Image source: WGN TV
Some things are new, but the behavior is old
The activity in the crypto space these days isn’t a new phenomenon in spite of what so many “coiners” claim.
This ongoing narrative that “this is all new.” “It’s never happened before…” have been said during the dot-com bubble. Several oil and gas bubbles. Biotech. And so on.
Yes the tech is new but the story of human behavior is roughly the same.
If you spend any time studying markets (or social media posts) you will see that nothing is new in terms of human behavior.
You see, way back in the days before the securities business had much if any regulation people did all sorts of things to make money. Bucket shops, trading pools and all sorts of unsavory behavior by modern “standards”.
Well, except for crypto standards.
In the book Reminiscences of a Stock Operator, the author went through a lengthy discussion of how to manipulate a stock. It would in many ways be the same process as making a market on a stock but with some added twists from the pre-regulation era.
First, he approached to run an operation on a stock that wasn’t performing. That wasn’t a speculative stock, but one of a real company.
He then investigates the stock to decide if it could be moved higher and considered the prevailing market conditions. And if the stock and market conditions warranted this type of operation he would then set the terms of the arrangement.
Then he went on to explain the details of how he would execute the process of “marketing” or selling a large amount of stock now under his control.
As I watched Bitcoin soar, this book came to mind. So I got it out and reread it for the first time in probably 15 years. It was eerie how prescient it seemed. Especially considering the book was originally published in 1935!
This period in Wall Street’s history provides an excellent idea of what market behavior in an unregulated environment would be like. Much like the cryptocosm of today.
See if it some of it looks familiar…
Consider the way the media (and now the internet) was used to spread stories about a manipulation target. The way he would buy up the stock to attract traders.
How the press was contacted to spread the story about the stock.
The news would then draw in new buyers from the public….that then attracted active traders…which created more activity that generated further interest from the press…. and brought in more buying from the public.
The circular motion of movement, buying, press, public participation, was textbook.
He would buy and sell to support the activity while moving the price higher. All with the intent of liquidating the stock he controlled on behalf of the group he represented at a certain price range.
That’s what came to mind when Bitcoin soared.
That’s why you need to use your head when it comes to trading crypto (or anything else), and not your heart.
Let me explain.
A market isn’t a “movement”, it’s an ecosystem
If you follow the financial news you constantly hear about traders. When the market is down traders are doing this. When the market is up traders are doing that.
Who are these traders?
It’s a euphemism for market participants many of whom are fund managers, asset allocators and computer-executed algorithms. It’s an evolving ecosystem.
In the traditional market, the ecosystem at one time was more stratified from the big hedge funds on down to the individual professional traders. They provided market liquidity. They made markets. They buffered big moves. They used their capital to provide a valuable service, the buyers of last resort, that kept markets healthy and flowing. Most of the time.
Computers do a lot of that now, and they do it efficiently. Maybe too efficiently.
To understand the ecosystem, think of a large block of stock being like a zebra on the savanna. At some point the zebra becomes the target of several predators.
The lion gets to eat first. These are the big pension funds, hedge funds. They have the capacity to consume large parts of the order or the whole thing.
Then come some scavengers, the hyenas and the buzzards. Those are the smaller hedge funds and in-house prop traders. They clean up the scraps from the order.
And in the end the small bacteria decompose the corpse to bones and dust. Those are the smaller individual traders that buy and sell pieces of the order decomposing it to smaller pieces. That’s how a trading ecosystem works. Orders are collected and distributed in a market through this ecosystem.
These “traders” aren’t involved in a movement. Or a tribe.
It’s not an emotional pursuit.
It’s a competition.
This ecosystem is generally underdeveloped in the crypto market. A big part of that is due to the lack of enforceable regulation. This means that parts of the ecosystem exist while others are completely absent.
But the competition remains.
The traders in the crypto market like those in the traditional markets aren’t thinking about the “movement” or the “tribe”. Or the community…
With crypto, you are a goldfish in a “community” of Piranhas.
Today, everyone’s a trader…
Back when I started trading, almost nobody wanted to be a trader.
To the uninformed observer, the typical trading floor was made up of an unseemly bunch. Some of these guys were on their last legs. Others, the young turks at the time were just spreading their wings. I was part of the latter group.
In the “old days” you learned by sitting with an old pro who had been at it for a number of years. Some a few years, others decades. But the number of years wasn’t always the important part.
It was how many years of experience the trader had accumulated in those years.
Some would take ten years worth of trading to get one year of experience while other traders would get ten years of experience in a year or two.
Which sounds esoteric but it goes to the point that people learn a lot under duress, or they fold.
Trading through 2007–2009 was like getting ten years of experience in two years. But the guys who came through that were changed forever. Context.
As a trader, you were told to read the “masters”. Schwager’s Market Wizards. Reminiscences of a Stock Operator. The Art of Speculation. The Battle For Investment Survival. The Alchemy of Finance….and a bunch more. You went back to the 1920’s and 1930’s, 80’s for ideas and wisdom. It was sort of like a traders version of formal education.
This version of education provided context but would never make you successful. You needed the relevance delivered by doing.
I’ll show you what I mean.
Moving vs storage
Where I began was a hub for speculative companies, primarily oil and gas and mining. But over the years there were many others as the trends changed. You traded these issues. Gambled with them, because we were in the moving business not the storage business.
Moving means trading. Storage means investing.
This terminology was used to remind of us of the business we were in when accounts became bloated with high-risk garbage stocks
Because “storing” bullshit speculative stocks was often (and still is) financially lethal if you don’t know what you are doing; and sometimes even when you do.
The storage part of the business (outside of the risk-seeking institutions like hedge funds) was the domain of the salesman. They wooed their clients with visions of riches and bragging rights. You know, like the Lambo they will be able to drive and stuff like that (Although back then it was a Ferrari). Dreams, most of which never came to pass (with the exception of the salesman).
So as I reflect on all the talk in crypto and crypto trading I’m reminded of these times. I laugh pretty hard reading some of the advice some people give.
And cringe as some idiot gives investment advice on these speculative products to some kid asking how to “build wealth in crypto”.
I always wonder at what level the advice provider has their sell orders at…
For the average person, cryptocurrencies should be considered long-only trading vehicles.
The reason is that the crypto trading ecosystem is immature and this is largely due to its lack of regulation.
These attributes make the crypto market more opaque and ruthless than the plain old stock market.
For the average dabbler, these instruments are not for storage. They are for moving.
To store or to move?
So what is a person to do? How do you get the education and the knowledge you need to trade these instruments if you want to? How can you put context and relevance together to help you?
That’s a great question.
I can tell you that reading books alone won’t get it done, but it’s a good place to start.
Because the first step is to have some perspective of the subject to begin with. Trading is, as the great Dr. Brett Steenbarger pointed out several years ago, a performance activity. So you should treat it as such.
Now the first thing you need to think carefully about is moving and storage. Are you trading or investing? And if you are investing do you understand what investing is?
It’s not supposed to be an emotional pursuit.
It’s not supposed to be a religion or even a movement.
Or a “community”. That’s just marketing mumbo jumbo.
Investing is a process where one measures what the prospects and risks are of an asset in the pursuit of a return over a given period of time. Part of the investing process is figuring out what your unique personal circumstances are, your goals and exploring how to get you there.
So “investment” in highly speculative assets is not an ideal strategy (especially exclusively) …unless you have play money you are willing to lose.
Although, there are other reasons to be involved with these types of assets other than returns.
How do you want to be seen? Position accordingly.
One of the first books I was given when I was going to become a trader was: The Money Game by a guy who called himself Adam Smith. Not THE Adam Smith. The other one.
A key passage in there was about why some people were involved in the stock market.
The reasons were varied but few of them are based exclusively on making money or buying a piece of a company or beating inflation… You know, rational reasons.
Instead, many of the reasons he highlighted were deep-seated emotional reasons because at the root of every decision is emotion.
Some people want sympathy, and because of that they would trade like chronic losers in order to use those losses to extract sympathy. Others would buy small amounts of the hottest stock so they would have something to talk about at parties. It elevated their social status. While other people liked to talk about the market to appear informed and intelligent.
So whether crypto or conventional, why are you thinking about being involved in the market?
It doesn’t matter what the reason is. No matter how shallow, it’s still a reason. It’s your reason. And the only thing that actually matters is that you are honest with yourself about what that reason is.
Remember, you don’t have to reveal this to anyone else.
This understanding is important because knowing what your real purpose is will help guide your trading and investing decisions. Head vs heart.
If you want to be the center of attention at a party, you don’t need to bet your entire life’s savings to do it.
If you want to be informed you can dabble a bit and test it out without taking on a bunch of risk. Or not.
You don’t need to have positions all the time, or any position at all if it doesn’t suit your deep-seated needs. Knowing when not to trade is actually a valuable skill, and yes it’s a skill.
Which is why the culture of shaming people for not being hodlers is pretty damn funny.
Consider this: on Wall Street, hold means sell…
Now, what are you going to trade?
When I started out they used to tell us to get the print out of the stats at the end of the day. You went through looking for the new highs with expanding volume. You wrote those down to look at the next day.
The reason is that new highs meant it would likely attract additional activity.
And the volume meant you could enter and exit easily in case you made a mistake.
It also implied that something was going on and it was unlikely they were going to be delisted (suspended from trading which was often permanent).
Then there is technical analysis which is based on the assumption that a large enough number of other traders and investors see what you see in the same way at roughly the same time. And that what happened in the past somehow contains certain valuable information about the present and the future.
This can be a viable approach if there are enough data points and participants.
Speculative assets more than other types of assets have crazy things happen.
They fail and disappear seemingly without warning. Sometimes the drama is book worthy. (Look up Bre-X minerals and the geologist falling out of the helicopter…)
Crypto is no different as I’m sure you can see.
So are you going to use a white paper, twitter mining, rumors, tips, charts, or some other type of data analysis to choose the instrument you are going to trade?
What else? How about the system.
Do you understand the system?
Now the one thing I don’t hear too many talk about, which I have always found valuable is: how does the system work?
Stick with me.
In the stock market how the system works would mean a variety of things. For example:
- How do the orders get to the exchange?
- Who are the different players in the ecosystem?
- What is HFT and how does it work?
- What are the impacts of ETF’s and indices on stock movement and liquidity?
- What tax, legal and exchange rules create incentives and disincentives for various types of activity?
- Why do certain stocks get blown out at the end of the year?
- Why do some stocks get jammed higher at the end of the quarter?
- What catalysts move things, and why?
- How do people get paid and how does that influence their behavior?
- Are there other non monetary incentives that drive activity?
So in Crypto you might want to know:
- How the wallet works
- What exchanges you should avoid and why
- How the various exchanges execute your order and any conflicts of interest
- What the security risks of a centralized exchange can be
- What influences movement in the tokens or crypto coins you are going to trade?
- Does your crypto asset have a sufficient number of buyers and sellers daily?
- How many active wallets are there on the asset you are looking at?
- What are the legal and tax risks associated with trading specifically and crypto assets generally?
- What are the kinds of activities that are banned on the regulated exchanges that can be used without penalty on the unregulated exchanges?
- What are the fees?
And so on…
A recent report on crypto exchanges from the New York AG raised some eyebrows. No trader worth his salt would have been surprised to see any of those things in an essentially unregulated market.
Knowing the system can help you when things behave unexpectedly and it can help you decide whether you should participate at all.
Now what’s next?
No plan is a decision
Well, let’s say you’re going to do some trading. You get your account set up. You understand your wallet…
Well what’s your plan? This goes back to the reason you are in the market in the first place. So what is your plan?
Let’s say you are going to buy some BTC for a trade.
How big will your position be? Are you getting a taste or executing a strategy? Or expressing an opinion?
It doesn’t matter, but remember start by knowing what the reason is.
Now, will you buy it all at once or will you buy in pieces on the way down or as it advances?
Where is your exit?
If it goes higher where do you plan to sell it?
How did you come up with that number? Old high? A chart? A rumor?
Doesn’t matter which one. But you need to know.
If it goes down where are you going to bail out?
How much are you willing to lose?
Or are you going to hold because, well, you think you are supporting something?
Remember, an asset whether a stock, a bond, a commodity, a cryptocurrency or a token, doesn’t know you own it.
Don’t hold onto a piece of shit just because you feel obligated.
You aren’t. Sell it and reevaluate. Use your head and not your heart.
And don’t let anybody shame you into doing something that isn’t in your best interest. That includes taking “tips” from anybody including the Lambo dudes on YouTube.
There is nothing wrong with taking a loss. Losses are called: tuition.
Now there is something wrong with not having your risk defined before you enter the trade.
…and there is definitely something wrong with letting your moving turn into storage. Don’t do that.
You will be forced to know yourself
Now think about this for a second. As of right now you haven’t even bought your BTC.
You are doing the mapping out of the trade. The thinking.
You can’t do this by asking some anonymous asshole how to build wealth in crypto on the interwebs.
They don’t know you.
They don’t know your situation.
They don’t know your underlying reasons.
They won’t tell you when to sell.
They won’t share your losses with you.
They don’t have a time machine either.
You need to think for yourself.
Now before you put that trade on there is one more thing you need to think about. The one that is too often glossed over by junior traders…It’s going to sound all new agey and shit, but I want you to take a moment and think about this.
You need to be aware that you are about to find out who you really are. And I’m not talking about putting a trade on makes you a trader. Or brave. Or a player.
I’m talking about the excitement of putting on a trade and assuming risk for the first few times.
It’s a rush.
It’s going to happen. It’s totally natural.
I’m talking about the anxiety as it goes lower.
The prayers when you let your tap out point pass and justify hodling a loser by going from the moving business to the storage business.
The frantic researching to rationalize sticking with your position as it falls into what feels like an oblivion.
The promising yourself you will sell it if it just gets back to whatever price level.
The elation if it goes higher.
The feeling of invincibility if it goes a lot higher.
And the anger at the “manipulators” when it gets pounded down shortly thereafter.
There is no more ruthless revealer of who you are deep down than the market. You can’t get this paper trading. You can only realize it taking risks, and you need to be aware that this will happen.
This is an example of relevance that will one day turn into context if you choose to continue.
So what do you do about it?
Well, first, do all the things I recommended above.
- Know what you are doing and why.
- Think for yourself based on your unique situation.
- Define your entry and exits.
- Use an appropriate amount of capital to express your reason
- Execute your strategy.
- Then follow up and evaluate what went right and what went wrong.
And that’s the way to manage some of what you will experience.
The next part is learning to use these emotional reactions as information. But that’s a topic for another time.
Context + relevance = progress
So education, reason and experience are context, technology and vision are relevance; and the secret is to put the two together. Or in simple terms start your trading and investing by using your head first, and understand the underlying emotion that may be involved second.
That’s how you build great things without having to do stupid things repeatedly because you decided to ignore the rich body of experience that’s available to you.
The experience is the tuition paid by the mistakes of others printed in a book somewhere so you don’t have to pay it twice. (or more)
The thinking part.
The part that all those people talking about “community” and “the movement” don’t think you need.
Like ignoring Jesse Livermore cuz he’s an old dead fogey; and what does he know about crypto in 1935 anyway…until you read the book and then you understand.
Tristram Waye