TANSTAAFL

Quote from: bitebits on Today at 01:56:04 PM

https://twitter.com/10kdiver/status/1537385102153424899

I think that I should change my forum name to “TANSTAAFL”.

A.

The buy-and-hold strategy does not give a free lunch: HODLers pay every day for their future wealth, in the time value of money. HODL incurs opportunity costs. HODL also embraces long-term fundamental risks; long-term risks are the cost of easily avoiding short-term risks on the irrationality of the markets.

Many nocoiners are jealous of Bitcoiners who get rich. They fail to account for the costs paid by HODLers in time value of money, in opportunity costs, in long-term risks, and even in the personal discipline of not selling.

Early Bitcoiners who bought BTC at $1 and held it have paid the cost, and taken the risk, of not taking profits at $10, $100, $1,000, $10,000, $67,000, and every number in between. Meanwhile, they are sitting on their liquidity instead of using it for other purposes. Jealous nocoiners should STFU.

From intelligent strategies (ignoring gamblers’ moon-shots), the polar opposite of HODL is HFT. Time = risk. HFT minimizes time-dependent risks, by holding for as little as a few milliseconds—it minimizes path-dependent risks, by keeping the paths negligibly short.

HFT is highly profitable; HFT trading firms turn $billions into more $billions. Of course, the catch is that you grossly lack their knowledge, their trade-secret algorithms, their high-performance computing equipment (some run trading algorithms on FPGAs to reduce latency), and their low-latency connections to the exchange. The shortest-term trading runs on such short time scales that the speed of light in a glass fiber is a significant factor; accordingly, HFT trading firms tend to locate themselves physically close to the exchange, with a leased line running directly into the exchange. Forget about using the Internet for that! Even for cryptocurrency trading over the Internet at slightly longer time scales, anything that could qualify as “HFT” requires high costs to optimize for latency. It cannot be done on a home Internet connection (never mind when Tor, VPN, etc. gets involved).

Garden-variety short-term traders are stuck in between. They get the worst of both worlds, plus many other problems. And because all trading is a zero-sum game, the amateurs only exist for the purpose of giving their money to the pros. Do you suppose that you can compete with HFT bots, or with quantitative traders generally? Do you have a maths degree?

Now, we turn to considering margin.

B.

I have learned by hard experience: Margin necessitates short-term thinking. Margin is incompatible with the HODL mindset.

Look at the notional chart quoted by bitebits. The path-dependence is time-dependence. The chart contains many short paths that would be profitable on margin—highly profitable. The catch is, of course, that this requires the risk of trying to time the market. TANSTAAFL! If you want ridiculously high leveraged profits, then you need to take ridiculously high risks—and keep the risks as short-term as you can, because time compounds risk by lengthening the path between your start state and your end state.

Now, I should batslap Jay for pretending that he has anything to teach me about how to think as a HODLer. I got wrecked because I have a HODL mindset. I got wrecked because I tried to HODL a leveraged long. I have said many times here: I could have exited in the late March/early April pump at $47k—I could have exited with more BTC than I started with!

This does not mean that margin trading works. I narrowly missed getting liquidated several times before that; and the worst near-misses required skillful loss-management to avoid getting wiped out in February. Meanwhile, I was hemorrhaging other assets—including things that I dearly wanted to keep, just not as dearly as BTC.

It means that I got lucky. Lucky. Lucky in a bad situation, when I was already at high fully realized losses. And I failed to take the lucky exit, because I am too much of a HODLer.

I could see only what Bitcoin would be in >= 6–8 years. Accordingly, each BTC in my account looked to me like >$1 million. Sell a big chunk at $47k to cover debt? WTF?

That “path dependence” neatly summarizes my error: I expect a long, volatile path to million-dollar bitcoins.

Thus it came to pass that I almost got the opportunity to come to WO, and brag to y’all about how margin trading is sort of awesomely profitable sometimes for those blessed by the Goddess of Fortune. But she is a fickle mistress, with a streak of cold cruelty. Beware her temper. If you think that Bitcoin is volatile, take pause to perpend her mood swings! Accordingly, luck is absolutely the most volatile asset in the universe.

As such, if I had hypothetically come in here to brag about my lucky margin trade, Jay would have been perfectly justified to batslap me for being a gambler masquerading as an “investor”.

C.

That path-dependence reminds me of some of my other margin-trading experiences in the past five months.

Besides some leveraged longs in alts that failed long ago, I have mentioned somewhere in my prior posts that I desperately tried short-term trading to pay off debt. Due to my attachment to BTC, it had to be alts—better yet, specific alts which I despise, about which I have no compunctions in selling or shorting to reap dollar profits off their markets. Of course, I was in a position in which I needed to use margin for that—cross-margin against my BTC; and since I was desperate, I used way too much leverage to try to make money fast. Desperate people do desperate things!

I actually do know a thing or two about trading. I did TA. I made some good calls, seeking to catch the short portions of potential short-term profitability in that notional “path dependence” graph. At that point, I did try at least a little bit to limit my risks: Nothing too spectacular—either basic channel trading, or in-and-out long/short in an obvious pump/crash. Where I tried something that I thought was just too risky, I hedged with a cash-settled option in the opposite direction. Although I would not claim to be a trading expert, and I did make some clumsy mistakes, I am assuredly not a n00b.

I made some sweet profits. Profits on leverage! Whittled down the massive debt trapping my BTC.

Then, I took some much larger losses. My losses were compounded by unpredictable circumstances outside my control, which stopped me from stopping losses timely. I was forced to cover ASAP, to avoid cross-margin liquidation of my BTC. Thanks to high leverage, unrecoverable debt piled up fast enough to make my head spin.

Still, I managed to cling to my BTC for a few more months (!).

Newbies are lambs to the slaughter.

D.

I have barely even begun to describe how margin forces short-term thinking.

This also relates to my thoughts on money at rest versus money in motion.

But this post is long enough for now.

Conclusions

Although there may be some variations and other ways, I see two classic strategies to make reliable profits in “crypto”:

Long-term holding: Buy BTC for cash. HODL. Understand very clearly that due to the path-dependence illustrated in bitebits’ quote of @10kdiver from Twitter, “HODL” and margin do not mix!

Short-term trading: Start by being born with an IQ >= 3 S.D. above mean. Next, attain a university degree in mathematics; and study quantitative finance. The rest will follow. If you attempt the shortcut of learning TA from some huckster on the Internet, prepare to be direly impoverished when your luck runs out. It will probably hit you much worse, much sooner, if you use margin.

One way trades the time value of money for the safety of money at rest, and avoids short-term risks by depending on long-term fundamentals. It requires the ability to buy BTC, and to avoid panic-selling.

The other way relies on keeping money in motion. The requirements list is much higher. The risks of failing to meet those requirements are extreme.

Take your pick!