How I Decide When To Buy and Sell Bubbles (Bitcoin or Otherwise)
My 5 Tier Ranking Scores Explained
Yesterday was crazy for Bitcoin–even by Bitcoin’s standards. By 9 am Eastern Standard Time, it dropped 30% in the day and then later rebounded 33% (from the low) when Elon Musk Tweeted that Tesla had ?? (meaning they were not going to sell).
I got a lot of questions and I invited three of my paid subscribers onto our Discord server, where I could answer their questions real-time.
But there, and over email, and on Quora, the question everyone wanted to know was: should I sell?
What remained of my portfolio, after closing my large 17.7x trade on Ether last Sunday, did roughly 573% in 8 months. Good enough.
This morning, I started scaling back in (20% of my crypto portfolio). Some people on Quora got mad because I’m not on a team: pro-Bitcoin or anti-Bitcoin.
But my actions are exactly what a principled trading strategy looks like.
Strategies for Trading Cryptos
Following a similar strategy, a little earlier in the week, I verified that Dom V., a Daily Bubble subscriber, successfully closed 11x on a $DOGE trade.
This article explains how I make my final decisions.
The approach is a structured one that adds consistency to your trades. This was the first step that I took as a trader that had a 2x effect on my portfolio returns. It’ll especially help my subscribers to understand my decisions better.
Thanks to Daniel T and others for pushing me to explain this in a single post, rather than in a bunch of different ones. Let’s start with a general point.
A Quick General Point
Trading bubbles isn’t about predicting the future and it’s not about teams.
It’s about responding quickly to meaningful events.
The base level of these events consists in economic data, while the top-level largely consists in price action–stuff that’s tracked by moving averages like the SMA 160–and market futures data.
These signals are aggregated into 2 separate scales that I find useful for buying and selling. They both have 5 levels, with the same colors, but they mean different things.
My investing strategy is a nested signal strategy. That means that things have to be good with the Basic Economic Cycle first, and then I go to check specific Industry signals.
So, let’s address these points in that order. In what follows (to make my legal counsel happy), I’m going to frame this all as a discussion to my past self, say when I was in college just starting out as a trader. All “you” mentions are just me talking to myself.
The Basic Economic Cycle
I explain the basic way that I built this indicator in this article. What you need to know is right now that it isn’t a predictor. It’s a fast reactor.
Well, some of the time it predicts–I entered futures market data as a signal for this–but generally not. What it does is identify real trouble right now.
So, for example, it told me to get out of the market on February 17th of 2020, well before most people were fearing COVID, and I did. … And that saved me a lot of money. Technically, market conditions were already deteriorating, I just reacted 2 weeks before the rest of the market.
For my subscribers, I contextualize these ratings, since I can look into the “guts” of the algorithm and tell which signals are saying what. But in a general way, this is what they mean.
This basically says. “all clear even for leveraged funds.”
Using this signal alone, I usually buy the $UPRO, $TQQQ, and $SVXY (or just short the $VXX). Those are all leveraged funds that you can’t trade in a retirement account.
This means that the market’s economics are fine, but that growth is uncertain for whatever reason. Probably the market will advance a little, but it’ll be volatile. So, I sell my leveraged funds because those don’t do well in a volatile environment.
This means that broader economic conditions are uncertain. Probably, you are looking at certain sectors in decline while others rise. Obviously, if you are in a good sector, then you’ll be fine.
This might also be a transition period–say, because the Federal Reserve stops quantitative easing or raises interest rates.
Depending on the specifics, then, I might dump stocks or coins in an industry (depending on the industry ratings for that industry discussed below).
When the indicator hits this, I make sure to be out of everything in the market. I usually pick bonds to buy, but that might not always be the right play–what if we’re facing an inflation spiral?
So, bonds, gold, or cash are my main options. Almost always, I hold some cash–US Dollars–here.
At this point, things are so bad, I might actually short the market. The easiest way would be through a short ETF, but I might also literally sell stock short, buy puts, or (if I think a stock is really attractive at a low price) write puts.
That last strategy is advanced.
To explain a little, in the March 2020 crash, for example, I sold puts on $XOM and $SQ. This means that if the price dropped to a certain point, I would have to buy the stock. But someone had to pay me upfront. I reasoned that I’d like to own the stock at that price, so that wasn’t a bad option, and otherwise, I’d just be paid to tie up my money for a month.
In the end, neither stock dropped as much as I wanted, so people paid me a very high APR to not use my money (80% in a month!).
With respect to the industry signals, I am looking for at least a Yellow 3 in the basic economic cycle above. Ideally, I want it to be a Green 4 or better. But with a Yellow 3, again, you might just be looking at a market transition, so that some specific industries will be fine.
If the Basic Economic Cycle is fine, in the way described, then I look at industry indicators.
These signals come in two forms: a lead indicator and a sentiment indicator.
- Bitcoin is the lead indicator for cryptos. The price of oil, easily tracked with the $USO, is the indicator for the oil industry.
- Tesla is a lead indicator for the Green Energy space.
- Biden’s legislative agenda was a sentiment indicator for cannabis, which is why when news dried up, so did cannabis stock prices.
With that in mind here are the levels of health for each industry.
Strategies for Trading Cryptos: Green Signals
This means that all of my momentum signals for the lead indicator are positive. I start looking at “leveraged” bets in an industry–good alt-coins like $UNI in the cryptos, for example. I made 8x on that purchase even buying very late in the cycle.
With oil, my favorite play here is $RIG, at least at the time of writing.
The industry as a whole is fine, but leveraged bets might struggle.
In oil, I sell out of $RIG at this point, because it really needs a sustained $65+ to be profitable.
The one weird thing is that sometimes this is where I find contrarian buys. For example, if some news came in that’s bad for the industry–India illegalizing cryptos in 8 months, for example–then that’s probably just fluff.
What people actually did in India, on that news, was buy because they wouldn’t be able to trade in a while and they wanted to make money while they could.
Strategies for Trading Cryptos: Yellow Signal
This means that the industry has reached a tipping point. Usually, it’s below both the SMA 50 and 160 day.
This is where the best dip-buys are found. If it doesn’t dip below the SMA 200, then you are likely to find a big bounce. On the other hand, it might crash down.
I follow the 3-step method I discussed here to make this decision.
Strategies for Trading Cryptos: Red Signal
Obviously, I sell. This happens when an industry drops below the SMA 200 or has other adverse economic news, e.g. COVID infections.
Don’t fall to the sunken cost fallacy. Remember that it is better to sell and take a small loss, if that’s your position, than to hold on through a large loss.
But, if conditions turn around, remember to start buying back in.
If things are this bad, and I don’t have a strong reading on a contrarian indicator like the pROC below a -50, and the basic economic cycle indicator is no better than a Yellow 3, then I might consider shorting the industry–or at least specific companies in the industry.
That’s hard to do directly with cryptocurrencies, and that’s partly why they are so volatile. I look at cryptomining companies like $MARA and $RIOT for this. Also, exchanges like $COIN and $VYGVF do terribly in a crypto downturn.
The best advantage to having a scale is that your trades are structured. You might start off and get unlucky with timing. But if you have a structured process for making your trades, then you’ll stand a good chance of making money long term.
Bubble trading isn’t about picking sides, it’s about following meaningful signals consistently. If you have questions, leave comments below. You can also try our (beta phase) Discord server.
The main thing to recognize is that there is always a next phase to a bubble market. If you have in mind where you are in the phases–and the indicators help with that–you’ll know what to focus on.
That’s it for now. Happy Trading!!
General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.
Specific disclaimer: I own more stocks and bonds than I discuss here, but they are not relevant to bubble trading. Anything that is relevant, I let you know my position in them through the charts above.