This article sorts out the opinions of encryption researcher Route 2 FI on personal social media platforms, and BlockBeats organizes and translates them as follows:
1. Crypto is a game of chance, but most people see it as a gamble
Let’s do a very simple excercise to illustrate how to get positive expected value (+EV) in your own investments .
The first is to consider long-term investment in BTC , let us set up the following 4 scenarios:
1. BTC will hit new highs this year
2. BTC will continue to trade sideways in 2022, but make new highs in 2023
3. BTC has done its historical role, it will fall and remain in one position
4. BTC will go lower this year, but make new highs in 2023
Now, let’s do some probabilistic analysis for each outcome:
1. Probability: 20%
2. Probability: 40%
3. Probability: 20%
4. Probability: 20%
With BTC currently at $42,000, what is the best trade right now considering these 4 scenarios?
1. to buy
2. to buy
3. to sell
In 80% of cases, buying is the best outcome.
1.20% probability of up 65%+
2. There is a 40% chance of a long-term rise of more than 65%
3. The probability that BTC will never rise back to ATH is 20%
4.20% probability that we will lose money in the short term and 65%+ probability that we will be profitable in the long term.
For point 3, you can place your stop loss at 30%. In other words, if BTC falls below $29,000, you sell. All in all, you have an 80% chance of gaining +65% and only a 20% chance of losing 30%. It’s worth the risk, isn’t it?
Of course this is a very simple example and you may disagree with the scenarios and probabilities, but I just wanted to show you how to think in investing.
2. How to use probabilistic thinking?
Remember, the market can remain irrational longer than you can stay solvent. In Crypto, anything can happen. That’s why you want to set strict rules for yourself.
For example, here are some examples of hard and fast rules about when to invest in LUNA:
1. When BTC has a sideways/upward trend
2. When the market value of UST is increasing
3. When momentum is evident (new protocol, more users, bullish news, etc.)
4. When Anchor Savings Generates Positive Returns
5. When Anchor TVL increases (usually, it is possible to track everything that happens with Anchor, as more than 70% of UST’s market cap is locked there)
6. When technical analysis looks good on 4-hour, 1-day, 1-month time frames
I personally think that as long as the above 6 factors are present, LUNA has a good risk/reward ratio.
3. Pay attention to the position size, never exceed the range you can afford
You will of course want to bet big when the odds are in your favor, but even investments with positive expected value can ultimately fail. Remember, it’s all about survival, which is why you should stop your losses and never risk more than 1-3% per trade.
As another example, suppose:
1. Total Portfolio Value: $10,000
2. 2% risk per trade, stop loss when losing 7%.
3. Position size: (10,000 x 0.02) / 0.07 = $2,857
This position is equivalent to 28.5% of your portfolio, but since you placed a stop loss at 7%, it means you won’t lose more than $200, or 2% of your total portfolio. Position sizing and stops are very important in trading, if you open yourself up too much, sooner or later you will lose your account.
4. Find out what your strengths are?
If you try to be the master of all things, you will end up doing nothing. You have to find the market you are most comfortable with.
You can think about it first, what are you most interested in? Trading, NFT or DeFi ? But even the deal is too big. Micro caps, small caps, L1, top 100 by market cap, not to mention time frames, swing trading, scalper trading, etc…
For NFTs, which ecosystem would you focus on? I did spend a few days researching floor prices on http://rarity.tools. For DeFi, what is your expertise? After all , it is too difficult to keep up with the latest status on each L1 public chain .
You have to figure out, are you a watcher of smart money, a finder of low-cap treasure, someone who can see NFT trends earlier than anyone else, or a woollen expert or a DeFi yield farmer? After figuring this out, you can go the extra mile instead of learning everything.
5. Be able to admit that you are wrong and stop
This is an important factor for success in the crypto industry. Whether it’s trading, NFT or DeFi, before you buy, you need an argument and a point of failure.
Ask yourself, “What if I’m wrong?”
Continue the example:
Buy AVAX at $79 , the point of failure is probably a fundamental change in the ecosystem, and the stop loss should be around 10%.
The reason I’m writing this article is because gambling is harder to get emotional than you might think. How many times have you not forced yourself to sell at a certain price, but instead said, “If it goes down another 5%, then I’ll sell”. Then go on to lose 5% after…
So, respect your rules.
6. Find the “echo chamber”
If you spend enough time in the Twitter cryptosphere, there are many sub-communities such as ETH maxis, LUNAtics, FTM degen, ATOM believers, etc.
While you should definitely join one or several of these communities, you should also be critical at all times. Don’t blindly receive information without making your own judgment.
At the end of the day, it’s a PvP game (player to player), and even if you feel like you’re part of a larger community on crypto Twitter, you’re alone and don’t assume everyone else is in your best interest.
7. Be patient
You don’t have to keep a full position all the time, you can also choose to use stablecoins for DeFi farming, or hold a certain amount of cash. Instead of always making deals, let deals come to you.
Try waiting for the big crash and the generational buying opportunity to help you achieve your desired goals (this is easier said than done).
My point is, learn to wait for a good time to trade. In a downtrend, don’t try to sell too much either. Keep in mind that most of the current top 100 projects by market cap will be gone in 4 years.
8. Some DeFi Tips
1. Check the income on http://coindix.com, the information that cannot be found can be supplemented on http://defiLlama.com.
2. Unless you are very experienced (microcap Orion), stick to staking or yield-farm opportunities with high TVL.
3. If you use leverage, keep monitoring your positions.
4. Try reaching out to the influencers on Twitter, many of whom have information that most people don’t know.
5. The higher the APR, the more likely you are to be a source of income.
6. Try to avoid the BNB chain, many items above will pull the carpet.
7. Turn on notification alerts for some important Twitter accounts, such as Peck Shield, which offers some great shorting opportunities. Or when Andre Cronje announced that he would “retire” in March, an easy shorting opportunity. Now, I think as soon as the news comes out, the news that USN is stable will affect the market in the NEAR ecosystem.
8. Never spend all your money on a DeFi protocol
9. Always keep costs low when trying a new platform for the first time
10. Try to focus on one or two ecosystems to capture the biggest opportunities
11. Watch where money goes to top wallets (you can check DeBank)