And now the final piece to the puzzle to put everything you have just learnt into a neat little package that makes sense and will have you on your way to making the correct decisions when charting and trading this market.
In this article we need to understand a few key fundamentals of trading any market and then see how it applies to the world of crypto, so first lets understand “The Benchmark”
When we talk about the US equity markets there is number of indices and ETF’s that track some of the largest companies in specific sectors to give us an overall indication of the entire markets performance in general and these are often referred to as a benchmark. But the one we will be focusing on is the S&P500 which is made up of floated weight of 500 of the largest companies in the US markets by market capitalization.
The historical average yearly return over the past 90 years is roughly 10%PA and some indices and ETF’s will offer a dividend reinvestment plan known as a “DRIP” which means your dividend payouts get reinvested to purchase more shares, allowing you to earn interest on your interest and thus enter the wonderful world of compounding interest….yummy.
When entering the world of trading and investing, your job is to beat “the market” or benchmark. Sure you can diversify your port folio, have a couple of good wins, maybe a moonshot or 2 and probably a couple of duds that just didn’t work out. But at the end of the year, if your port folio value hasn’t increased by 10% you have failed in your mission.
Remember I said the average yearly return on the S&P500 is roughly 10%, so if you can not increase your entire port folio value by over 10%, then you are NOT beating the market and should have in fact just plonked your entire wealth into the S&P500 and let it do its thing.
Now each market has a benchmark or standard, for the US markets it’s the S&P500, in the ASX it’s the S&P200 and in the crypto market, its BITCOIN. The crypto world is relatively new and who knows, things may change over time. But by using the data we have available now since inception it has always been bitcoin and there is no signs of that changing any time soon.
So to put the same theory into practice your task when trading the Crypto market is to beat Bitcoin’s performance. If your port folio value cannot beat Bitcoins performance then you have failed to beat the market and would have in fact just been better off putting your money into bitcoin and not trying to trade the crypto market at all.
Note* The crypto market being as young and volatile as it is, makes it hard to gauge a historical average but the data is there so just go look for your self.
Now lets understand the Base currency of a market.
When we trade on the ASX (Australia securities exchange) we are trading shares in companies or indices against the Australia dollar (AUD) and this is our base currency. What influences the price of the asset comes down to many things like interest rates, financial reports, PE ratios, future potential earnings, company growth, market share and a tone of other fundamentals but it moves against the AUD. When trading the US markets our base currency is the USD and the same theory above applies.
The price of Tesla shares is not effected by the value in the Turkish Lira, it is effected by the value of the USD.
Lets say your during some technical analysis and you chart up Tesla against the USD and its building a text book bull flag and is about to pop a ATH….. time to open a long right? But for some reason you have the urge to see what Tesla is doing against the Turkish Lira and its double topping at resistance and looks to be coming down, time to open a short? Up?, Down? which is it? What trade do you think is more likely to actually play out?
Hint* Traders don’t give 2 sh!ts what tesla is doing against the Turkish lira….
Ok so now you are picking up what I’m putting down regarding base currency and benchmarks, but how does this apply to crypto?
As I mentioned before the benchmark for the crypto market is Bitcoin, and the base currency for the crypto market is……drum roll…bdadadadadada….tinggg……
SATS (aka bitcoin)
Now this is a debatable topic and I agree there is good arguments on both sides of the “coin” (pun intended) and as a bonus I will share with you one my strategies around this that has helped me build a 6 figure port folio safety at the end of this article. But as an analyst I like to use facts and data to draw a conclusion, rather than basing my opinion on feelings or being stubborn to the mistakes I have made in the past.
Lets take a look at some charts, and see if you can spot some mistakes you have been making and hopefully learn from them and make better decisions next time.
Here I have 2 price charts of Cardano, the top is against USD and the bottom is against BTC. I have circled the exact candle on both charts to give you an accurate comparison against both, remember we like facts not feelings.
If you had purchased $1000 worth of ADA on the daily close on the 24th of September at roughly 8.2 cents (12,195 ADA) and sold on the close of the 2nd of January at roughly 18 cents you would have made a staggering 120% profit or $1200 …… WOW that is an incredible win well done.
Now what if I told you, you just lost…. Huh?
Well if you look at the bottom chart when you purchase $1000 worth of ADA it was 770 sats, which got you 12,195 ADA and it equaled roughly .0939 worth of BTC in total. How ever when you SOLD your ADA on the daily close of the 2nd of January, the sat price of ADA was only 550 sats which means your 12,195 ADA coins only equaled .067 btc
Congratulations you just lost .0269 BTC or $880 (now currently worth $1385 aud)
Your confused aren’t you? That’s because you have been conditioned to value your trades in AUD and USD currency pairs instead of educating your self on how this market is actually valued in SAT’s. Remember your job is to beat the benchmark (bitcoin) and by doing that trade on ADA, you did not beat the benchmark and would have in fact been better off just holding Bitcoin instead of trying to trade it because you lost it. The USD value of ADA is a by product of ADA’s SAT value and the price of a single SAT which is determined by the USD value of BTC.
Here is an exercise for you that may or may not hurt your feelings so I’m sorry in advance but some times the tough lessons are the best ones.
>> Think back to the day you bought into the world of Crypto, there is a good chance you bought some BITCOIN. Can you remember how much bitcoin you had back then? Maybe you bought 1 whole bitcoin, maybe half a coin, maybe you had 2.56 BTC, what ever it may be. Think back to that time and remember how much you had in total.
Now look at your port folio tracker, it may be full of stinkers but all port folio trackers will give you a USD total and a BTC total (Isn’t it funny how all crypto port folio trackers give you a total bitcoin value. ever wondered why?)
Now how much bitcoin do you have now?
If you have more bitcoin than when you first started, congrats you have beaten the market and probably caught a few mooners along the way. Do you have less than you started with? If so then there is a good chance you never understood how this market worked and all those days and nights stressing over trades and chasing moon coins has been pointless and you where probably better off just holding your bitcoin from day dot and sitting on your hands.
Does this mean you shouldn’t trade?
Hellll NO, It means you should just learn how to do it properly and dont rely on some loud idiot on Youtube, screaming at you with their next 3 hot picks for January.
In conclusion when trading the crypto market, pay more attention to SATS than USD, as your mission is to beat the market benchmark using the base currency. There is another question or debate that comes up regarding — Which chart works?. Does the price of alt coins move to USD or to SAT’s? and this Is something ill be writing a whole new article on soon, but for now…… Just hold onto your SATS kids, its gonna be a wild ride.
peace
