Conversation with trader Amanda: How to develop an investment strategy to outperform BTC in a bull market?

The following text is compiled from the series Twitter Space #dialogue trader, host FC, founding partner of SevenX Ventures, Twitter @FC_0X0

Guest of this issue: Amanda, Chainup Investment CIO, Twitter @WuWei_BeWater

About Amanda

Amanda, in February this year, the BTC standard return rate of personal options trading was 10 times, and this month it was nearly 5 times. The annual U.S. stock return was twice that of Nasdaq.

Who is she in this legend?

The current CIO of Chainup Investment built a panic index options trading model on Wall Street; he joined SDIC Capital in 2011 to conduct primary market investments and secondary market transactions, and led the listing of Essence Securities.

She entered the cryptocurrency industry in 2017. The investment concepts and trading experience accumulated in the traditional financial market made her understand how to make money in various financial subdivisions. After thinking and adjusting on her own, she summarized which investments in the traditional financial capital market are suitable for the crypto industry. Trading methodology, selfless sharing.

How to develop your own investment strategy?

First, ask yourself a few questions from two perspectives.

The first one is to think about 5 aspects from a personal perspective:

1. The total amount of assets that can be invested, premise: not restricted by loan repayment or time liquidity
2. Investment goals and income expectations: If it is 6%, it is enough to buy U.S. bonds (credit bonds) with leverage; if it is 20%, it is enough to buy quantitative arbitrage; if you want higher, look for high-growth ones.
3. Risk preference and tolerance: What is the maximum loss/volatility rate? If you can only withstand 20% fluctuation of this asset, do not increase the leverage by more than 5 times.
4. Invest time: When will I need to use this money, when I retire? Will it be used next year?
5. Liquidity arrangements: Think of yourself as a company to measure the balance sheet and income statement, and consider personal life arrangements for bill payments.

The second one is from a market perspective, paying attention to two aspects:

1. Market cycle: When it is in the middle of the market cycle, does it match my investment time and position control?
2. Position control: Don’t deliberately pursue diversification, but see clearly where the risk exposure comes from, and then diversify the assets. Otherwise, you will eventually find that although the asset names are different, the risk sources are all from the same category.

What kind of strategy can outperform BTC?

Outperforming Bitcoin mainly depends on timing and coin selection.

Let’s first talk about how to choose the currency

The volatility of BTC has narrowed much more than before, and is developing steadily in the mid-to-late period. And small currencies that have the potential to cause trouble have stronger growth potential than BTC.

So how do we define the indicators of project growth?
Amanda: “When I choose assets, I usually choose assets that have growth logic, the ability to make money, and the ability to tell stories and make things happen.”

1. Growth: Depending on the functions of different protocols and Dapps, they have different growth indicators, such as TVL, Token Holder number, transaction volume, storage and other quantitatively described growth indicators.
   On this basis, the pioneering choice is to use such quantitative growth indicators, combined with the circulation market value of the currency, similar to the PEG indicator in stocks, to calculate the relative valuation of a certain project, long-term monitoring and comparison with similar projects. , select assets with more growth and cost performance.
   Also, monitor supply and demand, affecting supply and demand such as halving, staking, and staking rewards;

2. Earning ability: such as protocol revenue, profit analysis and on-chain transaction analysis.

3. Public opinion, as mentioned in Fisher's "How to Choose Growth Stocks", must have both connotation and denotation comprehensive capabilities, so public opinion is the embodiment of denotation.

How to practice deliberately and train your coin selection ability?

A simple way to train your currency selection ability is to pay attention to the relative exchange rate of small currencies to Bitcoin. You will form a matrix with two coordinates, one coordinate is rising and falling, and the other coordinate is outperforming and outperforming. lose. This will form four quadrants, outperforming BTC when rising, underperforming BTC when rising, outperforming BTC when falling (less loss), and underperforming BTC when falling (losing more).

Among them, there is a type of asset that can outperform BTC when it rises and underperform less when it falls. This is the best asset choice, but it is unstable.

Then what you need to practice is long-term monitoring and judgment to find such statistical relationships, so that you can find these targets with high growth potential, good quality, attracting market attention, and may outperform BTC. The crypto market is not considered a weakly efficient market now, so technical analysis can still obtain excess returns.

Let’s talk about how to choose the right time for BTC

Buy when no one cares, sell when there is a lot of buzz. On the basis of retaining liquidity, Amanda bought BTC all in at $16,800 on December 26, 2022. When it later fell to $15K, I knew this was an acceptable and normal fluctuation.

There were short-term event-driven transactions in the middle, such as the sudden rise of BTC during the banking crisis. In January 24, the BTC spot ETF was short-sold and reduced its positions on the day it was launched, including option transactions. Therefore, the currency volume has increased now, and it can be said that it has outperformed BTC.

Long-term allocation and regular selling

Outperforming BTC is all about timing and currency selection. If you are not able to choose coins, just make timing and long-term allocations. If you buy near the 200-week line and sell regularly from around December to August after the halving, you can basically get most of the profits in the market.

Don't underestimate regular selling. This is also compared in "Turtle Trading Rules". Among various exit strategies, regular selling is the best performer. What's the hardest part? The reason is that everyone is in a hurry. If you care about short-term gains, you are destined to get very limited gains.

When is a good selling point?

Many technical indicators have shown signs of peaking recently. It is true that historical data is a good reference, but I don't think every cycle is the same as the last one. The one who can buy is the apprentice, the one who can sell is the master.

1. From a quantitative perspective, we know from calculus that the second derivative can be used to find the extreme value. When the second derivative = 0, it is the maximum value. It is a concept of speed. In other words, the growth rate is gradually slowing down, which is close to the top.
2. In the currency circle, the theory of reflexivity is most vividly expressed. As mentioned in "Financial Alchemy", the reflexivity theory states that the market fluctuations from the beginning to the end are not sustainable. In fact, it means that the positive feedback from everyone's ideas from expectation to realization cannot be sustained, and it reaches the top of the market.
3. From a qualitative perspective, what causes the market to rise will also fall due to what. * During the bull market of 2016-17, the currency circle was imagining that Wall Street institutions would enter cryptocurrencies and their emotions were high. As a result, in December 2017, CME launched Bitcoin futures. The public response was that Wall Street was shorting Bitcoin, and the market was panicked. * In the last bull market in 2020, after the COVID-19 outbreak, massive QE brought liquidity overflow, causing all risk assets to rise. Therefore, in November 2021, after the Federal Reserve announced that it would stop cutting interest rates, it reached the high point of that round. * In this round of the market, from a macro cycle perspective, the real starting point for volatility is expectations for ETFs. On the day it went online on January 10, the price began to fall. The power to sell came from Grayscale’s large amount of GBTC to be sold, which resulted in a net outflow of the ETF. If you simply look at the benefits of Trump's election, it is true that the recent growth rate has slowed down, which meets some signals of the peak of the cycle. But my judgment on this market cycle is that this time the interest rate cut is slow, and the massive adoption of large institutions is also increasing little by little, so there will definitely be a slow bull trend in this market.

What is the driving force of the market? ——Earth crust theory

The currency market is unpredictable, but what remains unchanged is the volatility of the market. If you want to capture what kind of volatility, you need a framework to capture it, and to understand the underlying emotional drivers. Like the center of the earth, it is the starting point of energy. The driving force of the market must come from emotion, which is the core. Sometimes it is panic, greed, or confusion.

Superimposed upwards, the project's fundamentals and price performance are driven by a short-term event, which is the mantle.

Then the prices displayed during that period of time are superimposed, and the prosperity of the market reflected together is the surface.

So the crustal theory is to have a profound insight into the changes in a market. What is it based on? End on what? What is the quantile level of market sentiment?

The core market momentum must come from emotions, which is the core of the earth's crust theory. Just like an earthquake, energy changes occur in the center of the earth, and then are reflected in the plate movement of the earth's crust, and finally there are violent fluctuations on the surface of the earth. Progressing layer by layer, you have to sense where the market sentiment starts, iterate, and then develop to the point where it cannot be sustained.

How to judge emotions and what indicators are there?

Simple indicators, such as the panic-greed indicator. For example, if it is below 20, you probably won’t be wrong to buy it, and if it is above 90, you won’t be too wrong to sell it. But behind it may be the opening of a position (opening: refers to an unclosed position in the futures or options market. At this time, the commodity is still waiting to be traded in the market and is still affected by market price changes).

There are many ways to judge emotions:

First of all, ETF deposit is a typical emotional change;

In addition, there are continuous price changes outside the US stock trading hours. To feel the pulse of changes in market sentiment, you can look at the hourly and minute lines, the market's opening interest, perpetual premium, and funding rate.

A general conclusion is that the market is still very positive and optimistic. That is to say, real money is being spent in the market, and there is a strong long sentiment.

How to continue to discover new Alpha?

First, consciously and proactively accept and understand these new things instead of being afraid. Soros told his disciples to invest first and then analyze, and then see whether it is sustainable.

Second, you cannot limit yourself to the small scope of the currency circle. To solve current problems, you must use a higher perspective, interdisciplinary thinking, and a conscious understanding of various major types of assets.

Third, invest with a mentality of gossiping about the world. Price response is often faster and more timely. You have to follow the price to explore what force behind it drives it. It is impossible to have no traces. You will definitely find its clues. If you follow the clues and dig out, you will know that it has a new story.

Regarding self-growth as a trader, would you recommend a book that can

help you change yourself?

Amanda: Every year I read 1-2 books that reveal a lot of room for improvement in my past. I read the Tao Te Ching twice again in 2022, and read Sun Tzu's Art of War in 2023, and then I finally read Mr. Munger's Poor Charlie's Almanac, which shocked me.
If we talk about trading alone, it would still be "Memoirs of a Great Stock Operator" and "Financial Alchemy".

Every day, I have iterative improvements like 1.01, 1.11, and 2.11 on my personal version. It is such a process of constantly improving one’s own cognition, and then you don’t know when it will be realized in your version. If you win a trade, you can understand the truth about the market and get long-term, stable and certain profits in this market by seeing yourself and the whole world.

write at the end

It’s not necessary to outperform BTC. If you find a trading strategy that suits you, and then practice it deliberately and continue to get better, the joy this growth brings you will actually support every trader’s progress more than monetary returns. the core driving force. This is why I think it is important to be a "Conversation Trader", and I also hope that everyone can find their own trading strategy early and have the feeling of closed-loop growth every day.