Been a fun ride in the past 3 weeks (bear in mind the whole thing tanks -85%, yep negative 85%, from a few months ago). Below is the actual trading log for the past month.
This specific market is so inefficient in that:
- Buy Side Order Book: Studying the second handle on the buy-side order book for long enough for some quarters, you will know that someone OR something is creating what I call “artificial price floor” as price appreciation has rather been very laddered in the past 3-4 quarters, and price depreciation has been precipitous in the terms of the steepness of the slope. This is even more pronounced if you study the “buy-side” order book vs. “sell-side” order book interaction down to the “1-basis point” level. Anything above 30-basis points aka the spreads (how these exchange market makers make their $) masks this.
- Inefficient Market Pricing: If you look at the ownership distribution of the top 5 most traded assets…it’s actually only owned by 20+ accounts. Bear in mind individuals can own > 1 account so essentially…
- Incentive Structure: These guys have all the incentive (monetary and psychological) mechanism to not let the whole thing drop too deep too fast. I don’t think anyone would like to see their net worth go from $500M today down to just $100M tomorrow.
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- MATH TIME! You might wonder how the incentive structure plays in the whole pricing of these assets…They are willingly to “sacrifice” arbitrarily up to 15% of their net worth instantly to pool into a pool to create a upward trajectory ladder on the “buy side order book” which if the overall price appreciates over a medium-term duration of > 17.64% to be exact due to their ladder pricing mechanism, they win out. Net worth back to $500M.
Some Lessons
- 2000 to 5: I went from trading 2000+ trades per month in March 2017 in this space to now just 2-5 trades per week. You get more clarity on your brain and helps you think better the potential moving parts.
- Duration: duration is a lot shorter now if you observe the buy and sell window, we are talking about seconds up to 1-2 hours
- Good Sleep YA!!!: The trading log below tracks trading down to the second time level (second level is only what we need for this asset, not nano-seconds). I set up the order pair before I head to bed around 12:00 – 2:00 AM and set up a sell order accordingly as well within a tight bandwidth. I adjust the bandwidth between [-2%,+2%] up to [-8%, +12%]
- Learn to Manage Pain: You learn how to manage pain as you go along, you lost big and hopefully win big back in the days. Back in 2017, you can see a 30% gain in an hour which could mean $30k in gain on an hour and equally the same on the flip side as well…but perhaps even more b/c humans treat loss (negative) as financial + psychological loss whereas we treat gains as just financial gains (general framework). Now, you just need to ladder 3% gain daily and ladder you way up for the exponents.
- Capital Mgmt: trading investors capital has totally different mentality given the incentive structure and access to capital. More on this in our lunch tomorrow.
No $ in Eyesight: When I pull out in the short-term, I usually transfer the full tradeable capital back into the checking account for psychology reason. It’s one way to curb human brain’s trading ‘addiction’ / psychology due to price movements. Though movement of capital in and out will cost ~$50 one way so basically $100 both ways. But very good control measure.
P.S. The Pro version allows you to trade on 0% maker fee, and up to 25 bps taker fee. I usually do the maker fee well for (1) it’s free to transact and (2) I wait more than I chase. There still a lot of learning but fun times thus far. OH and remember to pay your capital gain to the IRS in 2019. They came out with a new law earlier this year on this.
As always:
- Charlie Munger once said, “Concentration creates the wealth. Diversification maintains the created wealth” in layman term, you can go from A to B but not B to A.
- French Philsopher Blaise Pascal once said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” in layman term, they say you need to schedule an hour each day to just fking think.
- Jim Rohn once said, “Formal education will make you a living; self-education will make you a fortune” in layman term, keep learning after college and grad school.
Intersection notepad 