The following text is organized from the Twitter Space series #Dialogue with Traders, hosted by FC, founding partner of SevenX Ventures, Twitter @FC_0X0.
Guest for this episode: Amanda, Chainup Investment CIO, Twitter @WuWei_BeWater
About Amanda
Amanda, in February this year, achieved a personal options trading return of 10 times on BTC basis, and this month it has approached 5 times, while the annual return on US stocks is twice that of Nasdaq.
Who is this legendary woman?
Currently the CIO of Chainup Investment, she built a panic index options trading model on Wall Street; she 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, she accumulated investment philosophies and trading experiences from traditional financial markets, which allowed her to understand how various financial segments make money. After thoughtful adjustments, she summarized which traditional financial capital market methodologies are suitable for the cryptocurrency industry and selflessly shared them.
How to formulate your own investment strategy?
Start by asking yourself a few questions from two perspectives.
The first aspect is from the personal perspective, considering five aspects:
1. Total investable asset volume, premise: not limited by loan repayment or time liquidity.
2. Investment goals and return expectations: If it's 6%, leveraging to buy US bonds (credit bonds) is enough; if it's 20%, quantitative arbitrage is sufficient; for higher returns, look for high-growth assets.
3. Risk preference and tolerance: How much maximum loss/volatility can you tolerate? If you can only handle a 20% fluctuation in this asset, don't leverage above 5 times.
4. Time investment: When might I need this money? When I retire? Next year?
5. Liquidity arrangement: Treat yourself like a company to assess balance sheets and income statements, considering personal life arrangements and bill payments.
The second aspect is from the market perspective, focusing on 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: Don't deliberately pursue diversification, but rather understand where the risk exposure comes from before diversifying assets, or you might find out later that although the asset names differ, the sources of risk are from the same category.
What kind of strategy can beat BTC?
Beating BTC mainly involves timing and coin selection.
First, let's talk about how to choose coin types.
BTC's volatility has narrowed significantly compared to before, showing signs of stable development in the mid to late stages. Meanwhile, small coins with potential to create buzz have stronger growth potential than BTC.
So how do we define the indicators of a project's growth?
Amanda: 'I usually choose assets that have both growth logic and the ability to make money, and also tell a story and create buzz.'
Growth potential: Different protocols and Dapps have different criteria for judging growth metrics, such as TVL, the number of token holders, trading volume, and storage, which are quantitative indicators of growth.
Based on this, pioneering choices use such quantitative growth indicators, combined with the circulating market value of the coin, similar to the PEG metric in stocks, to calculate the relative valuation of a project, monitor it long-term, and compare it with similar projects to filter assets with better growth-to-price ratios.
Additionally, monitor supply and demand factors that influence supply and demand, such as halving, staking, and staking rewards.Profitability: For example, analyzing protocol income, profits, and on-chain trading.
Public sentiment, as mentioned in Fisher's (How to Choose Growth Stocks), must have both connotation and extension capabilities; public sentiment is the manifestation of extension.
How to deliberately practice and train your ability to choose coins?
Training your ability to choose coins can be simply done by paying attention to the relative exchange rates of small coins against BTC. You will form a matrix with two coordinates: one for up/down and the other for beating/lossing to BTC. This will create four quadrants: beating BTC while up, losing to BTC while up, beating BTC while down (losing less), and losing to BTC while down (losing more).
Among them, there is a category of assets that can outperform BTC during an uptrend and underperform less during a downturn, making it 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 will help you find high-growth, good-quality, and market-attended targets that may outperform BTC. The cryptocurrency market is not considered a weak efficient market, so technical analysis can still yield excess returns.
Next, let's talk about how to time BTC.
Buy when no one cares, sell when voices are loud. Amanda went all in on BTC at $16800 on December 26, 2022, based on sufficient liquidity, and when it later dropped to $15K, I knew this was an acceptable normal fluctuation.
There were short-term event-driven trades in between, such as BTC suddenly rising during a banking crisis, and on the day of the BTC spot ETF listing in January 2024, positions were reduced and options trading occurred, so now the amount of coins has increased, which can be said to have beaten BTC.
Long-term allocation with periodic selling.
Beating BTC is a matter of timing and choosing coins. If you can't choose coins, then focus on timing and long-term allocation. Buying near the 200-week moving average and selling periodically 12-18 months after the halving can help you capture the majority of market returns.
Don't underestimate timed selling. This has been compared in (Turtle Trading Rules), where various exit strategies show that regular selling often performs the best. The hardest part? Everyone is very anxious. If you care about short-term gains, the returns you obtain 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 don't believe every cycle is the same as the previous one. Those who buy are apprentices, while those who sell are masters.
From a quantitative perspective, we know from calculus that the second derivative can be used to find extrema; when the second derivative equals 0, it indicates a maximum. It is inherently a concept of rate, meaning the growth rate is gradually slowing, indicating proximity to a peak.
In the cryptocurrency market, reflexivity theory is vividly manifested. In (Financial Alchemy), it states that market volatility, from beginning to unsustainability, is essentially the positive feedback of people's thoughts from expectation to realization unable to last, reaching the market's peak.
From a qualitative perspective, markets rise for certain reasons and fall for others.
During the bull market of 2016-2017, the cryptocurrency space was excited about Wall Street institutions entering the cryptocurrency market, but when the CME launched Bitcoin futures in December 2017, the reaction was that Wall Street was coming to short Bitcoin, causing panic in market sentiment.
In the last bull market of 2020, after the outbreak of COVID, massive QE led to liquidity overflow, resulting in all risk assets rising. Thus, after the Federal Reserve announced the cessation of interest rate cuts in November 2021, that round peaked.
In this market cycle, from a macro perspective, the true point of volatility is the expectation of ETFs. On January 10, the day it launched, the price began to retract, with selling pressure coming from Grayscale's large amount of GBTC that needed to be sold, leading to a net outflow from the ETF. If you solely look at the favorable developments from Trump's election, the recent growth rate has indeed slowed, meeting some signals of a peak in the cycle. However, my judgment on this market cycle is that this round of interest rate cuts will be gradual, and the massive adoption by large institutions is also gradually increasing, so 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 of the market remains unchanged. To capture what kind of volatility you want, you need a framework to capture it and to understand how the underlying emotional drivers work. Like the Earth's core, it is the starting point of energy, and the market's driving force must come from emotions; it is the core, sometimes out of fear, greed, or confusion.
On top of that, the project's fundamentals, price performance, and short-term event-driven factors are the mantle.
Then layering on the price reflected during that period, the collective reflection of market prosperity is the surface.
Therefore, the crust theory offers profound insights into market changes, based on what it starts and ends, and what level market sentiment is at.
The core market momentum must come from emotions; this is the essence of the crust theory. Just like an earthquake, energy changes occur from the Earth's core, then manifest in the movement of tectonic plates, and finally result in intense fluctuations on the surface, layer by layer. You need to sense where the market sentiment begins, iterates, and develops to a point where it cannot be sustained.
How to judge sentiment and 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 90 or above, selling won't be a big mistake either. But in the end, there might be an opening position (opening position: refers to the position in the futures or options market that is still open and subject to market price fluctuations).
There are many ways to judge sentiment:
Firstly, ETF inflow is a typical emotional change.
Additionally, there are continuous price movements outside of US stock trading hours, allowing one to feel the pulse of market sentiment changes by observing hourly and minute charts, market opening interest, perpetual premiums, and funding rates.
The overall conclusion is that the market is still very optimistic. That is, real money is flowing into the market, showing strong bullish sentiment.
How to continuously discover new Alpha?
Firstly, consciously and proactively accept and understand these new things, rather than being overly fearful. Soros told his apprentices to invest first and analyze later to see if it can be sustained.
Secondly, do not limit yourself to the small scope of the cryptocurrency world; solving current problems must be approached with a higher perspective and interdisciplinary thinking, with conscious understanding of various major asset classes.
Thirdly, approach investment with a mindset of curiosity about the world. Price reactions are often quicker and more timely, so you should explore what forces are driving the price, as there must be traces; you will certainly find clues and dig deeper to discover new stories.
Can you recommend a book that has changed you for self-growth as a trader?
Amanda: Every year I read 1-2 books that reveal many areas for my improvement. In 2022, I read the Tao Te Ching twice, and in 2023, I read The Art of War, and it was only then that I finally read the book about Mr. Munger, Poor Charlie's Almanack, which shocked me.
If we only talk about trading, it would still be (Reminiscences of a Stock Operator) and (Financial Alchemy).
Every day I am iteratively improving my personal version with increments like 1.01, 1.11, 2.11; this ongoing process of enhancing my understanding means that at some point, it will materialize in my trading, because seeing myself and the world allows me to understand the market's truth and achieve stable, certain long-term returns in this market.
In conclusion
It is not necessary to beat BTC if you find a trading strategy that suits you and then continuously practice deliberately and improve. This growth brings you joy, which is actually a more fundamental motivation that sustains each trader's progress than monetary returns. This is why I think doing (Dialogue with Traders) is important, and I hope everyone can find their own trading strategy sooner and have a sense of closed-loop growth every day.