The following text is organized from the Twitter Space series #Dialogue with Traders, hosted by FC, founding partner of SevenX Ventures, Twitter @FC_0X0.
This episode's guest is Amanda, CIO of Chainup Investment, Twitter @WuWei_BeWater.
About Amanda.
Amanda, in February this year, achieved a 10x return on personal options trading in BTC, and this month it's nearly 5x, with annual US stock returns twice that of Nasdaq.
Who is this legendary woman?
Currently the CIO of Chainup Investment, built a panic index options trading model on Wall Street; joined Guotai Junan in 2011 for primary market investments and secondary market trading, leading the listing of Anxin Securities.
Entering the cryptocurrency space in 2017, the investment concepts and trading experience accumulated from traditional financial markets made her clear about how to profit in various financial sub-tracks. After reflecting and adjusting, she summarized suitable investment trading methodologies from traditional financial capital markets for the crypto industry, selflessly sharing them.
How to formulate your own investment strategy?
Start from two angles and ask yourself a few questions.
The first is to think from a personal perspective, considering five aspects:
1. Total available asset volume, premise: not affected by loan repayment or time liquidity constraints. 2. Investment goals and return expectations: If it's 6%, leveraging to buy US bonds (credit bonds) is sufficient; if it's 20%, quantitative arbitrage is enough; for higher returns, seek high-growth assets. 3. Risk preference and tolerance: What is the maximum loss/volatility you can withstand? If you can only tolerate a 20% fluctuation in this asset, do not leverage more than 5 times. 4. Investment horizon: When might I need this money? When I retire? Next year? 5. Liquidity arrangements: Treat yourself like a company, calculating the balance sheet and income statement, considering personal life arrangements and bill payments.
The second perspective is from the market angle, focusing on two aspects:
1. Market cycle: When in the middle of a market cycle, does it align with my investment timing and position control? 2. Position control: Do not pursue diversification excessively; instead, identify where the risk exposure comes from before diversifying assets. Otherwise, you might find out later that despite different asset names, the risk sources belong to the same category.
What kind of strategy can outperform BTC?
To outperform BTC, it mainly depends on timing and coin selection.
First, let's talk about how to select coins.
BTC's volatility has narrowed significantly compared to before, showing a stable development pattern in the mid to late stages. Meanwhile, small coins with potential may have stronger growth than BTC.
So how do we define indicators of a project's growth potential? Amanda: 'I usually choose assets that have a growth logic, earning capacity, can tell a story, and can create a buzz.'
Growth potential: Different protocols and Dapps have varying indicators for assessing growth potential, such as TVL, number of token holders, trading volume, and storage, which are quantitatively described growth indicators. Building on this, pioneering choices using such quantitative growth indicators combined with circulating market valuation, similar to the PEG ratio in stocks, can calculate a project’s relative valuation, continuously monitor it, and compare it with similar projects to filter more cost-effective growth assets. Additionally, monitor supply and demand, which can be influenced by events such as halvings, staking, and staking rewards.
Ability to make money: For instance, analysis of protocol income, profit, and on-chain transaction analysis.
Public opinion, as mentioned in Fisher's (How to Choose Growth Stocks), emphasizes both intrinsic value and external comprehensive capability; public opinion is the embodiment of the external.
How to deliberately practice and train your coin selection ability?
Training your coin selection ability can be simply done by focusing on the relative exchange rate of small coins to BTC. You will form a matrix with two coordinates: one for up and down, the other for outperforming and underperforming. This will create four quadrants: outperforming BTC during uptrends, underperforming during uptrends, outperforming BTC during downtrends (losing less), and underperforming BTC during downtrends (losing more).
Among them, there's a type of asset that can outperform BTC during uptrends and underperform less during downtrends; this is the optimal asset choice, although it is unstable.
What you need to practice is to continuously monitor and discover such statistical relationships, allowing you to identify high-growth, quality assets that are gaining market attention and may outperform BTC. The crypto market is currently not considered a weak efficient market, so technical analysis can still yield excess returns.
Next, let's discuss how to time BTC.
Buy when no one cares, sell when the crowd is buzzing. On December 26, 2022, Amanda bought BTC at $16,800 all in, based on sufficient liquidity, and when it later dropped to $15K, I knew it was an acceptable normal fluctuation.
In the middle, there are short-term event-driven trades, such as BTC suddenly rising during a banking crisis. On the day of the BTC spot ETF launch in January 2024, I shorted and reduced positions, including options trading. So now the coin supply has increased, and it can be said to have outperformed BTC.
Long-term allocation with periodic selling.
Outperforming BTC means timing and coin selection; if you lack the ability to choose coins, focus on timing and long-term allocations. Buying near the 200-week moving average and periodically selling around 12-18 months post-halving usually captures most of the market's returns.
Do not underestimate the power of timed selling; this has been compared in (Turtle Trading Rules) with various exit strategies, and periodic selling often performs the best. What is the hardest part? It is that everyone is too eager. If you care about short-term gains, the returns will inevitably be very limited.
When is a good selling point?
Recently, many technical indicators have shown signs of peaking. Indeed, historical data is an excellent reference, but I do not believe that every cycle is the same as the previous one. Those who buy are the apprentices; those who sell are the masters.
From a quantitative perspective, we know from calculus that the second derivative can be used to find extremums. When the second derivative = 0, it indicates a maximum. This is inherently a concept of rate; in other words, the growth rate is gradually slowing down, indicating that we are approaching the peak.
In the cryptocurrency space, reflexivity theory is vividly demonstrated. In (Financial Alchemy), it mentions that the market volatility cannot be sustained from the beginning; it is actually the positive feedback of everyone’s thoughts from expectation to realization that cannot last, thus reaching the market peak.
From a qualitative perspective, the market rises for a reason and falls for a reason.
During the bull market of 2016-2017, the cryptocurrency space was euphoric about Wall Street institutions entering the crypto market. However, when the Bitcoin futures launched on CME in December 2017, the public reaction was that Wall Street was shorting Bitcoin, leading to market panic.
In the last bull market of 2020, after the outbreak of COVID, massive QE brought liquidity overflow, causing all risk assets to rise. Thus, after the Federal Reserve announced the cessation of interest rate cuts in November 2021, that round of peak was reached.
In this market cycle, from a long-term perspective, the point of real volatility is the expectation of ETFs. On January 10, the day of its launch, prices began to fall; the selling pressure came from Grayscale's large-scale selling of GBTC, leading to net outflows from ETFs. If you only look at the favorable landing of Trump's election, it indeed shows a recent slowdown in growth, satisfying some signals of cycle peaks. However, my judgment of this market cycle is that this round of interest rate cuts will be slow, and the massive adoption by large institutions is gradually increasing, so there will definitely be a slow bull trend in this market.
What is the source of market dynamics? — Crust Theory.
The cryptocurrency market is unpredictable, but what remains constant is the market's volatility. To capture a certain type of volatility, a framework is needed to understand and capture it, as well as to understand the underlying emotional drivers. Like the center of the Earth, it is the starting point of energy; the intrinsic driving force of the market must come from emotions, which are core—sometimes fear, sometimes greed, or confusion.
Adding on, the project's fundamentals, price performance, and short-term event-driven factors are the mantle.
Only when layered on top of the price performance shown during that time does the prosperity of the market reflect the surface.
Thus, the Crust Theory provides deep insights into the changes in a market, based on what it starts and ends, and at what sentiment level the market is positioned.
The core market momentum must come from sentiment, which is the essence of the Crust Theory. Just like an earthquake, energy changes occurring at the Earth's core manifest as movements of the crustal plates, resulting in intense fluctuations on the surface, layer by layer. You need to perceive where market sentiment starts, iterates, and then develops to unsustainability.
How to judge sentiment? What indicators are there?
Simple indicators, like the fear and greed index. For example, when it’s below 20, it’s unlikely to be a bad buy; above 90, selling won't be a significant mistake either. But behind it, there could be an opening position (opening position refers to an outstanding position in the futures or options market, waiting to be traded and still subject to market price changes).
There are many ways to judge sentiment:
First, ETF inflows are a typical emotional change;
Additionally, outside of US stock trading hours, there are continuous price movements to feel the pulse of market sentiment changes by looking at hourly and minute charts, market opening interest, perpetual premium, and funding rates.
The general conclusion is that the market is still very positive and optimistic. In other words, there is strong buying sentiment in the market with real money being spent.
How to continuously discover new Alpha?
First, actively and consciously accept and understand these new things instead of being fearful. Soros told his disciples to invest first, analyze later, and then see if it can be sustained.
Secondly, do not limit yourself to the small scope of the cryptocurrency space; solving current problems must be approached from a higher perspective and interdisciplinary thinking, with a conscious understanding of various asset classes.
Third, invest with a mindset of worldly gossip. Price reactions are often quicker and more timely; you need to explore what powers drive the price, as there are always traces to discover, leading to new stories.
Regarding the self-growth of traders, can you recommend a book that has changed you?
Amanda: Every year I read 1-2 books that reveal many improvement areas of my past. In 2022, I read the Tao Te Ching twice, in 2023 I read The Art of War, and then I finally read Poor Charlie's Almanack about Mr. Munger, which shocked me. If we talk about trading, it's still (Reminiscences of a Stock Operator) and (Financial Alchemy).
Every day I have an iterative improvement on my personal version, with iterations like 1.01, 1.11, 2.11. It’s a continuous process of enhancing my own cognition, and you never know when it will manifest in your trading. By seeing yourself and the world, you can understand the truth of the market and achieve long-term, stable, and certain returns.
In conclusion.
It's not necessarily about outperforming BTC; if you find a trading strategy that suits you and continuously practice deliberately, the growth it brings will provide you with joy, which is actually a more core motivation supporting each trader's progress than monetary returns. This is why I find the dialogue with traders so important and also hope everyone can find their own trading strategy sooner and experience a sense of closed-loop growth every day.
