facts become discretionary. Keeping an open mind is an almost sisyphean task as we naturally latch onto certainty. We may start our research of a particular crypto without many pre-conceived notions but all too quickly we tend to come to a decision – A is good or A is bad and proceed to act from that bias.
Cognitive bias is entirely natural but also entirely inappropriate to market decisions. For myself, I see it in my day trades on Bitcoin – I have a strong preference to go long on BTC. Despite years of technical analysis experience, I still find it challenging to go short on Bitcoin. The issue is simply my strong preference for BTC as ‘hard money’ – this bleeds into my chart analysis and sometimes blinds me to otherwise clear shorting opportunities. I often take swing trade positions on Bitcoin long and short as over a longer time horizon I’m more objective. The solution I’ve finally arrived at is to rarely day trade Bitcoin at all. There are plenty of other markets where I see the charts with reasonable dispassion.
So, we all carry bias – it is always part of our frame of reference to decision making but it absolutely cannot be allowed to be the dominant part of any trading or investment decision. The twin ills of sectarianism and bias are the reason there are literally thousands of Telegram channels full of deluded individuals declaring the moon is inbound on cryptos with no product, no team, and no liquidity.
The herd is foolish and yet alluring. It is your ‘job’ as either a trader or investor to detach yourself from the comforts of the crowd and apply research, logic, planning, rules and discipline to your market actions.
In practical terms, disconnecting from the noise will allow you to see opportunity and perhaps, more importantly, cut your losses. Once a project no longer meets the criteria you used to invest in it – its time to sell it and move on – community, vision, and all other such hopium, notwithstanding. Projects are neither good nor bad – they are capital opportunities and or risks.
By all means invest emotionally in a project and become part of its community but don’t day trade it while doing so – these activities are mutually exclusive. It’s entirely possible to be supportive for a crypto but not invest in it. NANO, for example, is a great crypto in my opinion, fast, free to use, reasonably decentralized and so on. However, while I like it and the freedom it offers – I hold very little NANO – it’ just not a good investment by the criteria with which I judge such things. I wish it well and invest elsewhere.
Thanks for listening.