Volatility & Leverage
Within the world of traditional markets, there exists a stern warning to those looking to trade stocks and forex. Many countries actually limit the use of leverage, and some have gone as far as to actually ban certain trading activities. A number of years ago, Germany chose to ban short selling in certain instances. It’s true, there is an unparalleled opportunity that exists within the world of trading and financial markets. However, at the same time, there are enormous risks involved. As a result, potential investors are cautioned and encouraged to learn the fine art of trading before diving into a world that is most likely going to devour the majority of newcomers.
This is even more true of the Crypto markets, as volatility generally tends to dwarf traditional markets. One of the reasons why, prior to Crypto, the forex markets provided such high leverage is the low volatility of the market. Forex pairs generally move in very small increments on a daily basis. Sure, over time, these daily movements can begin to compound. However, daily volatility is low, and leverage provides opportunities for intra-day and day traders. We have however recently seen certain currency pairs suffer in the short term as a result of inflation and other geopolitical factors.
Ironically, Crypto has managed to attract many individuals who have no previous trading experience, whatsoever. Many have never traded a financial instrument prior to Crypto. As a result, there is little to no technical knowledge, as well as an understanding of leverage relativity. This is quite simply, a recipe for disaster, and generally tends to end very badly. Alameda Research is a prime example of, trading, void of any meaningful knowledge and risk management. Isn’t it ironic, that a market that requires the most stringent of risk management practices, is made up of participants who are generally oblivious to such practices?
Dollar Cost Averaging
I have repeatedly mentioned that dollar cost averaging is a practice for the inexperienced investor to gain exposure with the least amount of risk. Trading and investing strategies are better suited to the experienced. Trading without the appropriate foundation is a bad move. I have been keeping a close eye on the “opinions” and “interpretations” of many Crypto communities during this bear market. I have come away with an even stronger conviction that the majority of individuals actively trading Crypto are not suited to be trading any market, let alone Crypto.
Newcomers should be dollar cost averaging, while they endeavor to learn and grow in the knowledge of trading, and financial markets as a whole. Funny how people would never consider approaching an engineering company for an engineer’s position without a degree, but think they can excel as traders… without any training or foundational understanding. This “disconnect” only serves to increase the casualty cases within the Crypto market. If you want to know how effective you are as a trader… then honestly evaluate your predictions and performance during this bear market.
Don’t sugarcoat it, just do it. Everyone is a genius in a bull market. However, it requires knowledge, discipline, skill, and patience to survive a bear market. I continue to learn daily and remain in a state of mind that encourages the gaining of additional understanding and insight. The more you know, the less you know. One thing that you will note about those who have been consistently wrong (if you were paying attention) throughout this bear market is an adamant stubbornness. The “thesis” is adjusted weekly, and so the self-deception continues to grow.
Markets don’t entertain illusions, they are crushed, along with portfolios. This is a battleground! You may be able to convince others of a “thesis” without any substantial data, but the market sees you coming. If more newcomers arrived with the appropriate expectation, we would see a better retention rate, especially during bear markets. However, hodlers become traders, who ultimately become losers… who go on to become “leavers”.
Hodlers should instead become students, who later go on to become traders… who go on to be successful.