How to increase the probability of making money in the probability game of Crypto?
Original Author: Route 2 FI, Encryption Researcher
Original compilation: 0x137, Rhythm BlockBeats
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1. Crypto is a game of probability, but most people regard it as gambling
Let's do a very simple excercise to illustrate how you can achieve positive expected value (+EV) in your own investments.
The first is to consider long-term investment in BTC, let us set up the following 4 scenarios:
1. BTC will hit new highs this year
2. BTC will continue to trade sideways in 2022, but make new highs in 2023
3. BTC has completed its historical role, it will fall and remain in one position
4. BTC will go lower this year, but make new highs in 2023
Now, let's do some probabilistic analysis for each outcome:
1. Probability: 20%
2. Probability: 40%
3. Probability: 20%
4. Probability: 20%
Currently, with BTC priced at $42,000, what's the best deal right now considering these 4 scenarios?
1. to buy
2. to buy
3. to sell
4. buy
In 80% of cases, buying is the best outcome.
1.20% probability up 65%+
2. The probability of a long-term increase of more than 65% is 40%
3. The probability that BTC will never rise back to ATH is 20%
4. There is a 20% probability that we will lose money in the short term, and a probability of more than 65% that we will make money in the long term.
For point 3, you can set your stop loss at 30%. In other words, if BTC falls below $29k, you sell. All in all, you have an 80% chance of getting a +65% return and only a 20% chance of losing 30%. It's worth the risk, isn't it?
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2. How to use probabilistic thinking?
Remember, the market can stay irrational longer than you can stay solvent. In Crypto, anything can happen. That's why you make strict rules for yourself.
For example, here are some examples of hard rules about when to invest in LUNA:
1. When BTC has a horizontal/upward trend
2. When the market value of UST is increasing
3. When momentum is evident (new protocol, more users, bullish news, etc.)
4. When Anchor savings generate positive returns
5. When the Anchor TVL increases (normally, everything that happens to the Anchor can be tracked, because more than 70% of the UST market cap is locked there)
6. When technical analysis looks good on 4-hour, 1-day, 1-month time frames
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3. Pay attention to the size of the position, never exceed the range you can bear
When you encounter the odds in your favor, of course you want to bet big, but even investments with positive expected value can end up failing. Remember, it's all about survival, which is why you should cut your losses promptly and never risk more than 1-3% per trade.
As another example, suppose:
1. Total Portfolio Value: $10,000
2. Risk 2% per trade, stop loss when you lose 7%.
3. Position size: (10,000 x 0.02) / 0.07 = $2,857
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4. What are your strengths?
If you try to be a master of everything, you will get nowhere. You have to find the market you are most comfortable with.
You can first think about what you are most interested in? Trading, NFT or DeFi? But even the deal is too big. Micro caps, small caps, L1, market cap top 100, not to mention time frames, swing trading, scalping, etc...
For NFT, which ecosystem will you focus on? I did spend a few days researching floor rates on http://rarity.tools. For DeFi, what is your specialty? After all, it is too difficult to keep up with the latest status on each L1 public chain.
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5. Be able to admit that you are wrong and stop
This is an important factor for success in the crypto industry. Whether it's an exchange, NFT, or DeFi, before you can buy, you need an argument and a point of failure.
Ask yourself, "What if I'm wrong?"
Continue with the example:
Buying AVAX at $79, the point of failure may be a fundamental change in the ecosystem, and the stop loss should be around 10%.
The reason I'm writing this article is because gambling is harder to get emotional than you might think. How many times have you not forced yourself to sell at a certain price, but said, "If it falls another 5%, then I will sell". Then continue to lose 5% after...
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6. Find the "echo chamber"
If you spend long enough in Twitter's cryptosphere, there are many sub-communities such as ETH maxis, LUNAtics, FTM degen, ATOM believers, etc.
While you should definitely join one or a few of these communities, you should also always keep a critical eye. Don't blindly accept information without making your own judgment.
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7. Be patient
You don't have to keep a full position all the time, you can also choose to use stablecoins for DeFi farming, or hold a certain amount of cash. Instead of always making deals, let the deals come to you.
Try to wait for the big crash and intergenerational buying opportunities to come along to help you get where you want to go (easier said than done).
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8. Some DeFi skills
1. Check the income on http://coindix.com, if you can’t find the information, you can supplement it on http://defiLlama.com.
2. Unless you are very experienced (micro-cap hunters), stick to staking or yield-farm opportunities with high TVL.
3. If you use leverage, constantly monitor your positions.
4. Try to reach out to top influencers on twitter, many of them have information that most people don't know.
5. The higher the APR, the higher the possibility of you becoming a source of income.
6. Try to avoid the BNB chain, many projects on it will pull the rug.
7. Turning on notification alerts for some important Twitter accounts, like Peck Shield provides some good shorting opportunities. Or when Andre Cronje announced that he would "retire" in March, it was an easy shorting opportunity. Now, I think that as soon as the news comes out, the news that USN is stable will affect the market in the NEAR ecosystem.
8. Never spend all your money on one DeFi protocol
9. Always keep costs low when trying a new platform for the first time
10. Try to focus on one or two ecosystems to capture the greatest opportunity
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