No More Losses #105
Market Meditations | February 24, 2021
? Build wealth in the company of both bears and bulls.
There has been blood on the streets recently ? From liquidations to corrections and tax season, there seemingly hasn’t been a lot to be overjoyed about ?
? We propose a shift of tone. Let us reflect on each of these recent events and draw takeaways on how to become even better traders and investors.
Read, enjoy and share with your network. Let’s all grow richer together.
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Ethereum and Leverage Trading
On 22 February, Ethereum printed the single largest daily candle ever falling 21% from $1938 to $1550 on FTX. Due to cascading liquidations on the Kraken exchange, however, price plunged a terrifying 64% to $700 ?emptying the accounts of many margin traders in the process. A powerful reminder of the potential rewards and indeed the risks of leverage trading.
Margin or leverage trading is the practice of borrowing funds from an exchange to open a position where: Margin is the capital pledged as security (i.e., your collateral) and Leverage is your buying power multiple. In an example:
Suppose you want to open a $1000 position using 10x leverage. You can put up $100 and borrow $900 from your broker to open a $1000 position in total. You close the trade, return the $900 to your broker (plus a small fee), and keep the rest of the profit for yourself. How can you use leverage to increase profits? Well:
Your profit increases in proportion to the leverage you’ve taken
If you’ve taken 10x leverage and price rises by 1%, your profit increases by 10%
With a $1000 position using 10x leverage, your profit with every 1% rise in price is 10%. In other words, you made $100 by only putting down $100 of your money ?
Without leverage, your profit would have only been 1% (or $10).
In a nutshell: leverage increased your trading profits by 10x.
If you want to dive deeper into how leverage works, understand the difference between cross margin vs. isolated margin, and watch me trade with leverage live, ? check out my FREE course on YouTube ??
?As the Kraken liquidations have reminded us,leverage does not come without risk. The chance to multiply profits is attractive but most who try, however, lose everything due to liquidation. Liquidation is when your exchange automatically sells off your position at a loss ?
Remember, executing a trade with leverage means you are borrowing money from your exchange. When you open a leveraged trade, your exchange gives you a liquidation price. If the coin crosses this price at any point, your exchange will automatically close your position for a loss. They do this to make sure you can repay the funds you borrowed from them. Here are a few actionable things to keep in mind if you’re a trader looking to use leverage:
The higher the leverage you choose to use, the closer your liquidation price will be to your entry. This means the higher the chance you get liquidated. Focus on your total position size over how much leverage you should use.
Risk management is key. If you’re using leverage, place a stop loss order before the liquidation price so that even if a trade goes against you, you minimize your loss and avoid liquidation. Live to trade another day. Make sure to check out my ? podcast ?with @TraderSZ on how to protect your profits!
You can still make money without leverage as long as you pick the right coins to trade. Check out my ? FREE YouTube ?video on finding the best coins to trade in 2021.
Hopefully this article helps you trade the current markets more confidently. Our goal at Market Meditations is to help you build wealth ? Leverage is one tool to maximize your trading profits but without risk management, it can hurt more than help.
Now over to some of the hottest news and analysis in crypto ?
CRYPTO NEWS & ANALYSIS
Square Buys $170 Million Bitcoin
The company Square led by Jack Dorsey (Co-founder of Twitter) announced on Tuesday that it had purchased an additional 3,318 bitcoin at an average purchase price of $51,235. The USD equivalent is approximately $170 million.
We know that markets are simply a function of supply and demand. The supply of Bitcoin is fixed at $21 million, but when institutions like Square, Microstrategy, Tesla, and more announce they are purchasing Bitcoin, it reinforces the fact that significant demand is present.
For Investors: laws of economics suggest more demand with fixed supply will lead to a rise in price of the asset over time. In other words, HODL’ing Bitcoin could prove to be a wise decision over time as institutions continue pouring in.
For Traders: it’s important to remember that bullish fundamentals like institutional investment do not always lead to short term bullish price movement. For example, this week the market crashed from $58000 to $44000 despite the fact that Tesla, Square, and Microstrategy were all buying Bitcoin.
Whilst investors may simply look at fundamentals, traders need to combine fundamental analysis with technical analysis and risk management to form a system. Check out my FREE Technical Analysis course here and FREE Risk Management course here to learn more!
With more and more institutional investors in the space, the best traders and investors will also have an eye on the legacy markets ?
STOCK MARKET NEWS & ANALYSIS
Crypto, Tech and the US Economy
Current overall sentiment in the legacy markets serves to strengthen cryptocurrency markets ✅
On Tuesday, Chairman of the Federal Reserve Jerome Powell delivered his testimony on the state of the U.S. economy ?? He signalled that the central bank is nowhere near close to tightening monetary and fiscal policy. Loose policy was one of the main drivers of increased demand for cryptocurrencies across institutions. It follows that, for long as it prevails, so too will institutional demand remain.
What’s more, there has been a significant tech sell-off in legacy markets ?
Nasdaq, largely made up of tech companies, has been lagging behind (with Google, Microsoft, Amazon and Apple all slipping). Around the time of the main dip displayed above, “buy the dip” began trending on Twitter ?, as day traders took to their screens. Events like GameStop have certainly conveyed the power of individual investors.
When tech markets lag, institutional investors looking for yield may well cast an eye to cryptocurrencies, commodities and other anti-inflationary assets. Commodity markets have indeed been enjoying a rally, with many investors and traders calling a new supercycle.
Let’s move on to personal finance. All the best crypto and stock market insights are no good at all if they cannot be articulated into a coherent trading and investing strategy ?
Bitcoin Crashes 23% from All-Time Highs: Don’t Panic!
This week, Bitcoin experienced extreme volatility, crashing 23% from All-Time Highs before encountering psychological resistance at $60,000. Did you panic?
If so, author of The Intelligent Investor Benjamin Graham recommends two great options that will allow you to invest without fear:
1) Read every edition of Market Meditations. Our regular readers were warned of this price action last Friday! (Ok… maybe this recommendation comes from us)
2) Use Dollar Cost Averaging (“DCA”)
In essence, DCA is where you invest a fixed amount of capital at regular intervals, for example straight after you get your salary, and is the Bitcoin buying strategy we suggest to many people.
DCA more or less guarantees an average purchasing price of the asset meaning you don’t have to fear short-term volatility however still benefit from long-term price increases.
Are all things as fun as seeing your bags pump through DCA? Crypto taxes probably aren’t. But that doesn’t make them any less significant and we deliver the full package for Market Meditators ?
Crypto Tax Season
Before we begin, let’s ensure full transparency: we are not financial advisors or tax professionals, further to that we hold no relevant qualifications. For any legal, financial or tax related advice speak to a professional.
Tax season is a good reminder for us traders and investors that there is more to Bitcoin than buying it. We need to make sure we have appropriate measures in place not only for trading, but for accounting and security.
Kathryn Hauer, a certified financial planner, states “It could be a real tax mess for folks who try to hide crypto earnings from the IRS.” But tax laws will differ based on where you live and the regulation your country’s government has put into place. What we’ve written here are simply the basics you need to know. One of the most important things, however, is knowing which transactions are taxable and which transactions are not.
Taxable transactions include:
Selling cryptocurrency for fiat (selling 1 BTC for $50,000)
Exchanging one cryptocurrency for another (selling 1 BTC for 31 ETH)
Buying goods or services with cryptocurrency (selling 0.5 Bitcoin for a new car)
Receiving any cryptocurrency (gifts, mining rewards, staking reward, etc)
Non taxable transactions include:
Buying cryptocurrency with fiat (using $50,000 to buy 1 BTC)
Transferring cryptocurrency between wallets (sending 1 BTC you own from one exchange to your hardware wallet)
Here are some additional things to consider that will vary depending on your situation.
Amount of tax that you have to pay (i.e. tax rate)
When you must pay that tax (i.e. annually, quarterly, etc)
What forms you must submit to pay the tax
Make sure to check out my Beginner’s Guide to Owning Cryptocurrency where I walk you through everything you need to know step by step.
Investing Strategies from a $200m Crypto Fund with Jason Choi
CLICK HERE TO FOR EARLY ACCESS ?
Jason Choi is General Partner at The Spartan Group, a $200m crypto asset management and advisory firm. He is also the founder and host of The Blockcrunch Podcast.
Do not invest based on an idea. Ideas are nothing without execution so finding a project with an exceptional founder, capable of iterating and executing is key.
Catching the top of the market is impossible. Use adequate risk management strategies, regardless of market conditions to ensure you are always able to play the game. To learn more, check out our FREE risk management course ?
Get involved in projects you want to invest in. Many projects have discord or telegram groups where active users discuss the product and provide feedback. Become an active user and decide for yourself whether the project has long term value.
Manage your position size carefully. Prices can crash as fast as they can pump so ensure that one big drawdown will not wipe you out completely.
Curiosity and determination are key to finding a job in crypto. Technical skills can be taught but demonstrating these key behavioural traits will put you firmly ahead of other candidates.
Have a plan and stick to it. This helps manage your emotions as you can focus on execution of your strategy.
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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision.