Article reprinted from: FC Talk
The following text is organized from the Twitter Space series #DialogueWithTraders, hosted by FC, founding partner of SevenX Ventures, Twitter @FC_0X0.
This episode's guest: Amanda, CIO of Chainup Investment, Twitter @WuWei_BeWater.
About Amanda
Amanda: This February, my personal options trading in BTC yielded a 10x return, and this month it is nearing 5x, while the annual return from U.S. stocks is double that of Nasdaq.
Who is this legendary figure?
Currently the CIO of Chainup Investment, Amanda built a panic index options trading model on Wall Street; she joined the state investment capital in 2011, engaging in primary market investments and secondary market trading, leading the listing of Anxin Securities.
Entering the cryptocurrency space in 2017, the investment concepts and trading experiences accumulated in the traditional financial market have made her clear on how various financial sub-sectors make money. After thoughtful adjustments, she summarized the investment trading methodologies suitable for the crypto industry from traditional financial capital markets and selflessly shared them.
How to formulate your own investment strategy?
Start by asking yourself several questions from two perspectives.
The first perspective is from the individual level, considering five aspects:
1. The total amount of investable assets, provided that it is not limited by loan repayments or time liquidity. 2. Investment goals and return expectations: If it’s 6%, leveraging to buy U.S. Treasuries (credit bonds) is sufficient; if it’s 20%, quantitative arbitrage is enough; if you want higher returns, seek high-growth assets. 3. Risk preference and tolerance: What is the maximum loss/volatility you can withstand? If you can only bear a 20% fluctuation for this asset, do not leverage more than 5 times. 4. Time invested: When might I need this money? When I retire? Next year? 5. Liquidity arrangements: Treat yourself like a company to calculate the balance sheet and income statement, considering personal life arrangements and bill payments.
The second perspective is from the market level, paying attention to two aspects:
1. Market Cycle: When in the middle of a market cycle, does it match my investment time and position control? 2. Position Control: Do not pursue diversification for its own sake; instead, see where the risk exposure originates and then diversify assets. Otherwise, you may find that despite the different names of assets, the risk sources are from the same category.
What kind of strategy can outperform BTC?
Outperforming BTC mainly involves timing and coin selection.
First, let's discuss how to select coins.
BTC's volatility has narrowed significantly compared to before, showing a stable development in the mid to late phase. Meanwhile, smaller coins with potential can exhibit stronger growth than BTC.
So how do we define the indicators of a project's growth potential? Amanda: "I usually choose assets that have a growth logic, profit-making ability, can tell a story, and can create an impact."
Growth potential: Different protocols and DApps have varying indicators to judge growth potential, such as TVL, number of token holders, trading volume, etc. Based on this, innovative choices can use such quantitative growth indicators along with the circulating market cap of the coin, similar to the PEG ratio in stocks, to calculate the relative valuation of a project, monitor it over the long term, and compare it with similar projects to filter for more cost-effective growth assets. Additionally, monitor supply and demand, influenced by factors like halving, staking, and staking rewards.
Profit-making ability: For example, analyzing protocol revenue, profits, and on-chain transaction analysis.
Public sentiment, as mentioned in Fisher's 'How to Choose Growth Stocks', must have both intrinsic and extrinsic comprehensive capabilities, with public sentiment being the reflection of the extrinsic.
How to deliberately practice and train your ability to select coins?
A simple way to train your coin selection ability is to pay attention to the relative exchange rate of small coins to BTC. You will form a matrix with two coordinates: one for up/down and the other for outperforming/underperforming. This will create four quadrants: outperforming BTC when rising, underperforming BTC when rising, outperforming BTC (less loss) when falling, underperforming BTC (more loss) when falling.
Among them is a type of asset that can outperform BTC when it rises and lag less when it falls. This is the best asset choice, but it is unstable.
What you need to practice is long-term monitoring and judgment to discover such statistical relationships, which can help you find assets with high growth potential, good quality, and market attention that may outperform BTC. The crypto market is not considered a weakly efficient market, so technical analysis can still yield excess returns.
Let's discuss how to time BTC.
Buy when no one cares and sell when the crowd is clamoring. On December 26, 2022, Amanda went all in on BTC at $16,800 with sufficient liquidity, and when it later dropped to $15K, I understood this was an acceptable normal fluctuation.
There are short-term event-driven trades, such as when BTC suddenly rises during a banking crisis. On January 24, the day the BTC spot ETF was listed, I shorted and reduced my position, which has led to an increase in the amount of coins, effectively outperforming BTC.
Long-term cycle allocation with regular selling
Outperforming BTC is about timing and coin selection. If you cannot select coins, focus on timing and long-term allocation. Buying near the 200-week line and selling regularly about 12-18 months after halving can generally capture most of the market's returns.
Do not underestimate timed selling; this has been compared in 'The Turtle Trading Rules' among various exit strategies, with regular selling actually performing the best. What is the hardest part? It is that everyone is very anxious. If short-term gains are a concern, the returns obtained will be very limited.
When is a good selling point?
Recently, many technical indicators have shown signs of peaking. Indeed, historical data is a good reference, but I do not think every cycle is the same as the previous one. Those who can buy are disciples; those who can sell are masters.
From a quantitative perspective, we know from calculus that the second derivative can be used to find extrema, with the second derivative equaling zero indicating a maximum value. It is inherently a concept of rate; in other words, the rate of increase is gradually slowing down, indicating we are approaching the peak.
In the cryptocurrency space, the reflexivity theory is vividly demonstrated. In 'Financial Alchemy', it mentions that the reflexivity theory states that market fluctuations cannot be sustained from the beginning, as the positive feedback loop of everyone's ideas from expectation to realization cannot last, thus reaching the market peak.
From a qualitative perspective, the market rises for certain reasons and falls for others.
During the bull market of 2016-2017, the cryptocurrency community was excitedly imagining that Wall Street institutions would enter the cryptocurrency market. However, when CME launched Bitcoin futures in December 2017, the public's reaction was that Wall Street was coming to short Bitcoin, leading to market panic.
In the last bull market in 2020, after the outbreak of COVID-19, massive QE brought about liquidity overflow, causing all risk assets to rise. Therefore, when the Federal Reserve announced the end of rate cuts in November 2021, it marked the peak of that cycle.
In this market cycle, from a macro perspective, the true point of volatility began with the anticipation of ETFs. On the day it went live on January 10th, prices began to decline, with selling pressure coming from Grayscale's large sell-off of GBTC, leading to net outflows from ETFs. If you only consider the favorable outcome of the Trump election, indeed the recent growth rate has slowed down, meeting some signals of a cycle peak. However, my assessment of this market cycle is that this round of rate cuts is gradual, and the massive adoption by large institutions is also gradually increasing. Therefore, there will inevitably be a slow bull trend in this market.
What is the driving force of the market? - Crust Theory
The cryptocurrency market is unpredictable, but the volatility remains constant. To capture the desired volatility, a framework is needed to understand how the underlying sentiment drives it. Like the Earth's core, it is the starting point of energy; the market's primary driving force must come from sentiment, which is core, sometimes panic, sometimes greed, or confusion.
On top of that, the project's fundamentals and price performance, along with short-term event-driven factors, form the mantle.
Then, combining the prices exhibited during that period, the common reflection of market prosperity is the surface.
Therefore, the Crust Theory provides profound insight into market changes, based on what it starts from and what it ends on. At what level is the market's sentiment positioned?
The core market momentum must come from sentiment. This is the core of the Crust Theory. Just like an earthquake, energy changes occur in the Earth's core, reflecting in the movement of tectonic plates, and finally manifesting as violent fluctuations on the surface. Layer by layer, you need to perceive where the market's sentiment begins, iterates, and then develops to a point where it cannot be sustained.
How to judge sentiment, what indicators are there?
Simple indicators, such as the fear and greed index. For example, when it is below 20, you probably won't make a wrong buy; at above 90, selling won't be a big mistake either. However, behind it might be an open position (open position: refers to positions in futures or options markets that are not yet closed and are still affected by market price fluctuations).
There are many ways to gauge sentiment:
First, ETF inflows are a typical emotional change.
Additionally, there are continuous price fluctuations outside of U.S. stock trading hours, allowing one to feel the pulse of market sentiment changes by looking at hourly and minute charts, market opening interest, perpetual premium, and funding rates.
The overall conclusion is that the market is still very optimistic. In other words, real money is being put into the market, showing strong bullish sentiment.
How to continuously discover new alpha?
First, consciously and proactively accept and understand these new things, rather than being afraid. Soros told his disciples to invest first and analyze later, then see if it can be sustained.
Second, do not limit yourself to the small scope of the cryptocurrency space. To solve current problems, you must use a higher perspective and interdisciplinary thinking, consciously understanding various asset classes.
Third, invest with a mindset that is curious about worldly gossip. Price reactions are often quicker and more timely; exploring what forces drive it in the direction of the price is essential, as there are always traces to discover, and by following the clues, you will uncover new stories.
Regarding self-growth for traders, can you recommend a book that changed you?
Amanda: Every year I read 1-2 books that reveal many areas for improvement in my past self. In 2022, I read 'Tao Te Ching' twice, and in 2023, I read 'The Art of War' by Sun Tzu. Only then did I finally read 'Poor Charlie's Almanack' about Charlie Munger, which shocked me. If we're talking about trading, it's still 'Reminiscences of a Stock Operator' and 'Financial Alchemy.'
Every day I have iterations like 1.01, 1.11, 2.11 on my personal version, which is a continuous process of improving my cognition. You never know when it will translate into your trading because to see yourself and the world allows you to 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 then practice it deliberately, the growth it brings you is actually a more core motivation that sustains every trader's progress than monetary returns. This is why I believe doing 'Dialogue with Traders' is very important, and I hope everyone can find their own trading strategy earlier and experience a sense of closed-loop growth every day.
