Crypto Trading For Dummies
By Eugene Ng Ah Sio - 22-Nov-2024
Given the latest bitcoin breakouts to new all-time highs, some of new traders may be entering the crypto rabbit hole for the first time. After developing severe mental aids staying in this space for years, I thought I'd impart some learning lessons that I picked up (painfully), so that all new traders hopefully have a better time than I did when learning the tricks of the trade. The purpose of writing this article is also to share several approaches to trading the crypto market which I think makes sense, if you're starting out with a smaller stack (four-to-five figure portfolios).
The article “Crypto For Dummies (2024 Edition)” first appeared on X and has been formatted and republished for this blog with permission from the author, Eugene Ng Ah Sio.
Let’s start with a few Golden Rules of Crypto Trading.
- If you protect your capital well, the profits will come eventually.
- You do not need leverage to succeed.
- Decide how much money you want to commit to crypto up front, and NEVER wire more money later on in the cycle.
These rules are simple but surprisingly hard to obey for new traders.
A Quick Note About the Author: Beyond his well-earned fame on social media with 99,000 followers on X at the time of publishing, 0xENAS (a.k.a., Eugene) is one of the all-time greats in crypto trading verified on the Coin Market Manager Leaderboard. Ranked 3rd on the PNL leaderboard and 28th on the volume leaderboard, 0xENAS is uniquely qualified to share insights that will help novice and veteran traders alike in their journey.
Downside Minimization is the Key to Success.
Crypto is splattered with constant “dream shot” scenarios of making 100xs that induce maximum FOMO. Many of these screenshots are made with 10x to 100x leverage plays, which often result in permanent loss of capital. Due to survivorship bias however, traders on social media only see the wins but not the losses.
When analyzing a setup, I often ask myself: “What is the maximum I'm willing to lose on this trade'?”
With that in mind I begin to work backwards to find the right size for my trades. In almost all cases, the loss I'm willing to accept is the highest weighted factor in my decision-making process. As a useful benchmark, mine goes something like this:
- Low conviction - Max Loss = 1%
- Normal Conviction - Max Loss = 2%
- High Conviction - Max Loss = 5%
- Ultra-High Conviction - Max Loss = 10%
How to Properly Use Leverage:
This is by far the #1 killer of all market participants, and this is an extension of Golden Rule 1. High levels of leverage (more than 5:1) are absolutely unnecessary because good traders want to focus on volatility minimization to the downside. Leverage increases volatility both ways.
The desire to use leverage often stems from greed where we wish to make more with our existing pool of capital. This is a mistaken POV. What we should be prioritizing, is executing on good risk-reward setups where risks to the downside are defined. For example, longing a 4 hour level retest or longing a historical support level can be reasonable trades because invalidation levels are clear, and near a trader’s entries. Hence even if a trader is wrong on the trade idea, their loss of capital is low.
Money Out, Not Money In
The only time a trader should be onboarding into crypto is the day they decide to fully commit to the space as an investor or speculator. Whilst there are some exceptions to this rule, by and large following it will protect them from the second biggest mistake people make that results in financial ruin: Doubling down as prices go up.
Too often, what happens in a bull market is traders size down at the start, as they have no track record of winning and they have not yet experienced the greed and euphoria that comes later on. At this stage, people typically tend to bet smaller, maybe allocating 1-5% of their total net worth in crypto. After a couple of wins, confidence increases, a track record shows itself and you believe you have what it takes to size more aggressively. What people don't realize is that everyone is a genius in a bull market.
After sizing up towards the later end of the cycle, what started as a 3% crypto allocation becomes a 30% allocation which ultimately collapses when the bubble pops. By having a hard rule to never onboard more fiat, traders can stop themselves from making this mistake. If a trader finds that their capital pool has dwindled to a size where they feel a need a top up, then maybe they shouldn't be speculating in the first place.
Starting Out Today
If a reader happens to come across this article as they’re just discovering crypto or ready to commit in a serious way at understanding this game, I offer how I would approach the markets below.
General Frameworks:
There are two main domains to play in within crypto:
- Centralised Exchange (CEX) Trading
- On-Chain Trading
Each of these domains require quite different approaches to achieve success, and traders do not necessarily need to be proficient in both to succeed, but they definitely need to be skilled in at least one.
CEX Trading involves quick scalps for percentage-based wins where a trader is optimizing for minimal loss in the form of tight stops. A simple good risk-reward (R/R) trade would look something like this:
- Entry: $1.00
- Target: $1.25
- Invalidation: $0.95
- R/R = $0.25 / 0.05 = 5.0
How a trader finds these setups or where they decide to place these variables is up to them. But the general framework is that traders should have tight stops that protect their downside. Traders aren't necessarily playing for homeruns, but their goal is to compound successful trades like the one above consistently. I guarantee to traders who do this that achieving a 3-10x on their whole book without leverage is possible.
On-chain trading involves very early punts for multiples-based wins where traders optimize for minimal loss in the form of low valuations. A good on chain R/R trade would look like:
- Entry: $2m FDV
- Target: $20m FDV
- Invalidation: Zero
- R/R = 10.0
As this example shows, there is no invalidation for early on chain punts, but a trader protects themselves by going up the risk curve such that individual bet sizes don't need to be too big, and yet offer sizable enough upside to make it worth it.
For the larger accounts reading this, a key target size I would use for on-chain punts is 1% of total supply. At $2m FDV, this costs $20,000. If a trader is managing a mid-six-figure book, this would allow for reasonable bet sizes to be made without risking too much capital, whilst offering sufficient exposure if they happen to chance upon the next shitcoin that gets listed on a tier-one exchange (e.g., Binance or Coinbase). This is the most common way I've seen people make seven figure profits on individual bets (e.g., buy 1% of supply at $5 million FDV, ride it to $500 million FDV and exit for $5 million PNL).
Closing Thoughts
How each trader chooses their path will be up to their investing style.
As a trader, I would recommend smaller accounts to attempt on-chain trading first, and then eventually incorporate CEX trading into the game as a trader’s book becomes larger. Past a certain point of profit, on-chain trading will likely become a very small subset of a trader’s overall strategy, but that only becomes relevant in the high seven-figure portfolio territory.
Remember: these trading methods require very different ways of thinking about risk. Thus, being good at one does not translate to being good at another. Iin fact it can sometimes be inversely correlated.
Whilst traders who are reading this in the current phase of this market cycle are no longer early to the trenches, I would say that now is possibly the easiest time to generate profit in the last three years (since early 2021). Traders will be facing against much more experienced and skilled opponents who have survived the trenches over the last three years of a PvP market, but new traders still have one key advantage: a free mind, unburdened by what has been.
Use that as an advantage might just help new traders outperform the “old guard” in this new cycle.
Author’s Note: The initial comments to this post do indicate that we are truly in PvE; my IQ is lowered just reading them.