Lesson 11| Absolute Beginner’s Guide
This lesson is really a follow up to Lesson 9 | How to Crash Cost Average. That lesson explains how to get about 180% better returns during a bear market than dollar cost averaging. It’s also about deliberately buying into a bear market.
A related question–one that I’ve had a lot lately–turns on what to do if you’re caught, accidentally, in a bear market downturn. What if you either missed a signal or decided to override a signal and it turns out you were wrong?
In that case, you’re stuck down some 30% to 50% in your portfolio and you know that cryptos (and even tech stocks) can lose a lot more. You know that 80% declines are real and that they lose parabolically. For example, a 60% decline from BTC’s all-time high brings you to $27,000. An 80% decline brings you to $13,500, which is 50% less than $27,000.
What do you do now?
Well, option one is to take the cut, expand your time horizon and try to manage the signals better next time around. This might especially be something you need to do if you have leveraged bets or borrowings on your cryptos that need to be repaid.
But if you are going to have an expanded time horizon, you might also want to think about your portfolio strategy differently–at least through the bear market.
Let’s call it crypto maximalism.
Even in the worst of environments, where BTC goes through a massive winter and never recovers to better than 61% of its all time high, this strategy (if combined with crash cost averaging) can make you money.
Let’s start with the broader background.
What is Crypto Maximalism?
You’ve likely heard of Bitcoin maximalism. Jack Dorsey (CEO of Block and founder of Twitter) is one of these guys. He thinks that Bitcoin is the only needed cryptocurrency and everything else is a sh*tcoin.
That view is what’s behind his recent Twitter feud with the VC firm Andreessen Horowitz (a16z).
Well, a crypto maxi is nothing like that.
The Crypto Maxi credo is pretty simple:
- A crypto maxi believes that cryptocurrencies will have an enduring place in our world 5 to 10 years from now.
- They hold that we’re not going back to a world of only fiat currencies.
- They hold that very many current forms of social life, from video and music streaming to card and video games, will move onto the blockchain in some form.
- They hold, finally, that some forms of decentralized finance will continue to persist on the blockchain, likely working alongside some traditional finance systems.
This next point isn’t part of the Crypto Maxis credo, but most Crypto Maxis probably also worry about the long term future of the US dollar and its place as the global reserve currency.
Ray Dalio (the founder of BridgeWater Associates–the world’s largest hedge fund) is among those people.
This line of reasoning explains why Dalio owns some Bitcoin and Ethereum.
Now, you think those 4 main points are right–and especially if you also think the point about sovereign currency devaluation is right–then you are at least a Crypto Maxi sympathizer.
That’s the view you need to take–coupled with a longer 3 to 5 year time horizon–to make sense of the strategy involved.
The Crypto Maxi Strategy
There are two key ideas behind the crypto maxi strategy.
The first is impatience arbitrage. They look at panic selling in a crypto crash as a mistake. Unlike other people who want to be wealthy in a month or a quarter, they’re happy to accumulate intergenerational wealth over a span of about 5 years. Come on, that’s not very long. Most people, however, are too impatient for that.
The second is that they use relative analysis to get the most amount of crypto for their trade. Typically, since data for tracking alternative cryptos is hard, they look to maximize their base holdings of BTC and ETH.
Let’s assume that you executed this strategy in the worst environment on record for it: the 2017-2018 crypto crash and you only used it through the 2019 “mini-bull” run. So, you started here – December 17th, 2017 at the height.
Bitcoin eventually fell to a price of $3192 from a top of $19,648 = 83% decline. It then eventually rose, in 2019, to $12,951. Notably, it never recovered its all time high price–not until 2020.
Would this strategy have made you money in that environment?
I have a better algorithm for this–obviously this is why I have paying subscribers–but let’s do something basic. TradingView has a Least Squares Moving Average that is standard with its indicator set (the LSMA). We need something like that to catch the volatility of a crypto decline. To dampen false signals, we need to slow it down to a 160 day length.
Here’s what you see initially (for BTC-ETH).
You would have sold your BTC as the market crashed to hold ETH at .03773 BTC and sold out back into BTC at .0891 for an 82.6% return on your BTC.
You then would have had a series of mostly wash trades for (slightly negative) through most of BTC’s decline where it outperformed ETH. Then on Sept 19th, after the BTC mini-run, you would have switched into ETH again. You would have sold on Dec 7th for nother 14% gain.
Notably, as the 2020 cycle started, you would have massively added to your BTC gains. But our point here is that in the worst environment for this strategy, you would have turned 10 BTC into 20.748 BTC.
In raw numbers, if you had invested at the absolute worst day, your 10 BTC would have cost $196,480.
- Hodling BTC until Dec 7, 2019 = $75,400 = 61% loss
- Crypto Maximalism until Dec 7, 2019 = $154,404 = 21.4% loss
This does roughly 3x better than Hodling.
But, I know what you’re thinking: I want to make money, not lose less money! Let’s turn to that now.
To make money in this scenario, had you been crash cost averaging, which more than doubles the performance of dollar cost averaging, a conservative estimate is that you would have tripled your BTC holdings.
Finally, remember that this result obtains during a period in which BTC lost 61% of its value. We are talking about earning money through a decline by staying long only (not shorting anything).
And, of course, with my own algos I do much better (about doubling those returns).
So, I think I’ve delivered on my promise. This is a patient way to fix your portfolio if you are caught in a bear market unprepared.
This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
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