Developments in Cryptocurrency

As many speculators keeping an eye on the space know, cryptocurrencies as a whole got absolutely hammered in 2018. This event was quite predictable given the mania that occurred in 2017 and early 2018. Everyone who asked me about cryptos at that time got a firm answer, "Stay away!"

Electronic tokens trading at valuations of billions of dollars when no-one even knows what to do with them is crazy! Sure, sending money around the world quickly and at a low cost is fantastic, but anyone with an ounce of honesty knew they weren't buying cryptos for that.

What Happened in 2018?

A lot of people who jumped into the space to buy Bitcoin and other "alt-coins" in 2017 have learned a hard lesson in speculation. Many have lost 80 to 90 percent of their money last year. Others got ripped off by exchange hacks, poor security, and scammers or lost access to their wallets.

However, 2018 was actually a great year in the blockchain world as far as the technology goes. This past year we are seeing better development of smart contracts, higher transaction capacity within the various protocols, increased efficiency, and some interesting end-user emerging projects.

For example, artists may soon be able to load their creative work on blockchain platforms and receive micropayments for each "listen" or "view" directly from their consumer. Code can be embedded into the work to prevent loss of revenue from things like torrent uploads.

Websites and blogs could attach micropayments to articles so readers can show appreciation for the work done by the authors. While many would shy away from a $10 monthly subscription (a general minimum amount required to make a credit card transaction viable), paying something like 1/10th of a penny to read an article might be acceptable.

There are also some very interesting advancements using blockchain contracts for betting. One project, Augur, is establishing an open-source market for bets. While not yet fully active, the idea is that users will be able to freely design bets of all kinds and settle in cryptocurrencies in a peer-to-peer format.

Beyond gambling on horseracing or election wins, Augur could theoretically host bets that work like options contracts or futures contracts in financial markets. It would completely bypass the exchanges, drastically reduce fees, and eliminate third-party risks as we saw with MF Global and some of the FOREX brokers.

One of the most exciting changes is the continued development of transaction processing and verification. As you might know with Bitcoin, the proof-of-work ("mining") model is very energy intensive. It also limits the number of transactions the system can handle to less than 10 per second.

Cardano, TRON, IOTA, and a few other projects are basing their verification and transaction handling process on proof-of-stake protocols. They claim this will allow great decentralization, be highly secure, and the blockchain will be able to handle hundreds of transactions per second with a roadmap to increase this to thousands of transactions per second.

The second largest blockchain platform, Ethereum, is said to be moving to a proof-of-stake protocol as well in the coming year so they can increase their transaction capacity and reduce the energy intensive "mining" process.

These developments are showing a use case for blockchain and cryptocurrencies that can be understood by the broader public. The blockchain is becoming more user friendly and it's only a matter of time before average Internet users will be able to use the blockchain for a wide variety of tasks.

It could be compared in many ways to the Internet: developing from a technical network used by universities and defense contractors to today's user friendly tools like Google, WordPress, and Interactive Brokers.

I suspect we might be at the beginning stages of a very exciting time in the blockchain world. If even a fraction of the blockchain ideas proceed, it will be a major disrupter to today's giant "middlemen" corporations: banks, exchanges, lawyers, payment processing companies, data management companies, and so on.

Speculating in Blockchain/Cryptocurrencies

From a technical trading perspective, a number of cryptocurrencies are beginning to look much more attractive. I'm particularly interested in the cryptos which are making large strides in technology—often called the 3rd generation blockchain.

Ethereum

Source: Yahoo Finance

While technically still a second generation blockchain project, Ethereum started the idea of smart contracts and has an active developer community working on moving the blockchain into the third generation to compete with Cardano and TRON.

After bumping up against the 10-week simple moving average for most of 2018, Ethereum solidly crossed over and has been climbing upwards for the past three weeks. The crypto also hit long-term oversold conditions in December 2018.

Cardano

Source: Yahoo Finance

Cardano is solidly a third generation blockchain with ample academic research behind it. The developers are working hard perfecting proof-of-stake models and are making significant progress in other areas of the protocol as well.

This is a newer blockchain that is still in early stages of development. However, it is also one of the most interesting projects in the entire space. If even a portion of their objectives are achieved, Cardano could be a blockchain platform that is a true game changer.

Cardano features a similar technical picture as Ethereum. The last several weeks have seen a turnaround that could be very promising for speculators.

TRON

Source: Yahoo Finance

TRON was formerly a token issued under the Ethereum blockchain. A migration to an independent third generation blockchain took place in June 2018. TRON has focused their efforts on the entertainment industry.

TRON is a Chinese-based blockchain group with many developers who formerly worked at companies like Tencent, Baidu, and Alibaba. The team seems highly centered around the CEO Justin Sun. TRON does state it is a fully decentralized blockchain which is a not-for-profit.

Summary

While still highly speculative and risky for any individual investor, cryptocurrencies seem to have finally shaken off the mania of the past several years. Interesting things are happening in this space.

Using simple trend indicators, some of the better cryptocurrencies are making a shift from a long, solid downtrend to a potentially promising uptrend. This could be a good time to take a closer look at some of these currencies and add a tiny amount to your portfolio.

I think it's still fair to say that many of these blockchain projects will fail and their associated currencies will be worthless. Proper risk management is absolutely crucial in this space as it is in all investing applications.

Some of the most interesting blockchain projects in my view are Cardano, TRON, and Ethereum. As these projects continue to develop their capacity and end-user tools, their adoption could become much more widespread. That can only mean one thing for their associated currency valuations.

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Losses Are Truth

In the past week, I had the pleasure of taking small losses on two of my positions. I say pleasure, not because I necessarily enjoy losing money, but rather because it keeps me real.

I am no savant with all the answers, I take positions that end in a loss, I am human.

All I can do is manage my losses. I can control the severity and impact of losses on my overall portfolio. And this is exactly what I did... very well in both positions.

Both of these positions on which I took a small loss were in the form of long-dated put options, so the risk control was precise and very effective. It's a perfect example of why I love options more and more with each trade.

I followed my signals on the entry, but the market reversed. This means I had to exit the position. Simple as that.

The first position was a long-dated put option on IYR—a U.S. real estate ETF—which had a strike price of $75. I opened my position on December 18, one day after this sector experienced a pretty good drop.

By Christmas Day I looked like a true genius as my trade was “in the money” and up over 50 percent. However, as we know, the broader U.S. stock market turned around and has come back strongly since that time and IYR was no different. The signal changed and I exited my position for a small loss of a few thousand dollars.

A similar experience occurred with my long-dated put option trade on UNG—the U.S. natural gas ETF. I chose a strike price of $25 on a long-dated put option on December 18, once again betting that UNG would fall in value.

Again, as we rung in the new year this position was well “in the money” with a 60 percent gain. This week, however, natural gas prices jumped and I had to exit. I dropped the position for a tiny loss and moved on.

In total, I closed these positions for a loss that was far less than the maximum amount of money I am willing to risk on each trade. I simply followed my signals and I got stopped out. The cash is now in the bank and ready to deploy on a new trade.

Fear of Taking Losses

The events of this week got me thinking about the sentiment which I read so often on the internet and hear so often from my peers. I’m talking about the fear of crystallizing losses. The idea that a loss is not a loss unless it is realized—by that I mean the position is closed.

The fact is that a loss is a loss whether it is realized or not. Your equity has dropped. Your net worth is lower.

Riding a position down to extinction is not going to keep your from being poorer just because you refuse to sell. There is a vast graveyard of worthless stock certificates in the nation's dusty attics.

But this concept goes well beyond the world of stocks and financial investments. It can be your over-leveraged house (which is not an investment), it can be your dismal job, it can even be a relationship with a toxic individual.

When the facts change, or when you're in too deep, you need to take a step back, analyze the situation, and get out. Cutting your losses is critical to moving forward.

Keeping an Eye Ahead

When you really analyze the big picture, you realize that the past doesn’t matter. That doesn't mean we should behave in a manner that's oblivious to the past.

As people, we can certainly learn from the past. We can try avoid repeating the past mistakes we make or those we observe others making. But we shouldn't tie ourselves to the past. Instead, we should always look forward to the opportunities that lie ahead to improve our well-being.

For the investor in us the concept is no different. We use trading systems to try avoid the catastrophic errors made by ourselves or others, but we ultimately look forward.

That means the best way to manage your money each day is by trying to make sure you are invested in those assets which are likely to be the most profitable going forward. Investing is about making profits after all.

Everyday, or every week, or every month, depending on your particular trading strategy, you need to scour the investing universe for the best place to invest your money today. Figure out how to control the risk and place your bets.

I could easily be wrong on the trades I made. IYR and UNG might stop their upswings and once again begin to fall. That’s okay! Provided the risk parameters are right, I will get right back into the trade themes and try again.

The key is that I am willing to change my mind when the evidence shows me that I’m wrong. Even after I was initially right!

If you have losses, realize them quickly, try keep them as small as possible, and move forward.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.