You can tell a lot about a trader during times of crashing markets. Key attributes include a macro perspective, solid experience, understanding the ripple effects of rate hikes, and having cash reserves. These are crucial for surviving the battle of the crypto markets. With 30 years of experience in traditional markets and the last 7 years in crypto, I’ve utilized my extensive knowledge to navigate the challenges. This is especially important when major economies like Japan hike rates for the first time in 16 years.
Within the crypto, fears of a recession are a much-talked-about subject in discords up and down the broadbands, in the comfort of our shirts and underwear.
Those of us born in the 70s, raised in the 80s, and started trading in the 90s have the back catalogue of experience to recite what’s happened in the past, and how events like this are wonderful testing periods in a trader’s life.
While crypto is in its transition from the Wild West to Wall Street, it’s forming into a different animal, roaming in the same jungle. As I tell many of those I Zoom with on a daily basis, understanding volatility, liquidity, and opportunity are the three pieces of wisdom I can offer to ‘take a loss’ and turn it into a win. Because it’s not about how much of a hit you take, it’s about how quickly you recover.
So, while panic sweeps the market and fears of recession prey on the grapevine, investors worldwide sell off shares due to these fears, leading to a severe plunge in traditional global markets. This hurts us in the crypto market bigger than most, and ouch, did it hurt those who didn’t see this economic tsunami coming—which, for the record, is already priced in.
People in three-piece suits will talk about ‘Key Economic Indicators’ while sitting on some Bloomberg panel, giving their dramatic rhapsody that this was due to poor manufacturing, durable goods, jobs, and payroll data from the US, which raised concerns globally. It’s like the Batman signal to the world that a recession is coming because when unemployment rises quickly, it’s a clear sign of a potential recession. Honestly, I was surprised nobody blamed Trump, Biden, the unvaccinated, or even Britney Spears. Sigh.
Markets around the world started dumping like it was a craze, all trying to unlock as much liquidity as possible for that ‘rounded bottom’ many of us look for during these toilet times of flushing assets down the drain.
THE SHAKE DOWN: TECH STOCKS AND BITCOIN
Tech stocks Nvidia and even our grandfather of crypto, Bitcoin, saw significant drops. From my desk, it was clearly a massive shake down by those who actually run the world. Because while everyone is selling, you can bet the major trading shops are buying more of these assets than before. Trust me, I bet the bounce back was very, very profitable for those big names. In fact, I wouldn’t be surprised if we see a BUYBACK by many governments, starting with the USA.
THE JAPANESE CARRY TRADE: PRINTING MONEY AND MARKET INSTABILITY
While the US plans to switch on the printers again, let’s look at how the Japanese government borrowed money at near-zero interest rates from its central bank and invested in foreign securities and loans, creating a “carry trade.” While people are a little surprised by this ‘careless management of government funds,’ as one US analyst put it (which is ironic coming from his government), I have to point out that this is a very normal activity, and frankly, it’s happening all over the world. So, expect more printers to be switched on.
Think about it: you can print as much money as you like, borrow it for FREE, and then invest it into the US tech market. Kaboom, money machine. But when the lender turns around and says, “Hey, I’m now charging you for the lending,” all hell breaks loose. Which it did.
HOW SEASONED TRADERS REACT TO MARKET TURBULENCE
With rising interest rates and a weakening yen, the Japanese government faced higher borrowing costs, forcing it to sell assets to cover liabilities, leading to market instability. Rising inflation in Japan and the need to increase interest rates disrupted their financial strategy, causing broader market sell-offs. Economic conditions might be worse than expected, leading to panic selling. Those famous Japanese toilet seats will be going into overdrive in the coming weeks.
So as I get to the point of this article, how do seasoned traders react to volatility and liquidity, which WILL be FOLLOWED by the starting of the printers?
Our initial reaction on the 31st of July, when the BOJ announced this news, was to put our macro lenses on and brace for impact, and we were certainly ready for it. But we knew, and still know, that this isn’t over. It’s just the beginning.
AVOID LEVERAGE AND FOCUS ON LARGE-CAP ASSETS
As the world sells off assets to avoid further losses, we wait for the market to stabilize, typically looking for a “rounded bottom” pattern indicating that prices have stopped falling and are stabilizing. Then we pyramid, getting deeper and deeper into the positions we feel will bounce back the biggest. For me, I focused on the crypto market (BTC, ETH, SOL, LCX, ONDO, and one meme), while in my other book, I had the tech stocks on my menu.
As night fell here in Singapore, I stayed up watching the VIX for signs of sustained volatility or stabilization. Once a bottom was identified and market conditions appeared more stable, we started buying again, focusing on strong assets expected to recover first, such as major indices or blue-chip stocks. Then within 24 hours, kaboom, you’ve made a tidy return, while others are warming their asses on Japanese toilet seats.
While we won this small win, the battle is far from over. To prepare yourself for the next round, I would avoid using leverage due to the risk of further significant drops. Focus on large-cap assets in the crypto market, and prioritize large-cap cryptocurrencies like Bitcoin, Ethereum, and Solana over smaller, riskier assets.
ADOPT DOLLAR-COST AVERAGING OR BE AGGRESSIVE AND CONFIDENT
Consider Dollar-Cost Averaging (DCA) to gradually buy assets and spread out the risk, or, my favorite approach, be aggressive and confident. ‘To fight monsters, you need to be a monster’ is something I heard recently and have now adopted in the private haven of my home office as I write this piece.
PREPARE FOR RATE CUTS AND TAKE PROFITS
But be mindful: the US Federal Reserve is expected to cut rates multiple times by the end of the year, which should help stabilize and eventually boost asset prices. So be prepared, and don’t forget to take profits. There’s nothing more satisfying than having cash when you see a correction.
LOOKING AHEAD: MARKET STABILIZATION AND LONG-TERM INVESTMENTS
If markets stabilize, we might see a gradual recovery. However, if volatility persists and something in the financial system breaks, we could see more aggressive interventions and a quicker recovery once the issues are addressed.
Current market levels might offer good entry points for long-term investments, especially if no further significant disruptions occur. Manage risk carefully and be ready to adjust your strategies based on new economic data and market movements.
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