- If you can effectively protect your capital, profits will eventually come.
Author: Eugene Ng Ah Sio
Translation: Deep Tide TechFlow
Good morning—As Bitcoin recently broke its all-time high, some may be stepping into the world of cryptocurrency for the first time. After years of navigating this field, I have accumulated some valuable lessons that I hope to share with you, so you can avoid pitfalls while learning trading skills. If you are starting with a smaller capital (a 4 to 5 digit portfolio), I will also share some suitable market strategies.
Golden Rules
If you can effectively protect your capital, profits will eventually come.
Success can be achieved without leverage.
Pre-determine the amount you intend to invest in cryptocurrency, and never add more during the later stages of the market cycle.
1. Reducing Losses is Key to Success
The cryptocurrency market is filled with dreams of earning hundreds of times returns, which often triggers significant fear of missing out. Many of these profit screenshots are achieved through 10 to 100 times leverage, but this often leads to permanent loss of capital. However, due to survivor bias, you often only see success stories while ignoring the risks of failure.
When analyzing trading plans, I often ask myself, "What is the maximum loss I can tolerate in this trade?" Based on this thought process, I reverse calculate to determine the appropriate trade size. In almost all cases, the loss I am willing to accept is the most important consideration in my decision-making. Here are my reference standards:
Low confidence - Maximum loss = 1%
Normal confidence - Maximum loss = 2%
High confidence - Maximum loss = 5%
Very high confidence - Maximum loss = 10%
2. Leverage
Leverage is one of the biggest risks for market participants and is an extension of Golden Rule 1. High leverage (over 5 times) is completely unnecessary, as we should focus on reducing downside volatility. Leverage amplifies the two-way volatility of the market.
Typically, the impulse to use leverage stems from greed, hoping to earn more returns with existing capital. This is a misguided view. What we should prioritize is executing high-return trades with clear risks. For example, going long on a 4-hour backtest or going long at historical support levels may be reasonable, as the stop-loss point is clear and close to your entry point. Therefore, even if the trade goes wrong, the loss will be minimal.
3. Outflows, Not Inflows
The only time you should enter the cryptocurrency market is when you decide to fully commit to becoming an investor or speculator. While there are some exceptions to this rule, generally following it can help you avoid making the second biggest mistake that leads to financial collapse: adding to your investment when prices are rising.
In a bull market, the usual scenario is that you start with a small investment because you have no winning track record and have not yet experienced the ensuing greed and frenzy. At this stage, people typically choose to make small bets, possibly only investing 1-5% of their total assets in cryptocurrency. After a few profitable trades, confidence increases, and your investment record begins to show, you may feel capable of bolder investments. However, people often fail to realize that everyone looks smart in a bull market.
When you increase your investment in the later stages of the cycle, what originally accounted for 3% of your cryptocurrency investment may swell to 30%, ultimately facing a crash when the bubble bursts. By setting a strict rule to never invest more fiat currency, you can avoid making such mistakes. If you find that your capital has decreased to the point where you need to replenish it, then you probably should not have speculated in the first place.
Starting Today (Q4 2024)
If you read this article when you are just starting to engage with cryptocurrency or preparing to seriously invest in learning, I will share my views and strategies for the market.
Overall Framework:
In the cryptocurrency space, there are two main ways to participate:
Centralized Exchange Trading
On-chain Trading
These two areas require different strategies to succeed. You do not need to be proficient in both areas, but you should at least have some skills in one of them.
In Centralized Exchange (CEX) trading, you typically make quick small trades to gain percentage returns, and you need to minimize losses by setting tight stop-losses. A simple and effective risk/reward trading example is as follows:
Entry Price: $1.00
Target Price: $1.25
Stop-Loss Price: $0.95
Risk/Reward Ratio = $0.25 / 0.05 = 5.0
How to find these trading opportunities or determine the positions of these parameters depends on you, but the overall strategy is to set tight stop-losses to protect your downside risk. You are not necessarily pursuing a one-hit victory, but if you can consistently execute successful trades like the one above, I can assure you that even without leverage, achieving a 3 to 10 times growth in your entire account is possible.
On-chain trading typically involves very early small investments with the expectation of multiple returns. The strategy here is to minimize losses through undervaluation. A good on-chain risk/reward trading example is as follows:
Entry Price: $2 million FDV
Target Price: $20 million FDV
Stop-Loss Price: None
Risk/Reward Ratio = 10.0
As you can see, early on-chain investments do not have clear stop-loss measures, but you can protect yourself by raising the risk curve, so that each investment does not need to be too large while still providing enough upside potential to make it worthwhile. For larger accounts, I recommend that the target for on-chain investments be 1% of the total supply. At a $2 million FDV, this means needing to invest $20,000. If you manage a medium-sized six-figure account, such an investment can be made reasonably without taking on too much risk, while also allowing for sufficient returns if you are lucky enough to find a "meme coin" that is about to be listed on T1 exchanges. This is the most common way I have seen people earn seven-figure profits from a single investment (for example, buying 1% of the supply at a $5 million FDV, holding until a $500 million FDV, and exiting with a $5 million profit).
Conclusion
How you choose your investment path depends on your investment style. I suggest that small accounts try on-chain trading first, and as the account size grows, gradually incorporate CEX trading into your strategy. After a certain stage, on-chain trading may only account for a small part of your overall strategy, but this usually only becomes apparent in investments above the high seven figures. Remember, they require very different risk management thinking, so being proficient in one area does not mean you will succeed in another (in fact, it may sometimes be the opposite).
Although you are no longer among the earliest entrants to this market, I believe now may be the easiest time to achieve profitability since early 2021. You will face experienced opponents who have survived in the PvP market over the past three years, but you have a key advantage—a free mindset unbound by the past. By leveraging this, you may surpass established competitors in this new cycle. Bok Bok, Pigeon
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