Learning to bear trade in the middle of a bitcoin crash

My initial attempts at crypto trading were rather clumsy. I made all the beginner mistakes. Well I hope I did. I hope there aren't more nasties around the corner. I've been at it for a couple months. I started with a small investment. Actually only half of it was mine. A friend, who doesn't own a computer asked if I'd invest on his behalf. There's a lot of pitfalls in working with money that isn't yours. Especially when it belongs to someone you don't want to let down. In retrospect, I don't really want to invest on behalf of others. It adds too much stress. But anyway, let's talk about what happened.

At the beginning of November using 1000 Bulgarian Lev, I bought 0.089 Bitcoin. For about a week, I opened my Electrum desktop wallet and made sure it was still there every day and searched the internet for a good exchange where I could learn to trade it.

I settled on Poloniex because I couldn't find any unusually negative reviews for that exchange and I didn't know any better. I actually like Poloniex a fair bit. It's easy to use, has a simple interface and all the information you need to make trades is readily available. I've since done a fair bit of reading on tether (USDT) and decided that I don't want to use any exchange that uses tether because it's a dangerous, fraudulent house of cards. But I didn't know that 6 weeks ago. Poloniex (and other exchanges) use USDT because it means they don't need a bank account in order to operate. Traders can base their trades off USDT because it provides a convenient measure of profit or loss which is comparable to USD.

I love the concept of tether, I just don't trust the people behind USDT. Tethers need a very transparent auditable proof that exactly one US Dollar is held in trust for every USDT issued otherwise we have to assume that the tether is complete smoke and mirrors and not backed up by anything. This is the case with USDT (the evidence of USD held in trust is missing). So while I like Poloniex as an exchange and I understand why they want and need to use tether, it's simply negligent to hold customer money in a currency that could literally disapear in a ball of smoke when a regulator sneezes.

When I learned enough about USDT to know I didn't want to be anywhere near it, I transferred the bitcoin to GDAX and discovered that bitcoin transfer fees are actually pretty nasty. So much for a brave new world of free financial movement. If bitcoin doesn't fix this soon, it will relegate itself to the value store domain and leave altcoins to change the world.

Anyway, back to the subject of learning to trade... I'm going to describe a learning journey that is full of mistakes. Treat this as a guide for what not to do and you might learn something.

Trading at "market rate" means you just say how much of what you are holding (eg: bitcoin), you would like to sell and what currency you want to buy. You don't know how much of the currency being bought will end up belonging to you until the order closes (trade completes). This is usually a poor way to trade, but when you're a noob like me, it's the first method you get your head around.

So I watched the graph for the currency pair I was interested in (BTC-EUR). There are all these spikes and dips. Reasoning suggests that one should be able to sell bitcoin on every spike and buy it back on every dip and over time, the amount of bitcoin being held, should increase. In theory this is fine. In practice there are two gotchas. The first, rather obviously, is that you have to know when you are nearing the top of a spike or the bottom of a dip without the beautiful benefit of hindsight that a ticker chart displays for previous spikes and dips. It can't tell you anything about what the current spike or dip is doing and how long it might do it for. It just tells you about things that have already happened. Traders use a bunch of algorithmic overlays and voodoo magic to try and predict where the line will reverse its trajectory but there are no guarantees and there are no crystal balls. I reckon the best trades are accomplished because the trader has an intuition. A good feel for the market that lets the marvelous human brain perform the magic of prediction. AI is also pretty good at predictions like these and I have seen some AI bots be right more often than they are wrong but they still struggle getting predictions correct when they encounter a scenario they've never seen before. Like a bigger than normal crash or boom. Those are the sort of scenarios where they really need to be right but sadly those are the ones they struggle with. The second gotcha is that on small spikes or dips you need to predict well in advance in order to use a limit trade and avoid the exchange fees. Small reversals yield less profit which can be wiped out by a transaction fee. Initially I goofed on both the predictions and the fees so I actually managed to gradually reduce the total amount of bitcoin I was holding to about 80% of what we had initially purchased. But hey, I was learning. It was also great that for much of November and December, bitcoin was soaring in value faster than I could lose it with noob mistakes.

In December, after teaching myself to use the limit trade features (using youtube videos), we bought a few thousand dollars more bitcoin and started honing the new found limit skills. This went a lot better. Limit trades force you to think about which way the currency will move next and for how long. You still have to keep your finger on the pulse to be able to work out how far a spike or drop will go but as long as you're close, the constant volatility in bitcoin just means you wait until you are correct.

This new skill turned out to have been learned in a very timely fashion as this last week was a hellish bear run from $20k to under $12k much of which happened overnight last night. The nice thing about being able to limit-trade for free on an exchange is that you can make money while a price is crashing. The crash adds to the volatility so every crazy drop is followed by a little spike. You just have to predict where the next drop will end and how big the subsequent spike will be and then sell and buy respectively on each of them. I didn't get all of my predictions correct of course but I did manage to get enough of them right to minimise the losses. It meant staying up all night but in the end I got out of bitcoin while it was still at €12k (right before it dipped to €8.5k). If I'd known how bad the drop was going to be, I'd have sold everything 4 days ago but in retrospect and without the benefit of hindsight, I think being able to get out with a small profit was a great feat for a newbie. I left small even amounts in Litecoin, Ripple, Stellar and Bitcoin. Just enough to be disapointing if it's lost but not enough to cause pain and I'm taking a break for the rest of the year and hope to not be looking at the tickers again till January.