It is somewhat fair to assume that every investor who invests in altcoins does so to get above market returns. For all of my posts regarding market returns I assume that Bitcoin return is the market return. In other words, if your investment gain is larger than that of Bitcoin, you have “beaten” the crypto market. In this post I want to discuss how a crypto investor can consistently beat the market without getting lucky.
What is Alpha?
“Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations.”
In it’s most simple form;
Alpha = Actual rate of return on portfolio - expected rate of return on portfolio
You can see based off of this formula how investors could manipulate their alpha to look very good (> 0 = good, <0 = bad). For example if I used the S&P500 for my expected rate of return my alpha would be very high. As an investor you need to decide what crypto asset you are trying to beat. This could be BTC, ETH or even the Defi Pulse Index. Like I stated my goal is to beat BTC so I use BTC for my expected return data. From there just subtract that from your actual crypto portfolio returns and you are given your Alpha (positive Alpha = good). There are more complicated and accurate ways to calculate Alpha that use Beta and the Risk Free Rate (Jensen’s Alpha). However, for now let’s just focus on the basics. I encourage all of you to calculate your Alpha. It will give you a good idea if you are a half decent investor or not.
So How Do You Beat the Market?
There are thousands of different trading and investing tactics that have resulted in millions in book sales. There is a lot to be said on this topic but I just want to lay out the most important points. First off, the markets are pretty efficient. Since the crypto currency market is decentralized in nature and emerging it is not nearly as efficient as it will eventually be. I think the crypto market has a weak to semi-strong form of market efficiency.
Weak form of market efficiency
Market prices reflect all historical price information
Semi-strong form of market efficiency
Market prices reflect all publicly available information
Strong form of market efficiency
Market reflects all information. Public and private
Since the crypto market is not very efficient investors are able to earn abnormal returns. If it was completely efficient every investor would earn market returns. One could look at investing as buying information rather than buying an asset. For example, there are people who know the crypto wallet addresses of large crypto influencers or YouTubers. They use this information to buy assets that they buy (assuming them purchasing a coin means they will promote it). Once the influencer releases a video or information on that asset the price appreciates. The influencer talking about a select crypto asset does not chance the inherent value of it. In this situation the investor is not trading based off value, he is trading information.
Insider Trading and Information Edge
As I said the markets are pretty efficient. I believe that considering all factors (investment strategy, market timing, etc.) the most important factor is your information.
Did you know that hedge funds often have a large team of lawyers? The main reason for this is to exploit the insider trading laws or codes the best that they can. Hedge funds seek insider information that isn’t legally classified as insider information. That is ultimately the main way they are able to earn above market returns and a high alpha.
Examples of information edge
Weather data for predicting oil prices.
Satellite images for predicting consumer behavior (traffic)
Lunar cycles/ tide forecasts for predicting shipping times and costs
A unique perspective (being bearish when everyone is bullish)
Team/Operations knowledge (personally knowing the team or company)
Why I don’t Believe in Technical Analysis (TA)
While technical analysis looks cool and it can be fun to draw lines on a chart it doesn’t work (for most traders). I think TA can be a useful tool for investors but being a dedicated TA trader is very flawed. Technical analysis only considers historical prices. Historical prices are not an accurate representation of future price action. A good investor needs to consider all available information and gains an investment edge by finding the best information and utilizing it appropriately.
Disclaimer and Conclusion
My point is NOT that you cannot beat the market using TA or basic public information. You can do that and it happens to many investors. However, if you want to consistently beat the market you have to have some sort of edge. This can be building a unique strategy or just having better information.
Normal strategies and research = normal gains
Abnormal strategies and research = abnormal gains
I am going to be spending the next month or so laying the ground work for my email newsletter. Before I focus on specific coins there are topics that I need to go over. Without having a good understanding of the fundamentals, it is very difficult to consistently do well in this market.
The One Thing Holding 95% Of Traders Back From Consistent Profits...
Guest Post From Pat Bailouni - Mindset Consulting
From an early age, we are taught to think that winning is 'good'. And losing is 'bad'.
When we won in sport it was 'good' we got rewarded, we got attention and recognition.
When we lost, it was 'bad luck', we got punished and reprimanded.
We are hired-wired to seek after the pleasure we have associated with winning and avoid the pain we have associated with losing.
Being in this dynamic of perceiving winning as 'good' & pleasurable and losing as 'bad' & painful is the single greatest thing that will stop you from achieving your trading success.
Here are a few reasons why:
1. When inevitable losses come around (based on probability) we will feel the 'sting' and the resentment towards the losses.
2. We fear missing out on (FOMO) what is 'good' as a trader so we jump the gun and get into trades too early.
3. Whenever we are trying to avoid the pain of losing and seek the pleasure of winning, we are NOT objectively trading our trading plan - we are being pulled by our emotions.
As a trader the wisest position you can be in is seeing losing as neutral & winning as neutral, putting you in the best possible position to just execute on your trading plan.
Ultimately, us taking a 'losing' trade from the perspective of the market is neutral. We may choose to label it 'negative' because it challenges our priorities or doesn't meet up to our expectations.
So, if we are labelling a neutral event 'negative' we must be conscious of the downsides of that event and unconscious of the 'upsides' of that event.
Same in reverse for winning.
It's very possible to change your perception of losing and winning - so you see them as neither bad nor good. Just neutral events. Putting yourself in the best possible position to just execute on your trading plan. I help clients do this every day and I can help you too.
There is, additionally, one quick fix you can add into your trading to help with your emotional response to losing trades...
Be mindful of your expectations before getting into a trade.
If your expectation going into a trade is that 'ThIs Is GoInG To bE a bIg WiNnEr' and the fantasy you set in your head of all the profit you're about to make is very pleasurable. Then if the trade is a loss, by contrast, you're going to be devastated.
It's much wiser to put a position on and 'observe' what the market is going to do next - with no expectations.
Do you need mindset consulting?
Check out Pat’s Website for more: https://patbailouni.com/#