How I’m Running my Crypto Currency Hedge Fund

Initially published May 5th, 2017

Updated May 10th, 2018

Today I developed a cryptocurrency hedge fund strategy. I’m using Coinbase to execute all trades.

Hedge Fund Spreadsheet Viewable to Public Here

Why Bet on the Game

Essentially, this is a tiny portion of my overall investment account. Indeed, I don’t actually call this part of my investment plan. This is just a fun way to stay up to date with crypto-currencies and do a bit of gambling.

Crypto-currencies have the potential to dramatically shake up the global financial system. While studying economics at the University of Nevada, I learned a lot about monetary relations.

I have a perceptions that the financial industry plays an important role in the security and mobility of capital for individuals and companies around the world. Though I believe the institutions are important, I also believe that organizations like these are using their importance to behave sub-optimally.

Hedge Strategy

As I don’t pretend to have any idea of what is going to happen with any specific currency, I’ll just bet evenly across all of those coins available on Coinbase.

I’ll use a risk assessment which is entirely emotional on my part to make decisions on the ratio of cash to coins. I’m sure it would be better to create an algorithm to balance dollar weight average or find some sort of relationship between ‘bitcoin’ tweet frequency and the coin price… but that would take a lot of time and I’m primarily focused on other things.

Assessing Risk to Balance Portfolio

I’ll make fund balancing decisions based on how I feel about the currency market:

• Low (0% Cash) – When I feel that the currencies are at their historical lowest, I’ll take from the cash and invest in currencies.
• Medium (12% Cash) – When I feel that the currencies could go either way, I’ll take from the cash and invest in currencies.
• High (25% Cash) – When I feel that the currencies are at their highest and are likely to fall, I’ll take from the cash and invest in currencies.

When I feel that the currencies are overvalued, I’ll hold more cash. When I feel they are selling for less, I’ll hold less cash. Overall, I’ll hold at least 75% of the account at all times.

Trading Frequency

I plan to trade, at the very most, in 30-day increments. This is a long game. I expect to be holding crypto-currencies late into life so I’m in no rush here.

Here is an example of my most recent balancing spreadsheet:

In Coinbase I was able to execute two sell orders denominated in USD. Then a buy order for Litecoin. From logging into the platform to deciding on a strategy to executing the orders, this took me about 1 hour.

Some people bet on horses, I like betting on cryptocurrencies.

Dominating Theory

My dominating theory here is that I have no idea what these currencies will do. I don’t know if one has a chance for implosion, or if one has a chance to be the next bitcoin.

If Litecoin or Ethereum grows from $25 per coin to $1000 per coin like Bitcoin did in 2013, I want to hold a few of them.

That is why I’m only betting emotionally. That is why I’ll restrict my buy/sell decision to impacting, at the very most, 25% of the portfolio.

The rest I’ll leave to chance and time.

Updated September 9th, 2017

Well, this thing is looking more like a bubble every day.

I haven’t been keeping track at all since May 2017. It was totally out of sight and out of mind. Today I look at the numbers and my cryptocurrency account total looks like this:

September 2017 Crypto Currency

So I’ll be selling off BTC and ETH to buy LTC, GNT, TNT, and OMG.

All my BTC, ETH and LTC coins are stored at Coinbase. All my other stuff is on a market called Liqui. To buy GNT, TNT and OMG I’ll need to transfer $380.85 worth of BTC to Luqui. Then I’ll cash out $85.46 from BTC, and $365.65 from ETH. The next move will be to transfer $125.42 worth of ETH to LTC.

Finally, as you have to buy coins with BTC/ETH on Liqui, I’ll use the transferred BTC to buy TNT and OMG.

Buying TNT and OMG

The price in BTC of TNT is 0.00002980 at the time of writing this.

I’ll buy 0.03587 BTC worth.

 

The price in BTC of OMG is0.00287464 at the time of writing this.

I’ll buy 0.03587 BTC worth.

 

When I first tried, the prices kept going up. Therefore I would put out buy orders and no one would sell as the prices were higher than my orders.

So I just bought higher than the market a little in order to secure the coins to the account.

Finally, I need to up my GNT levels by $70.10 worth of BTC (0.01625 at the time of writing this).

Phew. I guess this is why some people call trading a job. I’ve balanced my portfolio. Now time to go outside and forget about this for a few months.

Taking Money Out

The most important thing in bubble surfing is to take money out.

My guess at this point is that I’ll take 10% of the account out each balancing. I’ll put that 10% into index funds or something boring like that.

Today, I can’t pull my ‘USD Wallet’ out. It takes a few days to verify the bank account I want to use to send the money.

Cryptocurrency Codes

• BTC
• ETH
• LTC
• GNT
• OMG
• TNT

Surfing on Bubbles

Please don’t mistake this for a commendation for cryptocurrencies as a way to make money. I believe these prices are ludicrous. I expect this to be a bubble which will certainly pop.

Blockchain technology is no joke. It’s a legit scientific development. It’s a new element that humans have created. I believe a lot of value will come due to the technological leap that is bitcoin. That said, markets grow, bubble and pop because of humans being irrational. High coin prices, I guess, will fall just like the value of Dutch tulips in 1622.

January 2018 Order Planning

Since I last wrote this, I made a few moves… but I’m not going to detail that madness now. Let’s focus on the big stuff.

The AUM of the fund was $3,107.51 in September 2017.

The AUM of the fund is $9,605.29 in January 2018.

(p0 – p1) / p1 = Growth Rate

(9605.29 – 3107.51) /  3107.51 = 2.09099

So the fund has grown 209% in about four months. Radical!

The core of my strategy is to buy lots of inexpensive coins with the chances that they will become the next BitCoin. The following section is me doing surface research on a few coins and deciding if I will add them to the list:

January 2018 Cryptocurrency Research

AdEx

Maybe the Google AdSense killer. Seems like they have a technology team with actual GitHub profiles. The advertising problem they are addressing could actually benefit from the consensus and mining attributes of the blockchain. Whitepaper seems like it’s legitimate – AdEx-Whitepaper-v.7 (copied from their site Jan 12th, 2018). I like this idea – adding it to the list.

SRN

They want to make an OS, a phone and make it all part of a new blockchain. Dramatically ambitious. The head guy’s website could have been coded in a day and is full of buzz words. They even have Jason Silva saying buzz words on their website. Seems like a respectable marketing effort to me. Pass.

SONM

It appears that these guys are trying to do a very similar thing to Ethereum. The way I understand it is that they want to use blockchain mining to power a distributed computation service platform. Like the silicone valley, pied piper program. Sounds interesting. They raised over $42 million thus far. They seem to have some sort of relationship to Hewlett Packard. I’ll add this to the list.

GUP

Interesting… their app wasn’t working for the first part of the day. Registration without Facebook didn’t work either… That said, they have a very good looking website and their development team looks good. They say they are launching the ‘product’, a matchmaking service of many different types on Jan 18th, 2018. I’ll standby for now and hope to revisit this team later. Reminds me of Earn. Good luck GUP team, but for now, Pass.

AST

This a coin that offers the ability to create marketplaces for tokens? I don’t get it. Seems like a non-blockchain thing.  I don’t get it. Pass.

SNT

This is a mobile application that uses Ethereum to build other application on top of it. To my understanding, why wouldn’t someone just build an Ethereum app? I probably don’t get it… but Pass.

EOS

Essentially the team at EOS is saying that they will build a platform that is like Ethereum but it will operate even faster. SNT wants to do it on mobile. At the end of the day, I’m going to add this one to the fund because I like the way Daniel Larimer talks about latency. Adding this to the list.

January 2018 – Allocating Cryptocurrency Capital

First off, I’ve developed the following plan for coins to purchase/sell and how to do it. Here’s the spreadsheet which will inform my allocation goals:

Selling ETH on CoinBase

11:34 a.m PST – Initiated ETH Sell of .1874 ETH

I should see the USD in the Coinbase wallet next day with Ethereum (so it’s not actually instant as Coinbase suggests). The transfer did reflect on the balances within an hour of placing the order. It appears that CoinBase is executing as a reliable marketplace.

*Does not show up in transactions automatically. I’ll have to check in tomorrow to ensure orders went through.

Selling LTC on CoinBase

11:38 a.m PST – Initiated LTC Sell of 3.27 ETH

I should see the USD in the Coinbase wallet next day with LiteCoin (so it’s not actually instant as Coinbase suggests). The transfer did reflect on the balances within an hour of placing the order. It appears that CoinBase is executing as a reliable marketplace.

*Does not show up in transactions automatically. I’ll have to check in tomorrow to ensure orders went through.

Selling BCH on CoinBase

11:44 a.m PST – Initiated BCH Sell of 0.1722 BCH

When the order initially went through the information said the USD in the Coinbase wallet would appear next day with LiteCoin (so it’s not actually instant as Coinbase suggests). The transfer did reflect on the balances within an hour of placing the order. It appears that CoinBase is executing as a reliable marketplace.

*Does not show up in transactions automatically. I’ll have to check in tomorrow to ensure orders went through.

Sending BTC from CoinBase to Liqui

The following transaction log took place on January 16th 2018 and details a Bitcoin Transaction between my CoinBase wallet and my Liqui wallet.

11:28 a.m PST – Initiated Coin Transfer of .027 BTC

11:40 a.m PST – Liqui still shows a 0 balance for Bitcoin so transaction has NOT executed. It is still ‘pending’ on Coinbase.

11:49 a.m PST – No development – Still waiting. 21 minute transaction time and counting…

11:56 a.m PST – Transfer complete. Now I have BTC in the Liqui account which should empower me to distribute to low list price coins.

Transfer time = 28 minutes | Cost = 0.00103 BTC

 

Liqui Trading

12:01 p.m PST – I started this note while trying to sell 240 GNT coins on Liqui. It’s now 12:27 and the order still hasn’t processed. The platform was glitching out. It appears that GNT doesn’t actually work.

The Next Day – According to my trade history, the GNT sales went through at 20:59 which only makes sense if Liqui timestamps everything with London’s time. If that is the case, the trades were executed within 20 minutes of placing the order.

All the other trades were ordered and executed. Perhaps there is a specific challenge with GNT + Liqui. I’m not sure. Here are some screenshots of the buy/sell orders:

At the end of the day, I could place all the orders I wanted because I simply grew tired of working on placing orders.

Final Thoughts on January 2018’s Balancing

The main goal is to have a small position in a few coins in their infancy. I grow more confident every day that this is a speculative bubble. That is why I’m pulling out a strategic amount each balancing period.

I probably don’t plan to revisit this fund until March 2018 at the very earliest. If you’re in the crypto game, please leave a comment below and let me know what you are thinking.

May 2018 Order Planning

The more I think about the fundamentals of cryptocurrency gambling, the more I believe that we will see a day where the value of a Bitcoin will drop to nothing, or near nothing.

Therefore, my new strategy is to just leave a token amount of capital in so I have the opportunity to pull money out in the future. But I plan to pull money out as aggressively as I can when it fits. How do I know when it fits?

I’m assigning cryptocurrencies a 5% position in my overall asset allocation. When it gets above that, I pull $ out. If it falls below that point, I do nothing. Normal allocation would suggest that I buy at that point, but I’m not going to do that. If that section of my overall portfolio dies, I don’t care.

I lose nothing because I’ve been pulling capital out the whole time. There is no way I can lose this game now.

Here are some graphs to show where I’ve been and what I’ve done today.

Essentially, I’m of the opinion that the whole market is speculation with a small, real value proposition.

The value of cryptocurrencies is in their ability to provide transaction services to people who don’t know each other. This transaction service is an inherently valuable element which makes these assets more value than other bubble assets like tulips or beanie babies.

That doesn’t mean that cryptocurrency assets generate income like a real businesses. A coin-operated laundry business actually generates cash. These are the kinds of assets I want to be a part of going forward.

To be sure, transaction processing is a large business. I have no idea how big that is. This is a hole in my logic. If BitCoin can have a significant technological advantage over Visa, Western Union and micro finance solutions (like Kenyan people using their phone credits and currency) then it’s possible that there is a blockchain business which will put a dent in the universe.

But BitCoin might not even be a transaction processing business that could survive. In order to verify transactions, Bitcoin needs mining. Mining requires a lot of energy to verify transactions. Really, they need huge buildings with hyper-speed computers that are air-conditioned. These are real costs. At what point does the cost of mining outpace the needs for the transaction volume? My guess is that the answer to this question is not infinity.

Once the cost of mining outpaces the currencies capacity to verify transactions, the value of Bitcoin becomes 0. If you can’t trade Bitcoin in a verifiable way, there is 0 reason to hold it.

Let’s not forget, mining is supposed to stop at a certain number of BitCoins. How on earth are the coins going to do anything but lose all their value after the mining stops? Deflationary currencies have inherent problems which I won’t get into here.

How I’ll Act Going Forward

I’ll try to bleed the crypto-currency game of capital while the bubble is still growing.

With zero exposure to the game, I can spend less time thinking about it and more time thinking about software engineering, adventure and fitness.

I will come back to update this blog, but it probably won’t be for a very long time.