One good trade is all you need
This is for my non-trading friends who are curious about crypto-currency and want some exposure to the upside if it takes off, but don’t want to spend any time on it or risk too much money. This is the simplest trade I can think of that has the best risk:reward ratio.
Disclaimer: This is not financial advice and is for educational purposes only.
Here’s the trade:
- Decide how much investing money you could afford to lose without crying.
- Open an account with Coinbase (no affiliation) and buy some Bitcoin at a macro low.
- Open an account with Quantfury (no affiliation; not available in US or Canada) and fund it with that Bitcoin.
- Place a long trade on BTC/USDT for the exact amount you funded.
- Wait until BTC hits a macro top and close the trade.
- Withdraw the funds to Coinbase and sell the BTC for your fiat currency of choice (don’t forget to pay capital gains on this part).
Here’s the trick: when you fund your Quantfury account in crypto, your trades are settled in that crypto. If you trade BTC/USDT (USDT just means synthetic dollars) and for the sake of argument you make 50%, that 50% is credited in Bitcoin.
So when you trade the same asset as you funded, long (meaning, you’re betting it goes up), as long as it does in fact go up, your returns are squared.
If Bitcoin appreciates, say, 4x versus the dollar, you 4x your Bitcoin, but it’s now worth 4x as much. So you make (in dollars) 16x, not 8x.
This is not a risk-free trade. If you stick to a position size of exactly the amount you funded, you lose everything if the asset drops by 50% from the time you place the trade. If it drops by, say, 40%, and then recovers, you don’t lose anything. You only crystallise the loss (or gain) when you close the trade or if your trade gets liquidated.
Everything to do with finances is risky, even pensions and savings accounts (I wrote an article series about that). Here, you can define the risk in advance, which is more than most armchair investors can do. And the high visibility of the risk will make sure you only invest money you can afford to lose.
As every trader knows, it’s not about risk, it’s about risk:reward.
Speaking of reward, there are now plenty of well-known investors—hedge fund guys and billionaires, not crypto-anarchists—who are giving very large numbers for the next Bitcoin high. No-one knows how high it will go, but I haven’t seen any predictions lower than $40,000. A common estimate is $100,000, and eventual highs of a million dollars are seriously discussed. Of course, a world of million-dollar Bitcoin is one where the dollar itself is not worth what it is today.
If one entered this trade with Bitcoin at $10,000, and IF it did indeed go to $100,000, that’s a 100x profit (10x squared, remember), i.e. 10,000% upside.
Fundamental reasons to be long include:
For a great trade you want to combine fundamental strength with a technical reason to enter. This trade only works if you can pick a macro bottom and top, meaning a spot where Bitcoin hits a multi-year low and a multi-year high in price. No-one buys the exact bottom and sells the exact top. But here, as in horseshoes and hand grenades, close enough is close enough.
Good traders I know think it was the recent flash crash of Bitcoin down to 3.8k. After that, it went all the way back up to 10k. Check out the chart (click to go to a bigger version):
The steep red dip you can see there was when everyone sold stocks, Bitcoin and even gold in the big panic when coronavirus really hit in March 2020. The previous bottom at the end of 2019 was actually the real macro bottom of this cycle, and that dip (higher low) confirmed it. Let’s look closer:
Today, 23rd May 2020, Bitcoin is trading around $9,200. I expect it will probably drop a bit from here before smashing 10k once and for all in the summer and never coming back there again. But even if you bought right now (the risky case, because you’re buying high), price would have to come all the way down to $4,600 for the trade to be lost. Is that possible? Yes. Is it likely? Not very. From a technical perspective, it’s below the lowest normal retrace, the 0.786 Fibonacci level.
For price to drop that far, we would need another panic event. I do think it’s likely that there will be a second wave of coronavirus, the economy is generally screwed, and the stock markets will go down for a long time, but not as sharply. This time, investors will likely not blindly sell everything, but also buy things that have outperformed stocks, like gold and Bitcoin (which also happen to be hedges against both deflation and inflation).
So, lots of ifs, and plenty of possibilities. On balance I think it’s more likely than not that Bitcoin does not drop below $4,600 again, ever. But for the sake of argument, let’s call it even. Imagine flipping a coin, and if it comes up tails, you lose your entire stake, and if it comes up heads, you get somewhere between 10 and 100 times your stake back. That is asymmetric risk/reward. Those are the best odds you’re likely to find anywhere, and that’s why I wrote this article.
Honestly, if I took this exact trade and Bitcoin dropped from 10k to 5k and destroyed it, I would sell something on eBay and put the same trade on again, because the trade just got an order of magnitude better: the upside just quadrupled, and the odds of it going down 50% again just dropped considerably.
This is a little more difficult to answer. Since Bitcoin has a four-year halving cycle, it’ll probably be sometime in the next 1–2 years. There are some psychological levels like $50k, $100k, which you might want to front-run (Bitcoin did not get to exactly $20k, but about $19,800).
There are some technical analysis methods that you could use to try to time the top, which are too complex to go into here.
Then there is the market mood. When there are adverts for Bitcoin on television or all over social media, or when acquaintances are talking about how much money they’re making in crypto, it’s probably near the top.
Finally, there’s your own mood. When you are amazed at how much profit you’re in, and you think that you can’t possibly sell now (I’m looking at you, 2017 altseason), that’s exactly the time to sell, or at least close out part of it.
You could set bids to try to get a lower entry price. The risk there is that you miss out if it doesn’t go down as far as you think.
You could take a position that’s smaller than your total funding. What you’re giving up there is some upside multiplier.
You could set a stop-loss order to close the trade if price drops, say, halfway towards your liquidation point. Your risk there is now you have to time when to get back in, with half the funds. You’re only up if it drops further and you succeed in getting a better price.
You could instead fund your account in Ethereum (ETH) and trade that long instead. If crypto-currencies in general get some adoption, Bitcoin will drag the others with it. Ethereum is the second-biggest crypto-currency, and tends to make bigger price moves than Bitcoin, amplifying both risk and reward. It has a huge, dedicated community and is in use for various applications, so it’s unlikely to disappear (unlike many other altcoins).
It’s more likely that ETH drops 50% than that Bitcoin does. It’s also likely to do 2–3x larger moves to the upside.
The other way to make it more risky is to take a position larger than your total funding. Now you’re margin trading. I wouldn’t do this unless you know what you’re doing (in which case, you don’t need any advice from me anyway).
- The price of Bitcoin or Ethereum dropping to the point where your account gets liquidated.
- Your chosen asset failing to make a decent high price (e.g. the project failing catastrophically, or everyone losing interest in the sector).
- You failing to identify the top, or being unwilling to sell there.
- The Quantfury exchange going bust or stealing your funds.
- You deciding to use the same account for trading other things and losing, reducing your funding so that you get liquidated sooner.
- You starting to obsess about the price of Bitcoin, causing you to panic-close too early or otherwise meddle with the trade, and to be boring at parties.
- You getting hacked, losing your password, or accidentally sending funds to the wrong address (unlike with a bank transfer, if you do this, you have no chance of getting them back).
When you make a trade on Quantfury, you’re not actually buying and selling Bitcoin. You’re making a bet on its price movement, like a Contract For Difference. Unlike most other brokers, however, there are no fees on Quantfury (and the spread is excellent—yes, really), and importantly there is no funding fee for holding a position overnight, or for a long time. This makes it suitable for long-term trades.
It’s also almost unique in that you can have your account funded and denominated in crypto. This is what allows the exponential part.
If there are other exchanges that have these features, please let me know. I’ve only found this one.
Sort of. I’m already using my own Quantfury account to trade equities, ETFs, and futures, so it’s a bit more complicated. But I’m using all the elements of this trade: I bought ETH in March at a reasonable price and used it to fund my account. I have orders set to buy BTC/USDT and ETH/USDT (to a total value of a bit less than my funding) if they drop 10–20% from here, and I might dollar-cost average down from there. And I’ll be watching for the big top. If you follow me on TradingView (a basic account is free) you can get notified of my published trading ideas, including when I will try to time the top.
Hell no. I’m just describing what seems to me a unique type of trade (exponential) at a unique time (when crypto is about to get adoption finally). Ya know, for educational purposes.