The Cryptocurrency Trading Bible
So you want to trade cryptocurrency?
So you want to trade cryptocurrency?
You’ve seen those eye-popping 3000% returns and you want in.
You don’t want some measly little 10% ROI after a year in the plain old stock market. That’s for grandpas and old people. You want quit-your-job with a middle finger, fuck you money! Am I right or am I right?
Maybe you dream of being Jordan Belfort, the Wolf of Wall Street, or Gordon “greed is good” Gekko?
Or maybe your wanna be a baller, shot-caller? You want a gold-plated house, a yacht and rap video supermodels jiggling around one of your six infinity pools in string bikinis.
Well have no fear because the Buddha of Wall Street is here to help you with your dreams of crypto glory! Here’s my story: I was living in a one-room apartment and sleeping in my bathtub and now I fly my helicopter to work just because I hate traffic.
All of this, and MORE, can be yours!
Come closer and I’ll tell you the ultimate, super-secret ingredient to lightning fast crypto riches!
Are you ready?
The secret ingredient is…nothing.
Wait, what?
That’s right.
There is no secret ingredient to getting rich. Anyone who tells you different is selling something.
Oh yeah and I don’t really have a helicopter…yet.
Of course, cryptocurrencies do have some of the best ROIs in history. And you do have a shot at making some good money. So let’s talk about investing in cryptos the right way.
I don’t hide the fact that I’m a long-term bull on cryptos. I believe they’re a game changing technology that will ripple across the entire world, remaking every aspect of society. Like my friend Chris Dixon, I believe Bitcoin could easily be worth $100,000 a coin one day, although I’m not quite there with perennial Dennis Hopper impersonator John McAfee’s prediction of Bitcoin going to $500K a coin, at least not in the next three years. It may take a little longer. I’ve talked about why in my articles Why Everyone Missed the Most Important Invention in the Last 500 Years and Reflections on the Best Blockchain Tweets Ever Written so I won’t rehash those reasons again.
Here we’re going to talk about cash money, y’all. Unlike many folks in this space, trading is not my primary interest, but like everyone I do enjoy making money.
How do you make money with cryptocurrencies?
Carefully.
Questions, Questions
The very first question you need to ask yourself is, do you have enough extra money to invest?
What does extra money mean?
Surprisingly, the SEC has some good guidance here. Even though they let Bernie Madoff get away with a massive pyramid scheme for a decade, despite someone telling them about it every year, they’re occasionally good for something! While, I’m not a big fan of the nanny-state accredited investor rules of the SEC that let’s only rich people invest as they see fit, nor of the “pattern day trader” rule that requires to you to have $25,000 minimum in order to day trade the traditional markets (which, by the way, does not apply to crypto markets…yet), there is some merit to the rules. Those numbers are arbitrary bullshit but I do agree with the sentiment that led to the creation of those laws.
They’re trying to protect people from losing money they don’t have to lose.
And since the nanny-state is not here to protect you in the crypto markets you will just have to go ahead and take personal responsibility and protect yourself.
While stories like I Invested All My Spending Money In Ethereum (And so Did All My Friends) are funny on some level (college kids can afford to take some risks because they have a lot of life left to recover later if they lose everything) they’re also utterly terrifying on another level. What if that girl lost all her food money for the year? Not awesome.
I can’t find the tweet now, but just the other day I saw a guy posting about how he mortgaged his car, lost it all trading cryptos and his wife kicked him out. He was looking to get in on a “shit coin pump” aka where traders get together and buy like crazy to pump a penny-stock equivalent to the moon before dumping it on idiots. Not good. Do not be that guy.
Only invest what you can afford to lose.
If you don’t have a lot of money, start small. Don’t go maxing out your credit cards or getting a “loan” from that guy your bother knows who sits on the corner outside the bodega on 156th and Broadway. You’ll only get burned.
The second question you have to ask yourself is:
Are you a buy-and-holder or a trader?
These are two very, very different things.
By a wide margin, the right strategy for most people is to just buy and hold. Get some well know cryptocurrencies like Bitcoin, Ethereum, Dash, or Litecoin, put them in cold storage, stick them in the sock drawer and forget about them. Don’t read the news. Don’t worry about the wild swings or the predictions of doom from the popular press. Just buy, hold and forget. In a year or two, dig them out and sell some of them and buy a little more with the proceeds. Wash, rinse and repeat until retirement.
If you want to trade however, that is a different beast all together. That means you’re looking to get in and out of the market. The rules of the game are simple:
Buy low, sell high.
Duh, you say.
Easier said than done though.
There are two parts to this game:
Making money
Keeping it
Most people crash and burn on the second part. Everyone makes money in a bull market and then most give it right back afterwards.
So does that mean you shouldn’t trade? No way. I love trading!
On the days you win, it’s the ultimate rush. You’re a Viking raider, swooping in on unsuspecting villagers and mowing them down with glee.
On bad days though, it’s brutal. You’ll lose sleep, hair, friends and money. You’ll be depressed, angry, and scattered brained.
So why play at all?
Because trading is the ultimate game.
You’re playing against other people, with incomplete information, on an occluded battlefield, as well as against the maniacal and sadistic “mind” of the market, and against yourself. Your mental strength, emotions and belief systems are all working against you. That business school bullshit they taught you about rational actors with perfectly distributed information making rational decisions in the marketplace is just that, utter and complete bullshit.
Anyone who spends five fucking minutes trading knows it’s crap.
The markets are not rational. Nor are people. We are fear based, emotional creatures.
Only an ivory tower academic economist would ever think something so utterly ridiculous.
First of all, the information is not even close to evenly distributed. We’re all playing with partial information and a fog of war. Even worse, we all have varying degrees of ability to process that information. Meaning all of us are kind of stupid. If you’re not that bright, it doesn’t matter how much info you have, you won’t be able to do shit with it. Go directly to Dunning-Kruger and do not pass go.
And most of us are not that bright.
All of us have stupid, magical belief systems and broken mental heuristics that work against us every single second of our lives.
If you ask a group of people how many of them are “above average” drivers, almost everyone will raise their hands. This is impossible. We can’t all be above average but we all believe we are.
Even if you’re a good trader, you’re not immune to this kind of mental insanity. If you think you are, that’s another magical belief. As I wrote this article, I made not one but two stupid BTC trades and busted out trying to catch today’s insane $600 a coin rally late.
I knew this was a terrible idea.
I did it anyway.
I was writing this article (not focused) and I was late to the party, a double whammy of stupid. Rule number one: If you miss a trade, stay the hell out of the market. Get ’em next time.
But did I listen? Nope. Because I am an emotional fear based creature just like everyone else. FOMO (Fear of missing out) got me. The force is strong with FOMO and not you or anyone else is immune to it. No matter how good you get, you’ll regularly and repeatedly shoot yourself in the foot.
When I used to trade the regular markets, I can’t tell you how often I saw good, professional traders (I’m looking at you Slope of Hope) saying “this makes no sense, the market is wrong.”
No, the market is always right.
You are wrong.
You’re either in line with it and making money or you’re losing money and bitching about how the market should be more rational.
The problem is most of us are seeing a movie in our heads about life, instead of what’s actually right in front of our noses. To the degree that reality doesn’t match up with what we want to think about it, we go with what we want to think about it. For most humans giving up their belief systems is the same thing as death. They would rather die, literally, than change their mind.
That doesn’t work for the market. The markets are a lesson in humility. You will learn to see things as they actually are versus how you imagine them to be or you will get taken out to the woodshed and beaten with a rubber hose. In other words you will lose all your money just like that idiot who sold his car to play the markets. The markets are economic Darwinism and they have no mercy.
Let me give you an example of how your belief systems work against you in the game of coins.
One of the traders I follow closely is the Wolf of Poloniex. In full disclosure, I am not a member of his “Wolf Pack” currently, which is his paid private trading signals group. I just follow the big market moves he posts about on Twitter. That’s because, in general, I prefer to do my own research, trust my own eyes and live with my own calls, right or wrong.
The Wolf is a fast, aggressive trader and that matches nicely with my personal style. His calls regularly make me tons of money. A question you have to ask of all traders is “are they right?” Nobody is right all the time. In fact, even the best of the best are wrong more than they’re right. The greatest traders make their money on 20% of their trades. The rest of our trades make only modest gains or loses.
So how can we know whether someone is right or wrong, objectively?
Simple.
Either my bank account is going up or its going down.
That’s it.
It’s a perfect system. Binary. You win or lose. There is no in between.
If my bank account is going up, and I’m following his calls closely, then he’s right. If I keep losing money on his calls, he’s wrong.
But most people don’t see it that way. Lots of folks think the guy’s calls are absolute shit. Why is that?
Because the Wolf has an in-your-face persona that rubs many people the wrong way. He loves to stick it to people who say he’s wrong. Any time he posts a call, people are quick to pounce on him and call him an idiot, a douchebag and a shill hucking trading calls. They want him to fail.
The reason is because they’re unable to disconnect his calls from his persona. They conflate two unrelated things. Whether he’s likable or not is utterly irrelevant. Personally I like the dude but that’s irrelevant too. Except people can’t and won’t see it that way.
People get very attached to their opinions. Burn your opinions! Your opinions mean nothing to the market.
If you thought a bull market was starting and it turns into a bear, your opinion was wrong. Period. Let it go! Move on! But people love their opinions. They cling to them desperately.
We’re just wired that way.
Our brains are littered with mental pitfalls.
Being “right” when you’re wrong is great way to lose money.
Do you know that at times as much as 38% of the population can’t tell you which party is more conservative in America. 38%! In fact, most people don’t vote based on actual politics at all. They pick who they like the most and then project their viewpoints onto that person, even if that person has diametrically opposed ideas to their own.
How fucking stupid is that?
Welcome to the human race.
We’re prone to all kinds of crazy-ass mental nonsense.
So with that kind of broken grey matter, how the hell can we expect to get good at trading?
Is there any hope?
Yes.
Getting Good at Trading
To start with, you better start reading.
We all have a lot to learn and the sooner we start doing it, the better we get. Your goal is to learn something every day for the rest of your life.
My current favorite book on trading is the super simple Top 10 Trading Setups: How to Find them, When to Trade Them, How to Make Money with Them. Like all trading books, I prefer the paper copy, as opposed to the Kindle edition, as the chart pictures are easier to see.
This book is short and to the point. There are no stories of the author’s trading glory, or links to his special, ultra secret system that you can have for a mere thousand dollars more. It concentrates on simple, practical advise, for multiple market trends. Everyone makes money when it’s all going up but how do you deal with trades going sideways or down? It’s in there.
While the book is focused on traditional markets, most of the rules he puts forward can easily be applied to the crypto markets. His reasons for why new traders lose money on the very first page is worth the price of the entire book.
New traders lose because they:
* Trade too big
* Trade without an edge, or in other words — gamble
* Over trade
* Trade low price junk stocks
* Use excessive leverage.
Trading with leverage in the cryptos is like juggling Cobras. Don’t fucking do it if you’re not a professional trader. The crypto markets move too fast and you can easily lose someone else’s money that you don’t have to pay back. Not good.
That brings us to the one major difference between the regular and the crypto markets.
Crypto markets move at video game speed.
When he talks about how a market might take weeks or months to play out, in the parallel universe of crypto trading, that could play out in days. We literally just saw the market crash out 40%, going full bear, and then recover in two days to new heights. That’s how fast it moves.
This is one of the reasons the popular press does not understand cryptos. They regularly report that Bitcoin is over and dead for good. It’s hilarious. Check out this article from 99 Bitcoins. Someone writes Bitcoin’s obituary every day.
The problem is the pop-press is used to playing the game at slower speeds. It’s as if they were good football players in college only to go to the pros and have guys blow right past them. It’s a totally different level. This is the e-Sports universe.
Cryptos are the computer generation’s stock market.
It’s run by kids who never lived life without the Internet. To them it’s just like a tree, it was always there. The NYSE come from the days of ink and wood pulp. When Forbes or CNN or FOX reports on bear markets in the traditional stock world, they’re usually right for a reasonable period. That market will go cold for months. In crypto it could go nova hot tomorrow.
It’s warp speed.
To keep up your need an edge. That brings us to book number two:
Encyclopedia of Chart Patterns.
This book is a monster. It’s heavy and dense and filled with information. After reading it you’ll likely start seeing patterns everywhere, even when they don’t exist. Don’t worry. Study them anyway. You’ll regularly see people drawing random lines on the chart on Twitter and calling it “technical analysis” but this book is much more disciplined and serious.
Technical Analysis (aka studying the chart patterns) works pretty damn well in crypto trading. My gut tells me it’s because most of the folks trading cryptos are geeks and we’re prone to liking TA because it makes sense to the engineer brain. That makes them a self-fulfilling prophesy. It also works because there’s lots of machine trading going on. You’ll be trading against bots regularly on the exchanges and they have no choice but to make decisions based on moving averages, pull backs, breakouts and all the other things that TA aficionados love.
The other reason it works is because TA is all about psychology. People want to take gains and cut losses. After a certain amount of rise, it’s going to fall. It’s just natural.
The markets are really nothing but the shared hallucination of our collective unconscious, the projection of our hopes, dreams and fears.
Remember though, TA is not a magic eight ball.
It does not work all the time. It’s often just junk voodoo. It’s hard to do right, easy to do wrong and prone to all kinds of false signals. Still, it’s a useful tool. It’s saved me a number of times and helped me avoid big crashes.
The last book on my list is one I’ve always loved: One Up on Wall Street, by legendary investor Peter Lynch. Yeah that Lynch, the one with his name on the marquee. He beat the market for fifteen years. Statistically most traders bust out after ten years. A lot of the advice in the book, like making sure you buy a home before investing in stocks, is outdated. Homes are regularly a huge money pit of debt for today’s young people. But his investing advice is timeless and applies to any market.
How did he make his mulah? Like Warren Buffet, he focused on “value investing.” What’s that you ask? Excellent question, young Padawan.
He invested in what he knew and understood. When his wife or kids came home with a shopping bag from a new store, he’d research that company and buy it. He figured if people were buying from it, it was a good company.
Investing in what you know is a great mental heuristic. Warren Buffet regularly refuses to invest in all kinds of companies, like the tech stars everyone loves, because he doesn’t understand tech. Because he doesn’t understand it he can’t make a good call ahead of time, so he stays out. If you don’t understand the purpose of a coin, stay out. Don’t buy it because it’s going to the moon and some jackass in a Slack forum told you it’s killer.
In crypto, value investing means not buying a bunch of shit coins. ICOs happen all the time and new coins pop onto the market, promising great returns. Some of them will deliver one day. But most of those coins will go to nothing in the next few years.
Personally, I tend to invest in “infrastructure” coins or coins that have a chance to be multifaceted and serve lots of purposes. I have a background in building systems because I was a systems administrator for more than a decade. I’m looking for the folks building the railroad tracks of tomorrow.
Ethereum, Bitcoin, QTUM, and Tezos have multiple purposes. Pot Coin does not.
Over the years, like all good traders, Peter Lynch made all his money on 20% of his “home run” trades and lost or made modest returns on 80% of his trades.
80/20 is the formula.
You will never do better than that, even if you manage it for a number of years. Eventually you’ll revert to the mean. That’s statistics baby. And math is God. It runs things around here and everywhere else.
And of course, even after you read all these books, try to remember:
There is no secret ingredient.
Actually, there is.
The secret ingredient is you.
It’s cheesy but it’s true.
The way to get better is to get in the game. There is no substitute for personal experience. There’s an old saying in the ancient game of Go.
“To learn Go, first lose 100 games fast.”
This is true of everything in life.
You have to get into the arena. You’ve got to play the game. Without skin in the game you won’t learn a damn thing.
It’s one thing to read about something in a book, and another thing entirely to do it.
When the pressure is on and your emotions are against you and you’re watching thousands of dollars vaporizing in minutes and you’re fighting with your significant other and absurdly blaming her for taking you to dinner and “causing” you to lose money (magical belief) because you weren’t watching the trading screen like a hawk, then you’ll understand.
This ain’t no joke.
This is not hypothetical. This happened to me last week.
But every day I learn.
Oh and I did make money. I was just mad I didn’t make more. That’s when I knew I needed to take a break and do nothing for a day. I got up late, took a walk, ate a nice breakfast and apologized for being a jerk to my beautiful lady.
You have to recharge. You don’t need to catch every damn run. Go out. See the trees, listen to the birds, play with your kids and your pets. In short, do the things that matter in life. The markets will be waiting for you when you return.
Here’s the deal: You’ll make mistakes. And you’ll learn. That’s the only way.
But if you let this amazing and legendary quote by the great Teddy Roosevelt be your guide to trading and to life and if you’re lucky, you just might do OK in the world:
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
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BONUS Trading Books that I like:
Candlestick Charting Workbook (good for testing your skills)
The ultimate book for understanding trading discipline and using a system instead of your insane gut feelings is Way of the Turtle.
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If you love the crypto space as much as I do, come on over and join DecStack, the Virtual Co-Working Spot for CryptoCurrency and Decentralized App Projects, where you can rub elbows with multiple projects. It’s totally free forever. Just come on in and socialize, work together, share code and ideas. Make your ideas better through feedback. Find new friends. Meet your new family.
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DISCLAIMER: Be a big boy or girl and make your own decisions about where to put your hard earned money. I am not a financial adviser and this is not financial advice and if I really need to tell you this then it’s best to keep your money in your pocket anyway.
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Here’s the list of traders I follow on Twitter. It’s a small list. Your list should be small too or else you will just get lots of conflicting signals.
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A bit about me: I’m an author, engineer and serial entrepreneur. During the last two decades, I’ve covered a broad range of tech from Linux to virtualization and containers.
You can check out my latest novel,an epic Chinese sci-fi civil war saga where China throws off the chains of communism and becomes the world’s first direct democracy, running a highly advanced, artificially intelligent decentralized app platform with no leaders.