How I Almost Lost $10k
The Risks of Margin Trading
When Bitcoin went from $40k USD to $65k USD, it happened in a span of a couple of months. It is not hard to ride that optimism, and believe it’ll continue to go higher. Then my brain got thinking, how can I multiply my gains even further? The answer is trading on margin, OR borrowing money to trade. I wrote about margin trading, or derivatives in an earlier two part letter. You can find them here.
This letter is going to expand on these concepts, but also talk about it from a more human perspective. That is, what it feels like to take on risk, and potentially suffer a huge loss. Risk invokes a feeling that crosses between fear and excitement. The adrenaline pumps, and you feel alive putting it all on the line. But is it worth it?
My $10k Bet on Bitcoin
Let us first take a look at my trade, in order to understand the risk that I’ve taken on.
This is the amount of Bitcoin I have bought, using borrowed money.
This is the liquidation price in USD; if Bitcoin falls to this price, I lose whatever is in my derivatives account
This is the amount of money I used as collateral to borrow money to buy 0.72 BTC.
This is the amount I currently stand to lose, if I close my trade. It says that I am down $3,424.54 (which is $936.11 * 365.83%).
In order to use $936.11 (3) to buy 0.72 BTC (1), I needed to fund my account with about $10k. I could fund it with less, but the less $ there is in my account, the higher the liquidation price (2) is, and the more risky my trade becomes.
My bet is that Bitcoin will increase to more than $100k by August 2021. This has been my general prediction for this bull market, and I still believe we are well on-track to hit this target. This is the entire reason why I feel comfortable making this sort of bet.
How I Almost got Liquidated
I almost got liquidated during the flash sell-off on April 22nd. Bitcoin crashed pretty hard to a price of $47k. Shortly before this happened, my liquidation price was $52k. Bitcoin was falling quickly, and I happened to be near my computer at the time. I had set aside some USD exactly for this occasion. In the event that my investment thesis (Bitcoin going up) didn’t pan out in the short term, I might have to fund my account with more money, in order to bring down the liquidation price. (More money in the account, the lower the liquidation price, the lower the risk).
You might ask, why not just keep a bunch of money in the derivatives account? The answer is that I have that USD elsewhere, earning me a good interest rate. When it is sitting in my derivatives account, it isn’t directly earning me money.
So I took the USD I had set aside and funded my derivatives account with it, dropping the liquidation price to $38k, well below the amount that I thought Bitcoin would be dropping to. My general rule of thumb is that my liquidation price should be about 20% below the current price of Bitcoin. A drop of 20% is common, and can happen in 30 minutes or less. If I am not around my computer, or asleep, then I can get myself liquidated, losing the entire $10k that is sitting in my derivatives account.
Plan for the Plan not Going According to Plan
If I’ve learned anything from trading, it is that my trades almost never go according to plan in the short term. Sometimes I think that the universe is conspiring against me when I am trading. Then again, I think the simpler explanation is that I am not as good at picking my entry points1 into the market.
Keeping that stash of USD is the equivalent of me planning on my plan not going according to plan. Not having that USD set aside for unexpected market action is tantamount to blind faith in my expectations, or more colloquially “Going All In”. The only thing I really have blind faith in, is things happening differently than I expect.
Set Targets; and Don’t Get Liquidated
There are generally two rules when it comes to trading. The first rule applies to any trade you might be doing. The second rule only applies if you’re using leverage.
Set Targets: Know your buy and sell targets
Don’t get Liquidated
How I Set my Targets
I use a simple spreadsheet to track my trades. This is what the structure of my spreadsheet looks like. Each row in the spreadsheet tracks a completely separate trade.
IMAGES AND CONTENT REDACTED — [ May 1st 2022 ]
Bitcoin Bought: The amount of Bitcoin that I bought for the trade
Purchase Price: The price in USD that I purchased the Bitcoin
Current Value/Profit: The current performance of each trade (blank for completed trades, filled in for open trades). This section tells me how my trades are doing, and gives me an indication on how much I’ll make (or lose) if I were to close the trade.
Sell Target: This is arguably one of the more important columns. This is essentially my RULE that I set for myself. When Bitcoin reaches that price, I should be prepared to close the trade.
Sell Price/Amount/Profit: This section tracks the end result of the trade. How well did the trade actually do?
Stick to Your Rules
It is one thing to set rules, it is another to stick to them. Earlier on in my experience as a trader, I wouldn’t even set rules. This caused me to lose money, because I found myself acting on emotion, instead of sticking to my rules. Later, I found myself setting rules, and not following them. Again, this caused me to lose money because I was trading from an emotional state, rather than sticking to my rules. Now I am setting targets, and sticking to them, and I am profitable.
A Few Words On the Sell-Off on May 12th
I am amazed that Elon Musk has as much market power as he does. It appears the words of one man has the ability to move markets up and down by non-trivial amounts. This post is mostly about the April 22nd sell-off2, but as I was writing this letter, the news broke of Tesla’s decision to stop accepting payments in Bitcoin due to its environmental concerns. If you haven’t already read my letter on the environmental debate, I recommend doing so. I lay out the two sides of the argument because it is simply not as cut and dry as the media makes it out to be.
I had to execute a similar strategy that I did in late April. That is, I had to dip into my USD reserves in order to prevent myself from being liquidated. Bitcoin fell from $55k to $46.5k (15% drop) in about 30 minutes. My liquidation was set at $42k, and so in accordance with my rules, I funded my account with enough money to move my liquidation price down to $38k.
What is really amazing to see happen in real time, is how quickly the market rebounds with an onslaught of buy orders. That is, how quickly the market is ready to pounce on prices that others are selling at. We touched $46.5k for just a couple of seconds before Bitcoin stabilized back around $50k.
Parting Thoughts on Risk and Trading
I desperately need to learn how to use stop losses to my advantage. I am overly optimistic about the performance of the market, and I need to learn how to better balance the risk that I take on. Furthermore, I need to take my own advice, and take profits more often. Lastly, taking on this level of risk is not for the feint of heart. It is the days that I am down 300% on my position that really strike a humbling sense of naivety into my bones. There is no better lesson than failure, especially when the failure has a price tag. Of course, at the end of the day, it’s all just money, and I still have followed the golden rule of investing. I haven’t put in any money that I am not prepared to lose.
All The Best,
Keegan Francis