Everything in this section is about removing your emotions from the decisions.
What is your aim?
Do you want to accumulate BTC, ETH, or USD? Depending on which, you have different trading opportunities. One coin might be a good deal if you’re using ETH to buy it, but not BTC.
How much do you want to risk?
I find that 1 month’s living expenses is a good size, with many psychological benefits. You have a good intuitive feeling for how profitable the trade is, after all.
What is your trading plan?
If it goes up, do you plan to sell everything or keep something? How long can you afford to wait for it to move? Answer these questions first and you can ignore your emotions later, when they endanger you the most.
What does the project do?
Look for something that generates value: opens a new dimension, makes new things possible etc. This is also better for the world.
The difference between a Ponzi scheme and Bitcoin is that the former is just moving money around, and it collects in a few hands. The latter is a whole new asset class with big social implications, i.e. it opened up a new dimension. That is, it generated value.
Bitconnect was an obvious scam, but many people apparently couldn’t tell. A trading bot cannot always make profit. Even if it does, trading is basically taking value from someone else, a zero sum game, so it cannot generate value. This means the value it can gain is limited.
Why will the project succeed?
Look at the people involved with the project. What sort of people are they? For example, Ethereum has many idealists building things on top of it. They talk about a world with ‘fair distribution’, ‘decentralized finance’, ‘solving the commons free rider problem’. In many ways it’s about solving social problems that the governments and capitalism can’t fix.
In contrast, if you take a look at the communities of other smart contract projects, it’s usually ‘our coin’, ‘our coin’, ‘something similar to Ethereum project but on our coin’. You cannot inspire people to join you if you’re all about yourself.
There are many people who are really good at something, but because they don’t know how to market themselves, society doesn’t pay them as much, or even listen to them. Projects are like that too. You must look at a project’s community like a person. What’s his character? Is he trustworthy? Is he doing something worthwhile? Can he convince others to believe in him?
For instance, Decred has the best codebase I’ve ever seen, and they have anonymous transactions, a great treasury, a community composed of mature, level headed individuals, but the way they shill their coin on Twitter is just childish, no better than how Emin Gun Sirer keeps trumpeting about Avalanche all the time. Yes they have more than Bitcoin, but they haven’t done enough to truly leapfrog Bitcoin.
A coin’s worth is based on many things, but the most important one of all is people’s belief in the coin, or what Vitalik called Legitimacy.
Take a coin whose worth is purely based on 1 bar of gold. If the number of coins goes up, but the 1 bar of gold is still 1 bar, then the value of each coin must have gone down.
Take a coin whose worth is based on people’s belief. The UK Pound, for example, is based on the belief that a king’s promise to repay a debt (to the bankers) is worth something. If the number of coins goes up… but here’s the thing, it’s difficult to quantify people’s belief. That’s why you can print some more coins. But if you suddenly print trillions in stimulus like the US Fed, then people’s belief will start to waver.
So the question is: can the project market itself successfully to make others believe in it? This ties back to the community section above. What kind of people could inspire you to believe in them?
Even a strong individual can succumb and die if you place him in the wrong environment.
How many competitors are there? How strong are they?
Does the world want something like this yet? (is the time right)
What is the state of the world?
What is the state of the crypto world, i.e. is it going up overall, or is it going sideways, or is it going down?
What is the state of the sector that this crypto project is in? Does it still have room to grow, or is it still relatively unknown?
You need to be able to explain all these by yourself. If you get this information from someone else, and the coin goes down, you will just blame him, sell to cut losses, and learn nothing. Then the coin goes up and you curse yourself.
Then, you need to keep a log to keep track of what you were thinking, whether it was right back then or not.
Optionally you may also choose to create certain rules for yourself so you’re even more divorced from your emotions.
The Art of Buying
A small number 10x-es easier than a large number.
A small number also 0.1x-es easier than a large number, so please take profits. Sell into a coin with a larger number, like BTC or ETH, or into USD.
Iron rule that’s served me well 99% of the time: if the token has gone up, it’s already too late. Buy when the coin is flat. This means nobody knows about this coin yet.
If the coin is going up already, try to catch it on a red candle/correction. What goes up must come down, although not perhaps down to the same level.
Use buying to manage your emotions. Buy a very small stake if you think you get in, but are unsure about the future. Van Tharp calls it Position Sizing in his book, Trade Your Way to Financial Independence.
The Art of Selling
As always, divorce yourself from your emotions.
When you buy, set a target for yourself. You want to 2x your investment. But you might wait a long time for the price to go up at all, if the coin has been flat. So let’s say 10x, to make the wait worth it.
Let’s say the token jumps up 4x. Divorce yourself from your emotions. Your thoughts should be: “Good, but I was expecting more. What is the overall market situation like?”
If the bullrun is just getting started, go do something else like clean your fingernails.
If the rest of the crypto market is dead, dying, or waffling around, sell and be happy.
Use selling to manage your emotions. If you feel like you have a lot to lose, sell a bit along the way up.
Often it pays to be ignorant of what’s going on. Read Edwin Lefevre’s Reminiscences of a Stock Operator: it was always his sitting tight that made him money! The more he paid attention, the worse he did.
Don’t worry, when the rest of the world starts talking about crypto, it’s God’s way of telling you it’s about time to sell.
When you’ve decided upon a coin, your actions should come from managing your emotions, not how much you hope to make.
Not sure how much to stake? Try a number you won’t care losing.
Not sure how much to stake, but you wanna finally make a difference in your net worth? Try 1 month’s living expenses.
Not sure to buy, but think you probably should? Buy 100USD worth, to keep your inner monkey satisfied.
Not sure to sell, but think you probably should? Sell a part, to keep your inner monkey satisfied.