My 7-day course on how to lose money on crypto
Day 4: Learn to lose from the stock market
DOGS OF THE DOW AND DAY TRADING
I won’t need to spend much time in explaining why stockmarket trading fundamentals don’t apply to cryptocurrencies. If you need to see why, look at yesterday’s lesson: Now trade!
Here are the principles from Investopedia:
- Share price should be no more than two-thirds of intrinsic worth.
- Look at companies with P/E ratios at the lowest 10% of all equity securities.
- PEG (Price Earnings/Growth ratio) should be less than one.
- Stock price should be no more than tangible book value.
- There should be no more debt than equity (i.e. D/E ratio < 1).
- Current assets should be two times current liabilities.
- Dividend yield should be at least two-thirds of the long-term AAA bond yield.
- Growth should be at least 7% per annum compounded over the last 10 years
Try to fit any one of those ratios to cryptos and you’d pretty soon retire exhausted. Price and earnings relationships just don’t exist. Cryptos don’t give you dividends. Assets vs liabilities means nothing in the crypto world.
DISCOUNTED CASH FLOW
One alternative to these ratios is Discounted Cash Flow: work out what could reasonably be the stock price in coming years then discount the price by the compound interest and if the current price is below this figure, invest. Otherwise, not. Easy to do with a spreadsheet.
But that doesn’t really work with cryptocurrencies. How on earth can you work out mathematically what the price will be in two years?
DOGS OF THE DOW APPLIED TO CRYPTOS
About the closest you can come is applying the Dogs of the Dow strategy of Michael Higgins- Invest n the top 10 companies with the highest dividend yield, and adjust your investment every year (usually three or four). But cryptos pay no dividends.
There’s something similar in crypto called momentum trading, choosing the top performers to invest in and dropping the weakest from your investments. Here are some results, picking 20 likely candidates, in mid-June 2018:
I started by investing a hypothetical $200 in each of the candidates, then compared their one-week performance with the one-month record. But since I already had investments in some tokens,some of these were more than $200-worth already.
HARDLY ANY POSITIVE RESULTS
What is important is the Difference column. At the far-right of the spreadsheet before the Notes. Hardly any were positive. In the middle (column G) are the percentage differences between the week and the month. Green is better, red is bad. But since they were all negative, you can hardly recommend them for investment.
DAY TRADING: LONGER BEFORE YOU CRASH OUT
As for day trading, here the picture is better. The third column (C) gives you the return on the day. Here you see several tokens making profits, up to 4.25% (BNB, the token for the binance platform rather than a digital currency).
Another good result: hardly any lost more than 1%. It would take a 100 days to lose all your investment if you chose badly for three months in a row.
BUT THE GAME CHANGERS DID WORST
The two coins that were close to 1.5% were the coins that wanted to change the system most: IOTA, focused on making all kinds of computerized products communicate with each other in the Internet of Things, and Monero (XMR), focused on increased privacy for transactions.
You have finished Day 4 of my crypto investing course following up on superforecasting cryptocurrencies (I never found a way)
Bonus: Technical Analysis
I can’t believe you’ll see this as financial advice, Look how badly I did.