How To Read The News To Make a 7x Return Trade In Crypto
A story about supply, demand, and the power of asymmetric information
I must confess that there is a lie in the title. Actually, there are two lies. What a way to start!
- I will tell you about two different trades, not one;
- One of them was 600% (7x) return over 1 month, while the other was a modest 40% overnight.
Despite what it looks like, the story is not bragging. In fact, there is not much to brag about — I am not a risk-taker, and my profit in absolute terms was in the ballpark of a weekend getaway. What it is really about is
- the power of asymmetric information;
- the importance of understanding the asset you are trading;
- philosophy of speculation.
Why assets increase or decrease in value
I would not be myself if I did not start the story by outlining the fundamental economic principle that lies at the core of any market — including the speculations I will be sharing here. The principle is supply and demand curve. Anything in economics boils down to these basics — from groceries to balance of trade and global financial markets.
The model illustrates how much of certain goods or service is available on the market for a given price, and, on the other hand, how much of it people are willing to buy. Let’s explore the graph below together:
- nobody is willing to sell at 0 price, but all buyers are up for some free stuff;
- there is no such thing as maximal selling price, but there is a price point at which nobody is ready to buy;
- everything in between, hence the upward and downward incline of the curves.
Supply and demand curves can move either way depending on the context , and the intersection point will move alongside with them.
What does any of this have to do with crypto — tell us how to become millionaires already!
Crypto assets can be bought and sold. They therefore follow the rules that we outlined in the previous section.
Bitcoin (BTC) price is not a weather forecast — it is formed based on offers from people to either buy or sell it at a certain price. If we see an increased number of people willing to possess some BTC, they will need to move alongside the supply curve and push the price up to the level where sufficiently large volume of BTC can be supplied by the sellers.
In the example below, should there be additional demand for 10 BTC, the buyers would first take the more favourable offers (starting from 29,033 USDT for 1 BTC), then they will have to agree to a higher price, all the way to 29,041 USDT to buy the desired amount. The new price level for BTC would be ~29,041 USDT after this trade.
What we have just seen is called market microstructure. I will write another story on how it works, and how people make money by enabling the financial markets to function (providing liquidity to them).
Key takeaway for us is that
For a price of an asset to go up, more people need to express their interest in buying that asset.
Why would people want to buy more crypto?
That is where the fun part begins — if you are scrolling through this story to find the gist, stop right here. While some crypto assets (tokens) are actually used to enable elegant, decentralized solutions for business, governments and society — think of smart contracts that require Ethereum (ETH) to function — here is the ugly truth
Most crypto assets are bought solely out of expectation that their price will increase, and the buyers will profit from the trade.
The circle is closed. People buy crypto to sell it at a higher price, but for that to happen, more people need to buy that same asset — guess why? — to sell it at a higher price. While not all investment is a zero-sum game, this particular setup is actually very close to one. For some people to win, others have to lose. For every profit to be made, there is a loss to bear.
This is where asymmetric information comes in as a crucial aspect. Making speculative profit is about knowing that more people will want to buy some asset, before people actually knowing it for themselves. If you buy earlier, and, hence, lower, you will be in a position to sell when the time comes and the crowd starts pumping the market.
With crypto assets being so plain simple that they either represent a potential for the owner to build decentralized applications, or nothing at all, it is still fairly easy for common people to follow the trends, catch the news and draw conclusions that are extremely naive and yet surprisingly efficient.
How I made 7x on Binance Coin within a month
First rumors that Coinbase, a large crypto exhange, would do an IPO, appeared as early as mid-December 2020.
In January 2021, it was crystal clear that the IPO was happening. You may have seen how positive sentiment of regulators towards crypto pumps the BTC price — and the other way around. The notion of a crypto exchange filing for IPO and actually getting through was unbelievable. The closer the date, the more people would flow into crypto markets thinking it would be the beginning of a new era.
Coinbase was not the only crypto exchange operating the market. The largest one is actually Binance, where I happen to run my research. It conveniently issued its own token Binance Coin (BNB) which is allegedly used to facilitate the operations of the exchange.
Remember the ugly truth? Nobody cares about what a crypto token actually does, if anything at all. I knew people would go for BNB when they hear about Coinbase IPO. I happened to be among the first ones to make that simple conclusion. I had some residual BTC in the wallet from the days I was a part-timer in a crypto startup. I put all of it into BNB.
A month later, talks about the IPO were everywhere. I checked the price level and it was already about 7 times the price of my entry. I closed the trade without further sentiment and paid off my weekend trip to Finnish Lapland.
How I made 40% overnight on metaverse
Same story, different angle.
Late October 2021, the newsfeeds were bugged with titles claiming Facebook rebranding. Many of them were already mentioning the magical word “metaverse”.
I had remembered a BBC episode about Decentraland (dating back to August 2018!)— an actual metaverse where people were setting up their virtual lives, getting jobs, buying real estate, all — using an in-game currency MANA that was also traded on crypto exchanges. For them, it was a game. For others, it was just a piece of something that related to the “metaverse” subject. I suspected the “Coinbase” story would repeat itself.
“Zuckerberg said metaverse. Metaverse is good. Metaverse will make me rich…”
— a thought must have crossed the minds of thousands of people. Without knowing or much caring for Decentraland, people starting logging in to their crypto exchnage accounts and buying the token.
To be completely honest, cashing in on that one was not my priority. I remembered about it just the evening of the announcement, got into MANA with a small amount, and set the limit order to exit at 40% profit… Which hit overnight.
Key takeaways
- Assets increase in price if and only if these assets are needed by more people — and the people are willing to pay;
- Most crypto assets are not used to build value-adding solutions, but instead form a purely speculative market;
- To profit from a speculative trade, one does not have to be the first to know of an upcoming wave, it is enough not to be the last;
- New technologies emerge all the time. Keep an open mind and stay curious to see the opportunities.
Why would I not do it again?
While it feels momentarily good to see a multiplier to your bet, speculating like this does not create any value. On top of everything, more often than not, the underlying assets do not create any value either.
The more big players join the market — and by big I mean multibillion funds with people scanning the news and predicting microtrends on a full-time basis — the more challenging it will be to be for amateurs to see the pattern early enough.
The joy of “beating the system” — which in reality means taking the profit off someone else’s failure — fades quickly. Sitting long hours in front of a monitor days and nights in search of the next move which may not arise until 6 months from now has an opportunity cost to it. The opportunity to spend the time with your family, partner, friends; do sports or travel to a neighboring city; be part of a cool team or build your own solutions that would actually make a difference. At the end of the day, projects that have a real, tangible impact on the society, are the ones most rewarding — financially and mentally.
