BlockFi raises $50 million, Risk of Ruin and The Habit of Change – Market Meditations #4
Market Meditations | August 21, 2020
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I’d like to share something that has allowed me to continually make money in the markets.
If the market crashed tomorrow I would survive
I make sure this statement holds true every single day. While it may not seem important in the short term, over a lifetime this is what allows us to keep our gains and reap the immense rewards of compounding small gains.
Even now in an extremely bullish crypto market, I take the necessary measures to make sure I can survive anything even extremely low probability events. We’ll be exploring specific risk management concepts in today’s Crypto Contemplations.
Also next week we will be releasing our first Q&A edition. Leave any questions you would like to ask me as a comment and I will answer as many as possible for next week’s newsletter.
Risk of Ruin
Tether Goes Live on the OMG Network to Combat Transaction Congestion on Ethereum
It’s Now Cheaper to Buy One Bitcoin Than to Buy a Single Defi Token Yfi
Crypto Lender BlockFi raises $50 million In A Series C Fundraise
As Airbnb Files to Go Public, Traders Break Down Where Expedia and Booking Are Headed
Erdogan Unveils Biggest Ever Black Sea Natural Gas Discovery
US Bank Regulator Sees Potential in Fintech Solutions to Legacy Banking Issues
Habit of Change
Risk of Ruin
This week we’ve seen the first signs of the crypto uptrend stalling and dipping. Making money is easy, keeping it is the hard part. We’re all taught how to find winning trades, but very few people touch on handling losing trades. Markets are never certain, so the chance of being wrong is always present.
Heavy volatility in the crypto markets, means being on the wrong side of the trade can have disastrous effects on a portfolio. Add leverage to the mix and you have a dangerous cocktail that could potentially ruin your portfolio in a matter of minutes.
I’ve seen traders wipe out years of profit with one mistake. To put this into context simply observe the image below. It demonstrates the importance of capital retention and the disproportionate amount of work required to recover from a heavy loss.
Risk of ruin is a commonly misunderstood concept we will focus on today. This is the probability of sustaining losses to the point where it is no longer realistic that you will recover. Now the more vigilant traders are prepared for a big loss, they have a good win rate and always use a stop loss. This is not enough.
When we trade we must be prepared for serious deviations from our win-rates. As our sample size grows the more likely it is that we will experience lower probability events. This means the longer we trade the more realistic it is that we experience an abnormal cluster of losses.
Normally we would assume that as long as our trading system adheres to the diagram below, we should be profitable.
So we can see that a 30% win-rate and a 2.5 R:R is profitable in theory. However, this does not take into account the probability of a large series of consecutive losses. When we risk 1% per trade our risk of ruin is ~1.86%, if we were to risk 5% our risk of ruin is ~45.06%.
This understanding of risk of ruin is why I stick to 1-3% risk per trade. Take a look at how quickly consecutive losses can rack up when using different risk levels, it becomes quite clear how dangerous exceeding 3% can get.
Tether Goes Live on the OMG Network to Combat Transaction Congestion on Ethereum. After announcing its plans to launch on the OMG Network (previously known as OmiseGo) in late May, the controversial stablecoin Tether is now live on the OMG blockchain. Ethereum has seen a strong increase in transaction fees and the rising popularity of stablecoins has been one of the contributing factors. The OMG network is said to support thousands of transactions per second at a third of the cost compared to similar transactions on Ethereum. The OMG token reacted positively to the news and saw an increase of more than 200% in the last couple of days. Read more.
It’s Now Cheaper to Buy One Bitcoin Than to Buy a Single Defi Token Yfi. The yEarn.finance’s governance token (YFI) is now more expensive than a single bitcoin, after surging more than 50% this week with price briefly trading above $16,000 yesterday. The YFI token, initially said to be a ‘completely valueless 0 supply token’, has been one of the most spectacular launch stories this year, up over 1000% in one month. The token had no pre-sale and the project’s governance is now completely in the hands of the community, a very active and motivated group of people continuously looking to innovate and improve YFI’s value proposition. Read more
Crypto Lender BlockFi raises $50 million In A Series C Fundraise. In a Series C led by Morgan Creek Digital, a digital asset fund led by Mark Yusko and Anthony Pompliano, BlockFi raised 50 million. A lot of notable investors are on the list for this new round, namely Winklevoss Capital, Castle Island Vantures and CMT digital. The company’s valuation is estimated at $400 million and there have been rumors about BlockFi aiming to become a publicly traded company in the next two years. Read more.
As Airbnb Files to Go Public, Traders Break Down Where Expedia and Booking Are Headed. The company announced this week it has filed to go public after submitting a draft registration to the Securities and Exchange Commission. This comes as travel booking stocks Expedia and Booking Holidays have shown signs of life. Booking has bounced 60% and Expedia 118% off March lows, clawing back from losses sustained earlier in the year as the pandemic worsened and lockdowns went into effect. Despite recent rallies, some investors remain bearish because of air travel; they believe the success of these companies is intertwined with air travel which of course is down 70% over the year. Nonetheless, Airbnb could get a boost from positive momentum in the initial public offering space. Read more.
Erdogan Unveils Biggest Ever Black Sea Natural Gas Discovery. President Erdogan of Turkey has found 320 billion cubic meters of natural gas in the biggest ever discovery in the Black Sea, and hopes to begin production by 2023. The lira and benchmark share index both gave up gains, though, possibly reflecting disappointment among investors over the size of the deposit. The lira fell 0.7%, the Borsa Istanbul 100 index fell as much as 1.8%, whilst shares in energy companies including refiner Tupras, Aksa Enerji and Aygaz dropped sharply after the news. Read more.
US Bank Regulator Sees Potential in Fintech Solutions to Legacy Banking Issues. The US Acting Comptroller of the Currency, Brian Brooks, recently expressed his willingness to embrace fintech solutions in an interview with CNN. Brooks, who was formerly Chief Legal Officer at Coinbase, explained that his job now was to ‘identify impediments that make it harder for people to get what they want and need’. This has already led to a green light for banks to provide crypto custody services, and Brooks also mooted the possibility of a future Central Bank Digital Currency (CBDC) issued by private companies but backed by bank deposits. The interview also covered the need for faster payment solutions, with the recent issuing of coronavirus benefit payments being sent across what Brooks described as ‘19th century banking rails’. Read more.
Habit of Change
Darwin’s timeless quote seems straightforward at first. Change? I have no problem with change, I hear you say. Well statistically speaking, like the majority of people, you probably do have a problem with change.
As put in a Harvard Business Review article, change interferes with autonomy and can make people feel that they’ve lost control over their terrority. The majority of people find this uncomfortable; they are not used to getting out of their box. This was useful for keeping us safe in a world long past, but at the current pace of technological and societal development, ideas and skills quickly become redundant. At the same time, news ones are coveted.
We all know it’s important to be a fast learner with the advent of the internet. But it is just as essential that we are able to challenge ourselves to ‘unlearn’ old ways of doing things in favour of superior ways. Unlearning is not the antithesis of success but rather the definition of success. There are six steps to unlearning old beliefs:
Pick a specific topic. By way of example, say we want to become a successful trader.
Ask ourselves: in the past, what was deemed necessary to become a successful trader?
Separately: consider what we need to become a successful trader today.
Compare and contrast steps 2 and 3.
Identify which beliefs are most important and work to empower them.
Identify old beliefs that are less relevant and mentally work to remove them.
Regularly practising this exercise will help to ensure your time is spent doing that which will help you most to succeed. Have the confidence to challenge your current skill set and understand what you need to unlearn.
It comes as no surprise then that the ‘Habit of Change’ or ‘The Power of Unlearning’ is a distinguishing factor of successful people. The Habit of Change is the ability to learn and unlearn in order to succeed.