Nikolas Sargeant
The crypto trading industry holds vast promise. After all, there are countless stories of degens making it big by putting together a strategy sure to win, following the footsteps of those early traders who now take their Lambo’s down the street for their morning coffee. With such a glittering promise of success, who can resist?
Based on how we trade, it seems like maybe more of us should either resist or at least decide how to trade better. This is because a staggering 90% of traders are losing money. After you pull your jaw up from the floor, you might wonder why this is. Are people losing money because crypto is less regulated than traditional trading? Are scams and hacks taking value out of the system? Actually, while these elements may have some effect, the stats for crypto trading mirror almost perfectly those of traditional stock trading. The 90% figure has been around for decades, across trading industries. Consider this summary from Levente:
“Numerous studies demonstrate that retail investors as a group significantly underperform the market over multi-year periods. For example, a 2012 study by Barclays Bank found that over a five-year period, the average retail investor earned annual returns of just 2.3%, compared to 7.3% for the S&P 500 index.”
So if it’s not crypto specific, what is it about trading (other than long term index investments) that creates such a losing battle? Let’s look into the specific reasons and show that there are tried and true ways of reducing risk in order to greatly increase your ability to profit over time. Within the crypto world, hedging has become more accessible in ways that are impossible with traditional retail trading. Platforms continue to develop stronger strategies using simpler interfaces, such as Umoja’s beta launch that even tauts a “zero-loss staking” option. While there are always upside opportunity costs for hedging, the strategy is proving to help balance out the detrimental behaviors that cause 90% of traders to lose out over time.
What Causes Trading to Be So Difficult?
As mentioned above, long term index trading should be a solid option for any portfolio. With traditional markets, along with crypto, the “Hodl” advice is solid if you have the right mix of investments. This is much newer from the crypto industry as there aren’t decades of performance or index funds as mature as their traditional counterparts, but the major losses don’t typically come from this strategy.
However, crypto trading’s youth also creates the advantage of offering higher returns when trades are done well. These higher returns are naturally balanced by having higher risks, and too many traders have gone into high return trades without considering the risk. While the traditional market can occasionally act in a volatile way, the swings of the crypto world can induce whiplash as they move up and down, often without warning.
Studies show strong trends in traditional investing that have a higher chance of losing money. As trading is a psychological exercise, it is likely that we can learn something from these studies in the crypto industry. The ability to set a stop-loss and stick to it is surprisingly hard for many people. When trading, there is a temptation to hold onto losing positions longer than intended, and to sell winning positions more quickly than intended. Our brains do not treat $100 of winnings and $100 of loss the same, and as a result we are drawn to change our logical strategy once we are emotionally engaged in a trade.
Ego can be a big part of sabotaging an otherwise winning strategy. Key losing elements to trading include individual selecting of stocks based on hunches (without a solid exit strategy), losing patience and acting rashly, trying to time the market to your advantage (both the traditional and crypto markets behave far too randomly in the short term), and enhancing positions through leverage and complex margin trading. These can be powerful tools if applied correctly and with the right hedging positions, but can also quickly shorten your trading career in any industry.
Balancing the Scales
While traditional trading and the crypto industry are two different worlds, the psychological elements we bring to the table (both good and bad), and the necessary risk management involved provide a number of important lessons for us. Because crypto trading is meant to be democratized, there have been amazing developments in how well even complex strategies have been both simplified and made available to all traders, from top crypto trading firms to individual, novice traders.
Hedging tools are one of the most straightforward ways to counterbalance the natural instincts to misjudge risk once emotion enters the picture. This alone has caused significant loss in the market, and all but the most disciplined traders can easily fall prey. In fact, because of ego there have been many traders who realized after acting rashly that they were less disciplined than they hoped.
While there are a variety of different hedging strategies, such as futures, options, diversification, and short selling, these options are especially complex for novice crypto traders. This is where platforms like Umoja come into play, as they create tools powerful enough for professionals but accessible enough for new traders. The Umoja platform is especially interesting right now because it may be the first to offer zero-loss staking, meaning that assets can be staked for yield while the principle is protected. To hedge, the platform requires just 10% refundable collateral (which is lower than some of the other hedge-based platforms), with collateral needing to remain above 5% for the coverage to continue. This type of risk management might tone down those major spikes of profit, but they offer a much better chance of actually making a profit instead of joining the 90% of losing traders.
Final Thoughts
Trading can be a brutal sport, especially for novices. There is no room for forgiveness or mistakes, and as the statistics show, most traders who don’t enter the market with a clear risk management strategy won’t make it out of the game intact. It takes proper balancing of risk and reward, and as novice crypto traders learn the finer points of this, using an intuitive and easy-access hedging tool can help protect them from the loss that will take out 90% of their competitors.
