Similar to how Renaissance Technologies pioneered quant trading and made a lot of money by going against conventional wisdom, that being the dominance of ‘buy and hold’ investing, so did I.
The majority of people who short Bitcoin lose money, and one would assume that a Bitcoin shorting strategy would fail spectacularly when Bitcoin is up 80% this year. Yet I was able to find a consistently profitable strategy of shorting Bitcoin, by isolating a specific timeframe for when shorting Bitcoin is profitable, that being when the US stock market is open. As discussed earlier, this is likely when the US government is liquidating its seized Silk Road coins valued at $3 billion, presumably when the stock market is open to take advantage of increased liquidity, so by shorting Bitcoin I am front-running these sales.
Large traders, such as hedge funds, try to be discrete when making large trades to prevent being front-run, but telltale signs or patterns still emerge which can be picked up if one is observant enough, as I did. Similarly, Renaissance likely looks for certain signs, but on a much greater scale and automated over many assets, such as stocks, futures, forex, and commodities, not just Bitcoin. It’s sorta like the concept of an inverse problem. Given some observable perturbances that deviates from some baseline, one seeks to isolate the source. Then you can make money by knowing what will happen next, analogous to predicting the weather. I think this is the best or more plausible explanation of Renaissance’s ‘secret sauce’. It’s not insider trading, as some allege.
For example, shorting Bitcoin on Sundays when the price pops a bit has worked really well all year. Here is the post from late 2022 where I mention Sundays as being profitable, “For the past few months been making good money trading Bitcoin. What I do is I short Bitcoin on Sundays (using Coinbase, Deribit, and other brokers) and weekdays. After the stock market opens, at 6:30 AM PST (although I may do it 15-30 minutes before the open), I short Bitcoin and or Ethereum while also going long DJIA, NQ and ES futures.”
It’s like a cheat code but real life. The cheat code is shorting Bitcoin, which is way easier than shorting stocks, and having done both, it’s not even close. [1] None of the shenanigans that work on Wall Street work on crypto. No amount of hype by the likes of Thiel, Balaji, Cuban, Larry Fink, O’Leary, etc. can make Bitcoin go up. It’s funny seeing these people try to hype Bitcoin, and it always fails. Billionaires have a lot of power on Wall Street, but when it comes to Bitcoin they fall flat on their faces, unable to make the price go up. Same for analysts, which are useless on crypto, whereas buy/sell recommendations not uncommonly can cause large swings on individual stocks. Social media hype does not work on crypto anymore either, unlike stocks.
Every attempt at a Bitcoin recovery is quickly reversed in a very predictable manner (such as the “Bart pattern”, which has become a meme) in which I can profit. [2] Here is an example of the Bart pattern today, in which I profited again by shorting on Sunday at 27900 (the hairline), and now at 27500 Monday morning (the neckline). Easy money.
It’s not surprising that a firm composed of some of the smartest people in the world can find similar strategies, but scaled up, if it works on a much smaller scale as it does for me.
Unlike Renaissance I don’t use any software or automated methods. There is no need for software when I can run it all in my head. I can look at a chart now and then recall past instances of a similar pattern, having memorized it, and then mentally flip back to all the earlier times that said pattern occurred, so I know what will happen next with a high degree of certainty. I can be like “oh, this pattern recurred seven times out of the past eight Sundays.”
Computers and AI are very powerful, but they cannot tell you where to look. That is the main weakness. This means a lot of computational power and time is wasted to sift data in a search space which is infertile to begin with. An astute individual can leapfrog ahead of software by simply zeroing in on the optimal strategies by getting a feel for how the markets work. Software is good if you need something redundant automated or if speed is paramount, but is no substitute for coming up with ideas or seeing the ‘big picture’.
It’s not so much that this stuff is hard, except initially. Once you figure out the rules and patterns, it becomes really obvious and easy, and you just keep doing it over and over, which can explain how Renaissance has done so well for so long. Likewise, for a math class, knowing a handful of rules suffices for solving many problems. Most people struggle at math because they never get the basics down. If Renaissance’s ‘secret sauce’ was divulged I am sure the collective response would be, ‘That’s it?’ Yeah, sometimes things are that simple, but the challenge is finding it in the first place.
[1] I never had success shorting stocks in over 12 years of trying. People think crypto is rigged, and it is, but stocks are another level above that. Soros called it the ‘theory of reflexivity’, or something like that. The idea is that as a stock price rises, the very act of the stock price rising improves the fundamentals of the affected company, such as access to capital by selling inflated stock, which begets even more gains, and so on.
I have seen on many occasions stock prices of near-insolvent companies be bid up 200% or more in a day due to bogus PR by management and social media hype, but I cannot recall a single crypto producing such a large weekly gain even as far back as a year ago. Because crypto is (mostly) decentralized, management and PR cannot prop up the price as easily compared to with stocks. Management can issue buybacks to make a stock go up, or insiders can buy back shares or issue fluff press releases about products that are in the development stage and nowhere near being viable, yet this is still enough to make the stock double in a day, but this is less effective or impossible with crypto.
[2] The unfailing reliability of this pattern would seem to violate the EMH. This agrees with my earlier observation that crypto markets are less efficient and more profitable for short-sellers compared to stocks, in which such patterns are less reliable. It’s possible that the government is selling its Silk Road coins whenever Bitcoin tries to recover, as I said earlier. This agrees perfectly with the Bart pattern, because the government is waiting for the price to pop, and then it dumps it suddenly as soon as liquidity is available, hence the long hairline before the sudden drop as soon as liquidity enters the market, such as at 6 AM or so.
Part of the reason shorting Bitcoin works so well is because market participants still systematically overestimate the risks, so this means the trade is still not crowded and still fertile due to funds being on the sidelines in fear. Efficient markets assume no participants stay on the sidelines; if there is an inefficiency, there will always be a market participant ready to instantly swoop down and exploit it, thus correcting the inefficiency. People have this irrational or unfounded assumption that Bitcoin can just double in a month to $50k, which in theory is possible, the conditions that were in place in 2020-2021 are not going to to be repeated anytime soon, maybe ever.
It’s like looking for ‘the next Beatles’…the conditions that created The Beatles and made them popular represented a unique confluence of factors that will never be duplicated. You would need another Ed Sullivan Show, another British invasion, no internet, the same demographics, etc. Thus the odds are well in my favor. The post-war period is interesting. The Nazis lost, and soon after there was the Cold War, yet all this global flourishing of culture and technology under the spectre of nuclear war.
The EMH is a useful or even necessary framework for pricing derivatives and is a good first order approximation of reality, but it’s not a perfect descriptor of reality. The reliability of this pattern is just another example of how easy it is to profit by shorting crypto, provided you stick to the correct window, that being when the stock market is OPEN to profit from the Silk Road selling.