The following text is summarized from the Twitter Space series #Dialogue with Traders, hosted by FC, founding partner of SevenX Ventures, Twitter @FC_0X0
Guest: Amanda, CIO of Chainup Investment, Twitter @WuWei_BeWater
About Amanda
Amanda, in February this year, her personal options trading on a BTC basis yielded a 10x return, and this month it has reached nearly 5x, with her annual US stock returns being twice that of Nasdaq.
Who is this legendary figure?
She is currently the CIO of Chainup Investment, and has built a panic index options trading model on Wall Street; she joined National Investment Capital in 2011, engaging in primary market investments and secondary market trading, and led the listing of Anxin Securities.
In 2017, she entered the crypto market, and with the investment concepts and trading experience accumulated in the traditional financial market, she clearly understands how to make money in various financial sub-sectors. After her own reflection and adjustment, she has summarized the investment and trading methodologies from the traditional financial capital market that are suitable for the crypto industry, and generously shares them.
How to develop your own investment strategy?
First, from two perspectives, ask yourself a few questions.
The first is from a personal perspective, reflecting on 5 aspects:
1. The total investable asset volume, with the premise: not restricted by loan repayment or time liquidity
2. Investment goals and return expectations: if it's 6%, buying leveraged US Treasuries (credit bonds) is enough; if it's 20%, quantitative arbitrage is enough; if you want higher, you need to find high-growth ones.
3. Risk preference and tolerance: how much maximum loss/volatility can you bear, if you can only tolerate 20% volatility in this asset, don't leverage it more than 5 times.
4. Investment time: when might I need to use this money, at retirement? Next year?
5. Liquidity arrangement: treat yourself as a company and calculate the balance sheet and income statement, considering personal life arrangement and bill payments.
The second is from a market perspective, paying attention to 2 aspects:
1. Market cycle: when in the middle of the market cycle, whether it matches my investment time and position control.
2. Position control: don't deliberately pursue diversification, but look at where the risk exposure comes from, and then diversify the assets, otherwise you'll find that although the asset names are different, the risk sources are the same category.
What kind of strategy can outperform BTC?
Outperforming BTC is mainly about timing and coin selection.
First, how to select coins
BTC's volatility has narrowed a lot compared to the past, and it seems to be in the middle-to-late stage of stable development. While the small altcoins with potential to cause a stir have stronger growth potential than BTC.
So how do we define the growth indicators of a project?
Amanda: "When I choose assets, I usually choose those with growth logic, earning ability, and the ability to tell a story and cause a stir."
- Growth: Based on the different functions of the protocols and Dapps, they have different growth indicators, such as TVL, Token Holder count, trading volume, storage, etc. to quantitatively describe the growth.
On this basis, use these quantitative growth indicators combined with the circulating market cap of the token, similar to the PEG ratio in stocks, to calculate the relative valuation of a project, long-term monitoring and comparing with similar projects to screen for assets with better growth-to-value ratio.
Also, monitor supply and demand, factors affecting supply and demand such as halving, staking, staking rewards; - Earning ability: such as protocol revenue, profit analysis and on-chain transaction analysis.
- Sentiment, from Fisher's "How to Choose Growth Stocks", it needs to have both intrinsic and external comprehensive capabilities, so sentiment is the manifestation of the external.
How to deliberately practice and train your coin selection ability?
A simple way to cultivate your coin selection ability is to focus on the relative exchange rate of small altcoins against BTC, you will form a matrix, with two coordinates, one is up and down, the other is outperforming and underperforming BTC.
Among them, there is a class of assets that can outperform BTC when going up and lose less when going down, this is the best asset choice, but it is unstable.
What you need to practice is to long-term monitor and judge to discover such statistical relationships, so that you can find the targets with high growth, good quality, and market attention, which may outperform BTC. The crypto market is not a weak efficient market yet, so technical analysis can still generate excess returns.
Then talk about how to time BTC
Buy when no one cares, sell when everyone is talking about it. Amanda bought BTC at $16,800 on December 26, 2022, keeping liquidity, and when it dropped to $15K, I knew this was an acceptable normal fluctuation.
In the middle, there are short-term event-driven trades, such as BTC suddenly rising during the banking crisis, shorting and reducing positions on the day the BTC spot ETF was launched in January 2024, including options trading, so the coin holdings have increased, so it can be said to have outperformed BTC.
Long-cycle allocation and periodic selling
Outperforming BTC is about timing and coin selection, if you don't have the ability to select coins, then do timing and long-cycle allocation. Those who bought around the 200-week moving average, and sold periodically around 12-18 months after the halving, basically captured the majority of the market's gains.
Don't underestimate periodic selling, this is also compared in the "Turtle Trading Rules", various different exit strategies, and periodic selling actually performs the best. The most difficult point is what? It's that everyone is too impatient. If you care about short-term returns, you are doomed to have very limited gains.
When is a good time to sell?
Recently, many technical indicators have shown signs of topping out, and it is true that historical data is a good reference, but I don't think every cycle is the same as the previous one. Those who can buy are disciples, and those who can sell are masters.
- From a quantitative perspective, we know from calculus that the second derivative can be used to find the extremum, and when the second derivative is 0, it is the maximum. It is a concept of rate, in other words, the rate of increase is gradually slowing down, which means it is approaching the top.
- In the crypto world, the theory of reflexivity is fully manifested. In "The Alchemy of Finance", it is said that the theory of reflexivity states that market fluctuations from the beginning to the unsustainable, is actually the feedback loop from expectation to realization that cannot be sustained, which is when the market reaches its top.
- From a qualitative perspective, the market rises for a reason, and it will also fall for a reason.
- During the bull market of 16-17, the crypto world was enthusiastic about Wall Street institutions entering the crypto currency, but in December 2017, when CME launched Bitcoin futures, the reaction in the market was that Wall Street was going to short Bitcoin, and the market sentiment turned panicked.
- In the previous bull market in 2020, after the COVID outbreak, the massive QE led to liquidity overflow, causing all risk assets to rise, so when the Fed announced the end of rate cuts in November 2021, that was the peak of that cycle.
- In this market cycle, from a long-term perspective, the real starting point of volatility was the expectation of the ETF. On the day of the launch on January 10th, the price started to fall back, and the selling force came from Grayscale's large-scale GBTC sales, leading to the net outflow of the ETF. If you simply look at the positive impact of Trump's election, the growth rate has indeed slowed recently, meeting some of the cyclical topping signals. But my judgment on this market cycle is that this round of rate cuts is slow, and the massive adoption by large institutions is also gradually being pushed up, so this market will inevitably have a slow bull trend.
What is the driving force of the market? - The Earth's Crust Theory
The crypto market is volatile, but the volatility of the market is unchanging. To capture the desired volatility, you need a framework to capture it, and to understand the underlying emotional drive. Like the core of the earth, it is the starting point of energy, and the driving force of the market must come from emotions, which is the core, sometimes it is panic, greed, or confusion.
Layered on top, the fundamentals of the project, price performance, and short-term event-driven factors are the mantle.
Then superimposed on the price performance during that period, the overall reflection of the market prosperity is the crust.
So the core theory is to have a deep insight into the changes in a market, based on what it starts and what it ends. What is the sentiment level of the market?
The core market momentum must come from sentiment, which is the core of the core theory, just like an earthquake, where the energy change occurs in the core, then manifests in the movement of the tectonic plates, and finally has violent fluctuations on the surface, layer by layer. You need to perceive where the market sentiment starts, iterates, and then develops to the point where it can no longer be sustained.
How to judge sentiment, what are the indicators?
Simple indicators, such as the fear and greed index. For example, when it is below 20, you probably won't buy wrong, and when it is above 90, you won't sell too wrong. But it may be due to opening positions (opening positions: refers to the open positions in the futures or options market, where the commodity is still in the market waiting for trading and is still affected by market price changes).
There are many ways to judge sentiment:
First, ETF inflows are a typical sign of sentiment change;
Additionally, during non-US trading hours, there are continuous price changes, which can feel the pulse of market sentiment changes, by looking at hourly and minute charts, market opening interest, perpetual premium, and funding rate.
The overall conclusion is that the market is still very positive and optimistic. The real money is being spent, indicating a strong long sentiment.
How to continuously discover new Alpha?
First, have a conscious and proactive acceptance and understanding of these new things, rather than being very afraid. Soros told his disciple to invest first, then analyze, and then see if it can be sustained.
Second, don't limit yourself to the small crypto space, solve the current problems with a higher perspective and cross-disciplinary thinking, and have a conscious understanding of various asset classes.
Third, invest with a gossipy mindset about the world. Price reactions are often faster and more timely, so follow the price to explore what forces are driving it behind the scenes. There must be clues, and by following the clues, you will discover the new stories.
Regarding the self-growth of traders, what book would you recommend to change yourself?
Amanda: Every year I can read 1-2 books that discover a lot of room for improvement in myself. In 2022, I read the Tao Te Ching twice, and in 2023, I read The Art of War, and then I finally read the Tao of Charlie Munger, which shocked me.
If just talking about trading, it's The Reminiscences of a Stock Operator and Market Wizards.
Every day I have an iterative improvement on my personal version, like 1.01, 1.11, 2.11. It's a continuous process of improving my cognition, and you don't know when it will be realized in your trading, because by seeing yourself and the whole world, you can understand the truth of the market and get long-term, stable, and definite returns.
In conclusion
It's not necessary to outperform BTC. If you find a trading strategy that suits you and keep practicing deliberately, the growth that brings you pleasure is actually the core driving force for every trader to move forward, more than financial returns. This is why I think doing "Dialogues with Traders" is so important, and I hope everyone can find their own trading strategy and have a sense of closed-loop growth every day.
