My crypto-trading f*&k-ups, and some lessons learned.
In 2015 I had roughly $90,000 to my name before I bought 11,700 Ether for roughly $0.97 each, and over a few months, accumulated 21 Bitcoin (a total investment of about $17,000).
Today I have $1.2 million tucked away in retirement and traditional investment accounts, 650 Ether, and 21 Bitcoin.
Now, at this point, most people say, “HOLY SH!T, You’re a millionaire!!!”
Yep. Crypto made me rich. But… BUT… do the math there for a second. Ether is currently trading over $1000. Had I employed the buy-and-hold strategy, that would equate to about $11 million buckaroos today.
Needless to say, I did not buy-and-hold. Here’s an account of a few mistakes I made that whittled away around $9 million trying to beat the market. One important distinction to make before we get started … These are not the usual missed opportunities that we all experience (e.g. “Oh man, I knew buying bitcoing in 2010 was a good idea. I messed up bigtime!). These were active trading missteps — a decision between do something (make a ‘clever’ trade) vs do nothing (hodl).
Enjoy the fruits of my suffering. I realize I’m extremely lucky to have made the gains that I have, and I thank my lucky stars every day. Hopefully by putting this out there, a few folks might avoid the same mistakes I did and gain a bit more themselves.
Mistake #1: The DAO and Naked Shorts
Anyone involved with Ethereum in early 2016 will have the letters D.A.O. seared into their brain forever. I was a DAO contributor to the tune of 2000 Ether. In the end, I got it all back (plus some ETC on the forked chain), but that’s not where I f’d up. In fact, I got quite lucky at first by coincidentally selling a large amount of ETH the day before the DAO hack!!
The price of ETH grew steadily as the end of the DAO contribution period neared, and finally shot up to $21 (all time high). I sold a big pile of ETH at $19 on June 16. Early morning on June 18, The DAO was hacked, funds were being syphoned, and the price of ETH plummeted to $12 in a few hours. I had a buy order set at $14, thus growing my ETH stack by around 800 ETH.
Pretty great so far, right? Well, during the great hard-fork debate of 2016, there was much hand-wringing. What would happen if hard fork? If not hard fork? Is this the end of ETH? Nobody knew, but there was a vast amount of anit-hard fork advocates predicting a crash once everyone got their DAO money returned after the fork occurred. I thought that seemed reasonable, so about 12 hours after the hard fork (but before the release of ETC), I decided to open a short position on ETH for the first time ever.
Whoops. Turned out the market itself was in favor of the fork, as ETH shot up from $11 to $14 almost overnight. I told myself I would ride it out to $16 (my liquidation price was ~$18). Nope. I panicked as I watched that dastardly green candle creep upwards. With tears in my eyes and shaky hands, I hit the ‘close position’ button and took a $30000 hit. The largest loss I’d ever experienced in my short life as a trader.
I felt sick to my stomach, and got pretty depressed for a few days. Especially after watching the price fall back to $10.50 two days later (which would have put me back in the black). Slowly my resolve returned after reading a bunch of stories on reddit from others that lost even more throughout the whole ordeal, then got distracted by the Ethereum Classic drama. Life moved on.
Moral of the Story: Never short Ether. Or anything. “Naked Shorts” are just plain stupid. Ask this guy.
Mistake #2: Tribal Thinking and Emotional Trading
After TheDAO Incident, Ethereum Classic was born. Being a true Ethereum fanboy, I was grossly offended by it’s mere existence, and as a matter of loyalty, pride, and yes, moral imperative, it was my duty to dump all my ETC as quickly as possible for more ETH.
So I did. And three days later the price of ETC quintupled from an organized “marketing” campaign by its chief proponents. Bloody Hell. My blind devotion to a project that owes me nothing cost me dearly.
Later that summer, Monero gained some notoriety by being acceptable currency for a popular darknet market site (you know, where you buy nefarious items via Tor sites in the name of ‘freedom’). Privacy coins became all the rage, and Monero and Dash started seeing daily gains in the neighborhood of 30% to 70%.
Surely this was a mistake, as these were shitcoins compared to BTC and ETH, right? Right?!? Well, what goes up must come down, I thought. So I dusted off my Poloniex account, click the Margin Trade tab, and went to town selling Monero and Dash.
Whoops again. $10k later I was licking my wounds and wondering what was wrong with the world. Turns out nothing. Markets be markets, and traders be trading. Once again, my tribalist mindset of BTC and ETH maximalism thrust me into some really shitty trades.
Moral of the Story: Don’t be a tribalist butthole. The market doesn’t care about your favorite team.
Mistake #3: Buying the Hype
Any prudent investor will tell you that diversification it’s a good idea. In fact, I hear if you try to buy a few stocks with the intention of beating the market, Warren Buffett himself will come to your house and slap you in the face for not buying index funds.
But alas, there are no index funds in crypto. So in late 2016, I figured it would be a good idea to take a bit of Ether and Bitcoin and spread it around to other crypto projects.
But what to buy? Well, this one time, Vitalik Buterin himself said he liked the work being done by the Synereo team. So I bought some Synereo AMP. It’s like Facebook for blockchain, or something. And… AND… they just happened to be having (another) crowd sale. Lucky me! There was also a nice bonus for contributing 10 BTC or more. Yep, this was a sure winner, so why not?
Then a bunch of internal drama happened with the Synereo team, and the lead developer left to go start a new blockchain project. AMP bottomed out while everything else started to recover in early 2017. I sold all I had for a measly 3 BTC.
Morale of the story: Don’t buy something because other people say it’s cool. At least read the website first.
Mistake #4: Swing Trading
Despite the multitude of screw-ups in 2016, I still managed to exit the year with 9500 ETH, some ICO tokens, and my Bitcoin. Not bad, but my bag of ETH sitting below 10k started to bother me. I wanted a 5 digit balance. I needed it.
So in March 2017 when Ether jumped from around $10 to $13, then $14, I thought to myself, “these are nice price increases, but they never last. Ether always retreats after breaking $14.” So I sold. Then the price went up. And I sold some more. Then the price went up again. And I sold some more. Finally, we were sitting in the mid-20’s, and I began to panic. I’d sold off 4500 ETH with an average price of $16. 😑
“It’ll correct back. Don’t worry, it’ll correct, and I’ll buy the dip.”
I told myself this over and over as the price moved north of $30, then $40, then mother f*$ing $50! Sonofagun! There were minor dips, but nothing anywhere near what would get me close to 10k ETH ever again. I finally capitulated and bought back in at $85.
You’d think I’d have learned my lesson after that, but no. Every jump of $20 — $30 or so, my finger would hover over the sell button, hoping to catch the top of a wave and ride it down. I had a few small wins, and a couple big losses. By the time June ended, my portfolio was about 80% cash and the rest ETH and BTC, with both reaching all time highs.
Morale of the Story: You cannot predict the future. Only sell when you reach your goals or need the money, not because you think you can time the market (because you can’t).
Mistake #5: Panic ‘Not Buying’
Along came July 2017, and Ether and Bitcoin were retreating from all time highs. “Here’s my chance,” I thought. “Imma set a limit order for ETH really really low (like $140) and just bide my time. I actually set a cascade of limit buys from $155 down to $135 and left it at that.
One fateful Saturday evening, as prices of ETH were slowly moving downwards, I went to bed and fell into a deep sleep. My wife shook me awake early the next morning, because she thought there might be some sort of emergency. My phone had been buzzing all night, and she thought I was getting frantic text messages. Turns out it was notifications of my buy orders getting filled.
Panic set it. In my dreary coffee-less state, I grabbed my phone and saw the huge red candles stabbing their way downwards. Hastily, I logged in and cancelled the remaining buy orders. It seemed like there would be no end to the bloodbath, but just in case there was a quick bounce, I set a sell order for all the ETH I just bought at about 5% higher than the current price.
Well, those sell orders got filled mere hours later. And the price kept rising. In fact, a day later, ETH made an 80% recovery (reaching almost $240). I, unfortunately, did not get to take part, as I simply had cash left over from my $160 sell order.
Had I stuck to the plan and left my original buy orders, then held one stinking day, I’d have built back my 10k ETH position in its entirety. I’m sure Kahneman and Tversky would have plenty to say about this.
Moral of the Story: Make a plan and stick to it. And have some balls. And never make a trade before morning coffee.
Mistake #6: Meaningless Entries and Impulse Trades
Ahh the summer of 2017, when ICO fever was in full pitch, and flipping tokens was de rigueur. I threw ETH at every hyped up ICO with a hard cap that I could find. Yes, I was one of those jerks that scheduled a transaction ahead of time for the BAT ICO with gas set to an astronomical price in order to jump the line (sorry, not sorry).
Also around the same time, volume on Bittrex exploded, and eventually new exchanges like Binance, Liqui, and KuCoin picked up steam a bit later. So many things to buy! And buy I did, until it took about 5 minutes to scroll through my entire list of positions in Blockfolio.
The problem that arose here was not so much economic as it was psychological. It was just too mentally taxing to keep up with price movements, news, product releases, technicals, and even which exchange to use for each coin.
So for a while I was just winging it. I’d buy some stuff that was hyped, sell things as the price went up, maybe buy back stuff that I sold earlier, trade here, trade there, jump on another ICO, sell the previous week’s ICO, and generally keep mashing buttons on exchanges all over the map.
This was dumb, and it nearly made my head explode. Plus, I was paying for a lot of these trades in BTC and ETH, so again, it was whittling my supply. And for some reason, I was glad to see a price increase of any coin vs USD, but failed to consider that it was losing against BTC and ETH. All in all, I have no idea if all that trading was profitable or not. It was the opposite of wise.
Morale of the Story: If you don’t have a plan, don’t trade. If you don’t know what it is, don’t buy it. Also, see the story above about ‘buying the hype’.
Mistake #7: The Tax-man Cometh
In August 2017, my wife was in the late stages of pregnancy, so the free time I had for staring at crypto-charts, Twitter, and Reddit all evening were quickly coming to an end. I also had a little over a million bucks spread across a few exchanges as proceeds from my ETH sales that I had no idea what to do with. So I cashed out. What remained of my ETH and BTC got stuck in cold storage, and all the US moneydollars moved to my plain ol’ savings account. Time to pat myself on the back, relax a bit, and raise a child.
But wait… did you know that you actually have to pay taxes on this stuff? I mean, really?!? Crytpo was supposed to save us all from the tyranny of overreaching governments and kleptocratic regimes!
Maybe some day, but this year Uncle Sam wants his cut of the action. Not only did I completely fail to report anything for 2016, but 2017 was shaping up to be a giant clusterfart of willy-nilly trades, ICOs, and transfers across nearly a dozen exchanges.
I called around to various accounting firms asking about trading profits for bitcoin and cryptocurrency, and was met with a lot of awkward pauses and let-me-get-back-to-yous. Only one firm got back to me. They cost $250 an hour. Ouch.
$2500 in accountant fees later, I had back taxes of about $35,000 to catch up on, and my 2017 bill was approaching $400,000. Needless to say, I’m not super thrilled about my decision to be an honest American taxpayer. Again, had I simply held for a year and a day instead of actively trading, that bill would have been much lower thanks to the difference between long-term and short-term capital gains tax rates.
Morale of the Story: Pay your taxes. Do not rescind your citizenship, buy a passport from St. Kitts, and move to Japan.
How to be a prudent invesetor that makes good decisions all the time and makes lots of money over a long period…
Normally this would be the part of the article where I’d talk about the new leaf I turned over, with links to portfolio theory, and a treatise on how buying and holding is best, and setting goals and keeping journals are good idea, and investment advice should come from Benjamin Graham, not Reddit… but no. I’m tired and my fingers are sore.
Edit: Wow! This article got legs! Thanks internet! If you want more, gimme a follow on Twitter 🦒