Bitcoin

Some traders are built to withstand the swings of market volatility. I am built like a lawn chair. Over and over again, my emotional state went through the same extreme cycles. It unfolded something like this:

1. Hope/Expectations: Everything that’s happened in my life (poker, retail trading results) suggests that I’m supposed to be a good trader. Everyone around me says I’m a good trader. I deserve good results. If good results happen, expectations continue to rise. But as expectations rise, I tighten up and become fragile and negative events send me into a tailspin. Proceed to 2.
2. Tilt: I am not meeting expectations. This outcome is not acceptable. I’m mad. I’m stubborn and I’m going to work harder and fight back. Sometimes it works out and we go back to 1. If we stay at 2. too long it now becomes 3.
3. Disappointment/Depression: Things have gotten worse to the point where I run out of fight. My body shuts down and my mind goes into the tank. The unacceptable outcomes now feel inevitable. I’m a disembodied soul at my trading desk, soaking in the pain and unable to do anything about it. Everything around me becomes background noise to the thoughts in my head. The insecurities turn into monsters.

It gets pretty bad at this point.

^{(continued from Sandy)}

I remember one day in the calendar where I was deep in “3. Depression” territory. I had been negative 5 straight days and 9 out of the last 12 days. March is almost certainly going to be my worst month ever. Maybe I wasn’t a big shot trader, okay, but the one thing I could cling onto was my consistency and now, even that was falling apart. I just remember waking up and not even wanting to get out of bed. I took an unplanned day off. My floor manager CJ emailed me around noon: everything OK? Maybe he picked up on the some of my bad vibes earlier in the week as I kept spewing money. I lied and told him I had a bad stomach that morning. I decided to get out of bed and explore the city. I was longing for Mexican, my favorite cuisine from back in SoCal, so I went to the Chelsea Market to eat Los Tacos No. 1. Then I kept walking up into Hell’s Kitchen and then into the Upper West Side and then Central Park. I’m just sad-pacing around Bethesda Terrace for a couple hours, contemplating my future in NYC. I brought a journal to write down productive thoughts… maybe get myself out of this funk? The thoughts are not productive.

Elsewhere on the MBC desk, the mood is actually picking up again. Everyone is excited about the upcoming merger, gabbing on about how they’ll get to risk more money. I was initially excited as well, but then reality hit me when my trading started to suck again. I feel like the sad guy at the party. What’s so great about risking more if you’re not a winning trader? That’s just not the issue. The issue is I suck. It’s just a matter of time before I tuck my tail and move back west, certifying this entire prop trading endeavor as an abject failure.

I didn’t get any real answers but I did eat a lot of good food. I decided to show up to the desk the next day.

The following day isn’t any better trading-wise but my attitude is slightly heathier. I start to lower my resistance towards accepting the hard truth: that I will fail here and that’s going to be that. Sometimes that’s the only way I can cope, to just really lean into the bleakness. Clockwork and I both joke about blowing up our accounts once the merger officially begins. Let’s just get stupidly reckless and either we make huge money or we can just go back home. Push this thing to the brink already. It won’t end well but at least it ends. He asks me what I’ll do after I move back. I tell him I’m thinking about law school. Pete the lawyer… doesn’t sound right but at least it’s a legitimate job.

Cya in Cali Pete! He packs up and leaves. Now it’s just the rest of us sickos doing our review work after 5pm. What’s the point anymore? Then my pal Mesut stuck his head over and asked me a question out of the blue:

Mesut: Pete you ever heard of bitcoin?

Me: No, what is bitcoin?

Mesut: It’s a cryptocurrency.

Me: Oh okay. No really, what’s bitcoin???

Mesut then went on to explain all the core concepts on how bitcoin works–things like “mining”, “blockchain”, “proof of work”, and “decentralization”.

Me (staring blankly): Ah yes, all of that makes sense. I completely understand everything you just said.

Mesut: (shaking head) Here, look at the chart. It has a market that trades 24/7.

Ohhhhhhhhhh. Now I get it.

I looked at the charts and I noticed the price action resembled the first setup I ever learned at MBC–Jimmy’s tight consolidation flag setup. But instead of some bullshit price action like the stock going up twenty cents only to then fizzle back into the old range, bitcoin would breakout clean and trade exponentially to the next psychological price target. $10 would go to $20. $25 would go to $50. It traded so much smoother than NYSE/NSDQ stocks.

The other thing I noticed about the charts was that after these steady exponential climbs, there would often be these illiquid flash crash moves. It closely resembled some of the first stocks I ever traded, the OTC pump and dump stocks. These flash crashes were usually good buying opportunities because they would often bounce right off the original breakout level where the coiled action started and form sharp v-shape turnarounds.

At this point in my trading career, the numbers said I had a much bigger edge on OTC stocks than on listed stocks. A light bulb went off in my head–why not trade bitcoin? Sometimes it’s less about strategy and more about finding the right thing to trade.

Of course bitcoin could also be a gigantic scam–after all, its price movements resembled that of the hyper controlled floats of an OTC pump. What if that was a clue that bitcoin was a ponzi scheme with a cabal of insiders ready to pull the rug at any time? At that time, I barely understood the technical side of crypto and blockchain. I had to do more research and evaluate the pro’s and con’s.

I scoured online forums and subreddits to research bitcoin’s use-cases. I found out that it was most often used to make illicit transactions on Silk Road–with bitcoin, you could buy cocaine, you could buy guns, or you could hire a goon to assault your wife’s boyfriend. Honestly, that made it sound cooler to me. Aside from its transactional uses, there were also these techno-libertarian communities that believed in bitcoin as a store of value, similar to gold, due to its deflationary properties. If the most paranoid of criminals and libertarians trusted bitcoin, I could at least temporararily trust it enough with a little bit of money. I decided to make an initial $4,000 deposit onto Mt. Gox, the largest bitcoin exchange at the time. I heard horrible things about Mt. Gox but all of the other exchanges had their own problems and at least Gox had the volume. I can’t believe I’m depositing real money onto a crack exchange that used to trade Magic the Gathering cards, what the fuck am I thinking? Here goes nothing!

I had missed the initial runup from $50 to $90+ but then I saw the exact same setup repeat itself in the low 90’s price range. I got long $91 with a stop at $89. I just dumped my entire account in to buy 40-something bitcoins. The pattern continued to work like a charm and broke through the big $100 psychological point without a hitch.

In my MBC trading account, I couldn’t yet defeat my “quad 3. piker” mentality. The habits of worrying about a winner turning into a loser and exiting early became so deeply ingrained. I felt determined to make this instance different because bitcoin felt different. It’s not stock. It’s magical fairy land money with no underlying fundamentals where the only limit is one’s imagination. I didn’t have unlimited imagination but I had one rule of thumb to guide my target: measured move potential. If it went up 50% clean from that $50 flag pattern, I could get another 50% clean move right here too.

5 days later… BTC hits $150. BONANZA! I sell and profit over 50%. I make over $2000, a profit milestone yet to be achieved on my MBC account. I figured it could go higher but it also had a history of scary flash crash moves in the middle of the night with DDOS attacks preventing anyone from trading it. And it could be a ponzi, I didn’t know any better. Selling into strength is always prudent and I had to secure the bag.

Five days later, bitcoin reaches $250. Oops. I sold it too early but it didn’t bother me. Trading bitcoin felt like this fun sidequest where I could temporarily get away from all the mental baggage of prop trading in NYC–where in my head, I had constructed this momumental narrative to live up to. I was “supposed to be” this prodigy stock trader who would make 6 figures instantly, 7 figures in 3 years, and be the #1 trader at the firm. As a result, my current underwhelming results left me drowning in the valley of disappointment where the depression monster lived.

I didn’t feel like I was competing with anyone’s PnL. I didn’t feel shadowed by bigger expectations from my friends, my managers, or myself. I’m just trading this obscure magic fairy land money that no sane trader should even touch. I’m chasing my curiosity and making money on it. Pure bliss.

I’m just scratching the surface of possibilities on bitcoin. This is the frontier of trading and good infrastructure–laws, order, regulation, technology–did not exist yet. Mt. Gox was an absolute joke of an exchange that would often fail to load because of these so-called DDOS attacks. Or that’s what they claimed, maybe they just suck at maintaining a quality market. Either way, it was truly a miserable experience to trade at Gox. It was also 100% bare bones trading–no margin or shorting. I had to find another exchange that offered more if I wanted to trade my full bag.

I researched which exchanges could offer me leverage and short-selling and came across this Hong Kong-operated outfit called Bitfinex. At this point I was hooked on BTC and I didn’t care to undertake hours of due diligence on whether it was legit or not–trading bitcoin at all on any exchange already felt adventurous (and risky) from a “this is the Wild West and there are no rules” perspective. Bitcoin was soaring into an unsustainable parabolic move and I had to be part of the action. I moved my initial deposit amount minus the $2000 profit, from Mt. Gox to Bitfinex.

On April 10th, bitcoin’s parabolic run finally KABOOM’d in spectacular fashion, trading from a high of $260 to a low of $75 within a couple hours. Mt. Gox actually halted trading around $120 and it became pure chaos! You would find 20-30% differences in BTC/USD price among exchanges as everyone was trying to figure out fair value without the largest exchange working. I deferred to the next largest exchange, Bitstamp, to read the tape and determine efficient order placement.

I didn’t try to time the top-tick short but I reacted to the intense volatility by deploying my FB IPO-style market making strategy to take advantage of an extremely thin order book. Bitfinex’s margin feature allowed me to enter sell orders without a pre-existing long position. My intention was to spam a bunch of limit buy and sell orders underneath the top market and just hope to get hit at insane levels from newb traders just carelessly flinging around market orders.

I just punched in every order by hand, based on feeling out current price and finding air pockets in the depth book. I would just rack up $100 here, $200 there over and over again while minimizing holding time and beta risk. I didn’t have a clue whether bitcoin was this big scam being rug-pulled or if this was just an “organic” sell-off. I didn’t care. I had some INSANE prices filled away from best market, which is what the MBC training program called a “Happy Print”. A happy print occurs when you get a trade executed at a price far outside the inside market–you could even qualify it as a “glitch” in the market. Say a stock trades at 101 bid by 102 ask and you get printed at 104 without ever seeing the ask lift from 102. That’s a happy print. Here’s one of my best prints that day on bitfinex below:

A Happy Print is basically free money and long-time readers KNOW how much I love free money! If this had occurred on Regulation NMS-securities (NYSE/NSDQ), they would bust these trades for being too far away from the best bid/best offer. But in the wild-west of trading, there were no fair practices and no refund policy. My best happy print came when I got executed 20 coins at $20 and immediately sold it to a best bid at $100 for an instant risk-free profit of $1600.

With btc oscilating between $80 and $200, I doubled my BFX account from $4,000 to $8,000 in 12 hours by simply using my market making strategy to capture large spreads and occasional happy prints.

There I was with sitting on my apartment floor with my laptop at 3am, carving out my place on the frontier of trading by rapidly scalping this magic make-believe money. This is so cool. Who else is doing this?! YOU ARE PETE. YOU ARE THE ONE. I couldn’t help but smile, I felt so fucking rejuvenated. I knew I was going to make it.

Even though I pulled an all-nighter, I chugged a red-eye and decided to trade at the desk that morning anyway. The depression monster disappeared.

I reached 4. Acceptance. The world will not end. Failure is not inevitable. Let’s just keep going.

^{(to be continued in Joint Venture)}