The-Absolute-Beginners-Guide-to-Trading-Bubbles_1.2-Labs

https://onepointtwolabs.
com
The Absolute Beginner's

Guide to Trading Bubbles
By Sebastian Purcell, PhD
General financial disclaimer: I am not providing advice on financial investments and I

am not a financial advisor. I am only explaining how I think about this process and
imply no returns on your investments. As they say in the news industry, this is for
entertainment purposes only. Please do your own due diligence before investing in
anything.
Potential Conflicts of Interest: At the time of writing, I own a variety of

cryptocurrencies, including Bitcoin and Ethereum. In general, I trade these, so by the
time you read this, I may not still own them.
© HTTPS://ONEPOINTTWOLABS.COM 1
Table of Contents
Introduction.......................................................................................................................................4
Why Doesn’t Everyone Do This? ............................................................................................................... 5
1. Risk Tolerance........................................................................................................................................ 6
2 Small Funds ............................................................................................................................................ 6
3 Can’t Monetize Other People’s Money .................................................................................................. 7
Concluding Thoughts ................................................................................................................................ 8
Lesson 1: The Mechanics of Exchanges and Trades ..............................................................................9
1. Where Can I Go To Buy Stocks for Bubble Trading? ............................................................................ 10
2. Why Can’t I Just Use Robinhood for Everything? ................................................................................ 11
3. Where Can I Buy Bitcoin and Other Cryptocurrencies, then?............................................................. 12
4. What’s a Bid-Ask Spread? ................................................................................................................... 13
5. What Are Limit Orders and Why Should I Use Them? ........................................................................ 14
Concluding Thoughts .............................................................................................................................. 16
Lesson 2: Learn the Structure of the Stock Market (100% Returns For Free?!) .................................... 18
What Exactly Is “The” Stock Market? ..................................................................................................... 19
Why Do Companies Go Public? ............................................................................................................... 20
What Happens When I Place A Buy Order? ............................................................................................ 21
The Exchange Trade Up – With Stocks .................................................................................................... 21
The Exchange Trade Up – With Cryptos .................................................................................................. 22
Lesson 3: The Structure of Stock and Crypto Indices .......................................................................... 26
What Is An Index Good For? ................................................................................................................... 30
The Standard and Poor 500 Index ........................................................................................................... 32
How Flaws in the Index Create Opportunities ........................................................................................ 33
Lesson 4: How to Identify the Value of Stocks ................................................................................... 37
A Simple Case .......................................................................................................................................... 38
Relative Valuation with Stocks ................................................................................................................ 39
Absolute Valuation (an Outline) .............................................................................................................. 43
Lesson 5: Bitcoin’s Intrinsic Value ...................................................................................................... 48
Is Bitcoin An Asset? ................................................................................................................................. 49
Why The Stock-to-Flow Model Is Wrong................................................................................................. 51
Why Metcalfe’s First Law Works In Theory ............................................................................................. 52
Why Metcalfe’s First Law Is Hard In Practice........................................................................................... 55
The Macro and Momentum Approach ................................................................................................... 57
Lesson 6: Trading With Tea Leaves (How Not To Trade on Emotion).................................................... 59
Patterns in Price Movements .................................................................................................................. 60
Jason’s Dr Pepper Story ........................................................................................................................... 64
How Chart and Precedent Reading Are Non-Falsifiable.......................................................................... 65
Why Do People Use This? ....................................................................................................................... 67
Lesson 7: Trading Momentum .......................................................................................................... 70
How To Find A Moving Average?............................................................................................................. 72
Evidence For Its Effectiveness ................................................................................................................. 75
Some Bad Ways To use Momentum ....................................................................................................... 76
Combining Momentum With Value Investing Through Economic Signals .............................................. 79
References............................................................................................................................................... 79
Lesson 8: A 3-Step Method For Late-Start Trades ............................................................................... 81
Good Reward / Risk Ratios ...................................................................................................................... 81
But What About When I’m Late To A Bubble? ........................................................................................ 82
Case Study: Bitcoin With All-Time High of About $50,000 ..................................................................... 83
Lesson 9: The Simplest Way To Make Money During A Crash (2.4x Better Than HODL-ing) .................. 86
What Is Dollar Cost Averaging? ............................................................................................................... 88
What Is Crash Cost Averaging?................................................................................................................ 90
Lesson 10: What To Do When You’re Late To Exit A Crash? ................................................................. 92
What is Crypto Maximalism? .................................................................................................................. 93
The Crypto Maxi Strategy ........................................................................................................................ 94
Introduction
One of the most profound effects of social media appears to be that it creates
bubbles everywhere. Throngs of people follow a trend and go on a march, cancel a
celebrity, or buy a stock.
There has never been a better time to learn about how to trade bubbles, especially
for the small trader who is looking to earn enough money to pay off their student
loans, a mortgage, or simply build enough money to retire shortly—in 9 rather than
45 years.
We all have different risk tolerances and are at different stages of life. I am more
aggressively minded than those looking immediately at retirement, but I also
already have enough money that I aim also to preserve my wealth. My goal with
bubbles is thus to use them to boost approximately 20% of my portfolio with 300%-
700% returns over the course of a year.
I also accept that each individual trade could have a 35%-39% downside. I’m
comfortable with that. If you decide to trade bubbles, you need to be comfortable
with that too.
Very simple mathematics can tell you what to expect with those sorts of
returns. Use this compound interest calculator and you can get a sense of what is at
stake. If you start with $2500, add $500 each year, and retain 150% in returns (after
taxes) each year, you’ll have more than $10,000,000 in 9 years.
Notice, the point is not to get one trade that will make you a millionaire, as
r/wallstreetbets aims at. You must gamble for that kind of return and most people
will lose everything. The art of trading bubbles is to learn to identify good bubbles
and trade them with a real sense of
1. when you will take your earnings and not earlier, and
2. when you will exit your trade with a loss if things go wrong.
My purpose in this work, originally a series of newsletters for my followers, is to

explain just that point. My motivation in providing these lessons for free is that I
want to help ordinary folks get out of the rat race.
I have written a series of 15 lessons explaining The Art of The Bubble. What I
discovered, in the feedback from readers, is that they wanted more development
on the basics. They want to know:
• Where can I buy both stocks and cryptocurrencies?

• What exactly is the difference between a broker and an exchange?
• What’s the exact difference between a value investor and a momentum
investor?
• Can you combine those strategies? (Yes, that’s exactly what I do).
As a result, I’ve come to realize that in addition to my Lessons in The Art of The
Bubble, I need a series devoted to the concerns of beginners. That is the purpose of
this guide.
Notably, what follows still presupposes some familiarity with investing terminology.
If you do not understand a term , I have put together a terminology guide called
“The Most Interesting Resource of Financial Terms You’ll Ever Read.” My goal with
that guide was to do a better job at explaining how to use various financial ideas,
rather than merely define them as Investopedia does.
Before explaining…
Why Doesn’t Everyone Do This?
Given the growing popularity of r/wallstreetbets, I think the facts of the matter now
are: many millions of people are trying to do this. They’re just trying to get rich from
one trade rather than a series of smart trades over several years.
Yet, given that the large investment firms on WallStreet have literal trillions of
dollars at their disposal, you might reasonably wonder why they haven’t tried to
trade bubbles more aggressively.
I think there are three main reasons:
1. Risk Tolerance
I’ve already mentioned this in the opening portion of this chapter, but it bears
repeating: this is not a strategy that works well if you are just about to retire.
Now, I do use the Basic Economic Cycle indicator (from my algorithms) to identify
when I should shift the mix of stocks, bonds, gold, and cash in my retirement
accounts. So part of what goes into bubble trading is helpful for that stage of your
life.
Still, if you are looking at retirement, you need to be able to count on stable month-
to-month flows. Bubble trading is not that. You can expect that your bubble
portfolio will have drops of 30% every two months or so. Unless that drop comes
from the end of a bubble, then it’ll go back up and gain more. But it’s still hard
psychologically.
That’s why, even for a person like me who is nowhere near retirement, I am not
willing to put my entire portfolio into a strategy like this. That’s why I take a sort of
second-best approach with my investments and only have about 20% invested in
bubble trades.
But this isn’t the only reason why everyone isn’t doing this.
2. Small Funds
A second reason, and the main reason why WallStreet isn’t trying to trade bubbles
in the way that I do, is that you just can’t do it with billions of dollars.
If you tried to buy $10,000,000,000 of Bitcoin, you’d move the whole cryptocurrency
market. I mean that you would be buying so much Bitcoin that you would move the
price up on your own, making your own bubble just through your own buys.
Ray Dalio’s hedge fund alone, Bridgewater, is worth $160 billion. So if he tried to
invest just 16% into a strategy like this, he would end up owning most of the world’s
Bitcoin.
Alternatively, a lot of the best companies that I trade for bubbles are “small-cap”
stocks, meaning that they might only be worth $50 million total. Dalio could buy the
entire company and it wouldn’t even be .1% of his portfolio. It just wouldn’t be
worth it.
So, I hope you understand the point I’m trying to make. Most people on WallStreet
have so much money that they can’t possibly use this strategy. The assets that
we’re after are too small.
But that also makes this a perfect market for “small” investors, but which I mean
anyone with less than $10,000,000 to trade.
3. Can’t Monetize Other People’s Money
A final reason is that WallStreet is in the business of managing other people’s money.
Yes, they put up some of their own, but their main job is to manage the money of
clients.
Now cycle back to point one about risk tolerance. How easy is it to convince
someone else that losing 30% of their money, every couple of months, is just
normal?
If you’re wealthy (and if this strategy could scale to large sums of money), who
would you choose?
• Option one, the guy who says: yea, I’ll lose $3,000,000 of your $10,000,000
every couple of months, but it goes up after 5 out of 7 times and has a high
probability of out-performing everything else.
• Option 2, the guy who says: I will make you a stable 14% return on your
$10,000,000 with no significant draw-downs.
Remember, 14% of $10 million is $1.4 million. Could you live on that annually? Do
you even need the services option one is offering?
The point, then, is that strategies like bubble trading do make a lot of money, but
the way that they do it also makes it hard to gain and keep clients.
Since WallStreet actually makes money by keeping clients and only indirectly by
making money, they have no reason to try using a strategy like this one.
Concluding Thoughts
Now you know:
1. What kinds of gains you can reasonably expect from trading bubbles.
2. What kinds of losses you might experience trading bubbles.
3. Why I use bubbles as only one part of my portfolio, but your situation
might be different.
4. Why I use a basic economic cycle algorithm (to learn when I absolutely
must sell).
5. Why everyone isn’t trading bubbles.
Lesson 1
The Mechanics of Exchanges and Trades
The point of this lesson is to save you money. Probably lots of it. I’ll also teach you
how to double your Ether holdings for free.
Really.
To explain, let’s begin with a story. My cousin Jason Purcell and his partner, Marie,
opened an account to start bubble trading Bitcoin a few months back. She wanted
to start small, so she deposited $500 and bought as much Bitcoin as she could
when it was priced around $46,000.
Then she noticed something unexpected in her account: the transaction cost for
that $500 purchase was $25! When she decided to sell, she realized, it would be
another $25. In total, she would spend $50 just buying and selling Bitcoin.
That’s 10% of her initial investment in transaction fees!
Unfortunately, this is not uncommon in the cryptocurrency world. Gemini and

Coinbase are the only exchanges available for people in New York and they both
have platforms that charge you enormous fees. Many other platforms are similar
even if you live elsewhere.
There’s an easy fix for this, however, and I’m going to review that for you here.
I’m also going to save you money by explaining why you need to have different
cryptocurrency and stock brokers. You absolutely shouldn’t use Robinhood for
everything (sorry).
Then I’ll explain how to solve the stupid transaction cost problem Marie
encountered. Finally, I’m going to cover something an absolute beginner has never
heard about: bid-ask spread problems. This can cost you thousands of dollars, but
the solution is again simple.
In sequential order, we’ll cover the following.
1. Where Can I Go To Buy Stocks for Bubble Trading?

2. Why Can’t I Just Use Robinhood for Everything? (How to Double Your Ether)
3. Where Can I Buy Bitcoin and Other Cryptocurrencies?
4. What’s A Bid-Ask Spread About?
5. What are Limit Orders and Why Should I use Them?
For right now, let’s get on with the lesson.
1. Where Can I Go To Buy Stocks for Bubble Trading?
Ok, so bubble trading is both cryptocurrency and stock focused. Bubbles can
happen everywhere and as I explained in the Lesson on Black Swans, there is safety
in trading more than one.
Also, you’ll want to be able to trade both stocks and options pretty cheaply.
I explain what options are in the terminology guide. But to keep this relatively self-
contained, options are contracts that give you the option to buy (or sell) a stock in
the future at a certain price. If the stock goes up a lot, for example, and your option
allows you to buy it cheaply, then you get to exercise the option at the lower price
and sell all those shares immediately at the higher price.
The easiest place for beginners is Robinhood. I’m going to plunk my affiliate link
here and if you sign up we’ll both get a free stock worth between $3 and $5.
Otherwise, you can just go to Robinhood.com and sign up. I won’t get anything and
you won’t either.
I do use Robinhood myself and Etrade and other stuff–I’ve been doing this a while
and my needs are not the same as most beginning users.
If you have more than $250,000 that you plan to start with, use Interactive Brokers.
Their customer service is terrible for people who don’t have much to invest, but at
that level, they’ll actually get back to you in a timely fashion.
Robinhood has gotten a lot of bad press lately, because of the $GME fiasco, but I
can say that on literally every other broker that I use, shares of $GME were limited.
Why do I like it for beginners? Because it is super easy to use. You can get started in
under 10 minutes. Just answer their questionnaire honestly when you get to that
part.
2. Why Can’t I Just Use Robinhood for Everything?
You’ll notice that on Robinhood you can buy cryptocurrencies. The thing is, you
don’t really own them. Robinhood acts as a custodian, but you can’t take the coins
off their exchange.
That matters because you won’t receive forked coins.
A coin fork happens when there is a software update on the coin and there is a big
disagreement among the people who maintain it in existence.
If there is enough disagreement, some maintainers will keep to the old protocol
while others will go along with the new one. The result is that the original
blockchain splits into two.
This is probably happening with Ethereum in late July (it looked like early August
originally). It happened with Bitcoin in 2017 when it split between $BTC and $BCH.
If you move your coin off an exchange–which you can’t do with Robinhood–into
your own wallet, then you’ll get both coins. In this case, you’ll probably get to
double your ethereum holdings for free.
To be clear, a wallet is another application you need for cryptocurrencies. It is a

program that can hold your coins just like a physical wallet.
On your phone, you can download the Coinbase wallet, which is not the same thing
as the Coinbase exchange. That is an ERC 20 compliant wallet, so that’ll work for
buying other things in cryptoland.
I also use Exodus and MetaMask. They are both ERC 20 compliant. MetaMask is a
browser plug-in, so it’s super easy to use, but the least secure. Exodus is an app I
run on my desktop, which makes it more secure than my phone app.
So, you need to download a wallet app too. In terms of security you have:
1. Desktop Wallet
2. Phone Wallet
3. Browser Wallet
The most secure wallet is a hard wallet. You can buy a NanoLedger for example. It’s
basically a thumbdrive, so unless you plug it into your computer, no one can hack it.
But it does need its software updated regularly.
One guy on Reddit, apparently, forgot to update his wallet for years and then lost
all his Ether–literal tens of thousands of dollars lost. So, if you decide to buy a Nano
for extra security, make sure to update its software at least 2 times a year.
3. Where Can I Buy Bitcoin and Other Cryptocurrencies,

then?
Now your problem is this. You have Robinhood for stocks and a wallet for getting
free forked coins.
But how do you buy and actually own those coins?
Well, you need to sign up for a cryptocurrency exchange. Outside the US, I like
Binance and OKEx. They have loads of coins and cheap transaction fees.
Gemini and Coinbase are your only options if you live in New York like me. But if
you live in any of the other 49 states, you could use Voyager. They are trying to set
themselves up as the Robinhood of cryptocurrencies, offering trades without fees.
The problem is, I can’t check them out to see how easy they are to use. Online
feedback is all over the place.
What I can say is that if you use either Gemini or Coinbase, you need to upgrade to
the Active Trader account (just click the link in the account) or download Coinbase
Pro.
The easiest to navigate is probably Coinbase Pro. I just used it to buy Bitcoin at a
high volume time and my trading fee was $2.49 rather than $25!
The takeaway:
1. In the US, Coinbase Pro is going to be the easiest to use (and I can verify
that service).
2. Outside the US, make sure to upgrade if that option is available.
I am not going to offer you a Coinbase affiliate link, even though we’d both
make $10 if you sign up, because that link is for the version that will charge
you $25 a trade.
I’d rather have you save money than make money through a crummy affiliate
program.
The one drawback when you upgrade to a “Pro” version is that you have to learn
about Bid Ask spreads.
4. What’s a Bid-Ask Spread?
Buying and selling a stock or cryptocurrency is like going to an auction. You have an
asker who is trying to sell at some price and a bidder who is trying to buy it for less.
For example,
The auctioneer says: “Do I have a buyer for $101? Alright, how about $102? $103?”
and so on.
The bidder says: “I’ll buy it for $100.50 and not a cent more.”
That difference, between the $100.50 and $103 is the bid-ask spread.
The only difference on exchanges is that the bidders and askers are very numerous
and transactions happen very quickly because computers can communicate much
faster than traditional auctions.
Look at the (admittedly confusing) image below of what the screen looks like for
Coinbase Pro.
You’ll see the spread is in the second column at about $.01.
Now, you can close that spread by just agreeing to whatever the seller wants, but
that’s like just agreeing without even negotiating a price. It’s called placing a market
order. You’re likely to lose money if you do that.
With Bitcoin, you have a small spread, so you could just buy at a market order and
be ok. But for less active coins, you’ll lose quite a bit. So you have to change from
the default market order to a limit order.
5. What Are Limit Orders and Why Should I Use Them?
The solution to losing money with market orders is to place a limit order, where you
say, as in the example: “I’ll buy it for $100.50 and no more. That is my limit.” If the
seller agrees to come to your price, then the deal happens.
Just change the tab and then enter how much you want to buy and what your limit
is. If the spread is small, you can probably go with what people are asking. But if it’s
big, pick something between the orange and green prices.
Here’s a disaster story. A student of mine, Ivan, got excited about stock trading,
learned about options, and decided to trade them on Robinhood–mind you, I
absolutely don’t think beginners should do this, but he was acting on his own. I only
learned about his situation after he realized he was in a crunch and he asked me if
there was anything he could do.
What he did was go on Robinhood and buy options that would short volatility (again
… not for the inexperienced). His idea wasn’t bad, actually, but he made two crucial
errors. First, he didn’t realize that he bought options that would expire in 4 days
(these things are tricky). Second, he just bought them at market value rather than
using a limit order.
The result? He waaaay overpaid because the bid-ask spread was huge. Unless
everything went perfectly he was going to lose a ton and that’s what happened.
There was a small market surprise two days later and his options never recovered.
He lost about $5000 of his initial $6000.
That’s why I don’t think it’s smart to start with options. It’s also why you want to
start out buying and selling small amounts. You’re very likely to mess things up the
first few times.
Concluding Thoughts
We’ve reviewed the following three items in this chapter:
1. Why you need a (1) stockbroker, (2) a wallet, and (3) a cryptocurrency
exchange,
2. Why you need to move your cryptos to your wallet to get forked coins (each
site has videos on how to move coins using their software)
3. Why you should use limit orders rather than market orders and what bid-ask
spreads are.
I also explained why I like Robinhood and Coinbase for beginners especially in the
US context. Believe it or not, they are the easiest to use and that matters a lot.
Taken all together, that should save you hundreds in trades, double your coins
when they fork, and save you from disastrous losses.
Some of the commonest feedback I get is that I’m not doing a good job at
communicating to my subscribers the value of the paid memberships. When Bitcoin
recently dipped to about $48,000 I didn’t tell and I told my Daily Subscribers that I
was buying more–a few days later, it’s up to around $57,000.
I told them specifically that I was also looking at leveraged buys on cryptocurrencies
and I picked up $COIN, the stock for Coinbase, and $VYVGF, the stock for the
Voyager exchange (which made 18% alone last Friday).
My initial Ethereum trades are up more than 14x and my late Uniswap buy is up
more than 10x. And, of course, I told my Daily Subscribers before the opening bell
that I was selling out of $TLRY because I thought the bubble was going to pop–
netting 782% in about 90 days.
At the core of my strategy is a Basic Economic Cycle indicator. The data for that
algorithm alone costs $200 a month. Then you have to build the thing and make
sure it works. I’ve been running it live for several years and it even told me to sell
out of the market before the COVID crash in March of 2020.
With a subscription, you get access to that kind of information. I can only teach
principles in these weekly lessons, but if you want to get the experience you need
to trade well, then the subscription does that.
Subscribers get weekly updates on every one of my bubble positions and the
output of my algorithms. Thank you to those who have been asking questions on
Discord. I use all of it to improve.
Lesson 2
Learn the Structure of the Stock Market

(100% Returns for Free?!)
Sometimes nothing is something.
When Apple announced its stock split, its stock price soared. Look at the chart
below (which also includes obvious good news in the COVID pandemic).
The weird thing about a stock split is that, say in a 2 for 1 split, you get double your
stock at half the value. If you had one share at $200 before the split, then after you
have 2 shares at $100 each. It changes nothing, at least in theory.
But in practice, it makes the stock easier to buy for people. Rather than pay $200 a
share, newcomers only pay $100. It also makes certain advanced moves, like
options trading, easier too, since each option represents the value of 100 shares–
and with a lower price, those options are cheaper. Finally, it creates buzz.
This is just one example about how market mechanics do strange things to the
price of stocks and cryptocurrencies. Sometimes no change (in the
fundamentals of a company or coin) results in change (in price).
In this chapter, I’m going to review what the stock market is, how it functions, and
why a move called an Exchange Trade Up can result in 100% returns when literally
nothing about the company or coin changes.
I’ve told my paying Subscribers about moves with the cryptocurrency market that
the same week resulted in a 40%+ jump in $DOGE. My Daily subscribers even
learned about my plan to trade out on that bounce.
Even they will learn from this lesson though, since it can help them understand why
I’m looking at specific trades.
As a note, basically everything that is going to be developed here for the stock
market holds for cryptocurrencies, so I’m going to talk about stocks for the most
part. Let’s dig in.
What Exactly Is “The” Stock Market?
When people talk about “the” stock market, they usually mean a well-recognized
index like the Standard and Poor’s top 500 index.
The actual stock market is just the global market for buying and selling stock, which
is a share of ownership, in publicly traded companies. Each country has its own
laws around buying and selling publicly traded stock, but these companies all have
to go through a special legal process to make their shares available for purchase.
An index, like the S&P 500, is a well-defined and carefully selected group of
companies that are thought to represent the best business available publicly. They
represent the conventional wisdom in which stocks are “smart.”
Investing strategies are then tested against the returns of these indexes. Basically, if
your strategy doesn’t return better than the S&P, then your strategy isn’t better
than the conventional wisdom about the stock market.
So, for the most part, when people talk about the stock market, they usually mean
the S&P 500 ($SPY), the Dow Jones Industrial Average ($DOW), or the top 100
companies in the tech-heavy Nasdaq ($QQQ).
Why Do Companies Go Public?
The short answer is also the truest: to make a lot of money.
When you own a company, whatever earnings are retained (= all revenue minus all
expenses and taxes) become the value of that company’s stock.
The problem is that it’s really hard to sell private stock to anyone. You have to find
someone who wants to buy it and you can’t do much with it unless you buy enough
to own the company. This is why small mom and pop shop owners tend not to buy
and sell their stock often.
As a result of this difficulty finding buyers, private company stock, called private
equity, usually sells at 3x-8x the company’s annualized earnings when the company
as a whole finally sells.
Nerd Note: private equity usually sells at 3x to 8x of the seller’s discretionary equity,
which is defined as net earnings + whatever the previous owner was getting from the
company in wages and benefits. So if the owner was getting wages, then that counts as
part of the seller’s discretionary equity. If they had a company car, that also counts.
To make things simple, if Local Mom and Pop Shop made $1,000,000 in earnings
one year then it might sell the company for $3,000,000 in the private equity market.
When a company becomes a publicly traded company, by contrast, it usually can

sell for 15x those earnings and sometimes even more.
Clearly, $15,000,000 is a lot better than $3,000,000.
And to be clear, this difference in payment is a result of public v. private listing. The
main reason is that a public company’s shares are easier to buy = higher demand =
high price.
What Happens When I Place A Buy Order?
You can already see how public stock prices respond to demands. The reason is
that a market is like an auction where each stock has an auctioneer. One party asks
for a certain price, say $101 dollars, and another party bids to buy it, say at $100.50.
When you actually place an order, you are not only buying the stock, but also
setting a precedent. If you agree to the $101 asking price, then the auctioneer has a
reason to expect the next person to pay more.
The ask price might go up to $101.50. And if someone buys that, then $102 … and
so on. That is how stock prices rise.
Now, it matters how many shares you are trying to buy, because 1 share doesn’t
make for a lot of demand. But 100,000 almost certainly will. As a result, when you
place a buy order you will move the price up.
If you get a fancy display of the stock market, say through a professional platform,
you’ll actually be able to see the 40+ exchanges used for buying and selling stocks
in the US, and how big each bid is on each exchange. You’ll be able to see, as a
result, when a big purchase is coming through and how other traders are reacting
to that.
So, even bidding or asking (not completing the transaction) usually moves the
market just a little bit because it indicates increased (or decreased) demand for a
stock (or coin).
All of this leads to the real concern: how demand for stocks is affected by the
exchanges they are on.
The Exchange Trade Up – With Stocks
Some stocks, those that usually have an ‘F’ at the end of their ticker, aren’t on major
exchanges. US cannabis companies like $GRAMF–which owns Jay-Z’s Monogram–
don’t trade on major exchanges. These are the companies that would have been
traded on old-styled pink sheets.
In the case of cannabis companies, it’s because they cannot legally satisfy the
requirements necessary to be placed on a large public exchange. They can’t have
traditional bank support, among other problems. For a lot of other ‘F’ companies,
they are too small to be listed–this would be the real fate of Local Mom and Pop
Company.
The result is that they usually don’t trade at 15x their earnings. They quite often
don’t trade at much more than private equity numbers, maybe 3x or 4x. That
means that their share prices are often less than a dollar.
They are, as a result, penny stocks.
But it’s not the price that makes them a “penny stock” so much as their restricted
exchange access. As soon as they satisfy the requirements to get larger exchange
access, say on the New York Stock Exchange (NYSE), then they’ll get a huge boost in
demand.
Currently, I’m hoping $VYGVF is able to do this. That’s the stock for Voyager, the
“Coinbase Killer.” They offer free trades, which is cheaper even than Coinbase Pro, if
you live in the US but you don’t live in New York.
Currently, they are working on getting their NY Bitlicense, and once they do, they’ll
not only be able to get customers from NY, but they’ll be able to apply for listing on
the NYSE.
Using Coinbase, as a basis of comparison, shows that such a move would effectively
double their share price without changing anything about the company’s actual
profitability.
Just relisting on the NYSE would likely give you a 100% profit. That’s why I like
this stock as long as Bitcoin’s trendline remains ok.
The Exchange Trade Up – With Cryptos
The same thing happens with cryptocurrencies, but they offer a twist.
What’s the same is what you are going to witness with $DOGE. They are about to
list the coin on Coinbase. When that news came out $DOGE jumped a lot. Musk
also Tweeted about the same time, so you saw a 40% jump in about 24 hours.
I think it’ll jump again when people can buy it on Coinbase.
The inverse happened when Elon first Tweeted about not accepting Bitcoin for Tesla
cars because he was worried about environmental damage. That made the market
go on the hunt for environmental coins.
The smallest junk coin that had relatively easy access–BitGreen–did 12x in about 10
hours. Here’s its chart.
I actually posted about it on Quora, but it was late at night and I went to bed before
I could set up another account on an obscure exchange to buy the coin.
Instead of waking up to what would have been a 10x gain, then, by the time I
realized what had happened, the pump had dumped.
The moral of that story is this: restricted exchange access created a huge pump, but
also led to the coin’s price demise because there was no wide group of possible
buyers.
Concluding Thoughts
So, that’s the lesson.
1. “The” stock market is actually an assembly of markets.
2. People often confuse the “stock market” with a major index like the S&P
500.
3. Buying and selling changes demand for a stock, which changes how many
times earnings–called the multiple–the stock trades for.
4. When a stock moves to a bigger exchange with more demand, its price can
double pretty quickly, even though the company is not any different than it
was before.
5. The same thing can happen with cryptocurrencies, with a twist: some
cryptos can actually benefit from restricted access. But that restricted
access also makes their pumps very short-lived.
Those last two points explain ways that price moves without any relationship to the
earnings of a company (or value of a coin). They explain how you can make 100%,
or even 1000%, without anything actually changing.
Obviously, for my subscribers, I try to tell them about both the short term pumps
and the longer-term exchange trade-ups. But the only ones that prove reliable are
exchange trade-ups.
Lesson 3
The Structure of Stock and Crypto Indices
The idea behind this lesson can seem abstract, so let’s start with some images. Take
a look at the following graph. Which would you rather own, the blue line or the
black line?
Obviously, the black one–since it returns more. Here’s the weird thing about
them: they are exactly the same holdings. They are both ETFs of the Standard
and Poor 500 Index.
Why did one perform better?
Because they don’t hold the same amount of each stock.
The worse performing ETF is the SPY, which gives greater weight to the largest
companies of the index. The better performing ETF is the RSP, which gives 1/500
weight to each stock (= each one has equal weight). Since smaller stocks tend to
grow more, the RSP tends to do better than the SPY.
Here’s the performance of those funds over the pandemic.
Yes, the SPY did better because those stocks are more resilient in a downturn.
Interestingly, though, the RSP was bouncing back a lot faster–as you might expect
from smaller companies.
Now, what if you combined this insight about the differences in return with these
ETFs along with a strategy that traded them more intelligently. What would that
look like over the last 22 years?
Well, here you go. Here’s an image of the SPY trading according to my basic
economic cycle indicator–it’s the red line. The blue line is the better performing RPS
(from above) over the same period of time.
So, you’ll notice that it’s a lot better than even the RSP–returning 2178% over that
period of time.
Now let’s use that strategy trading the RSP, rather than the SPY.
Predictably, it’s even better–returning 2946%.
The lesson: just knowing the difference between these two indices gives you extra
yield. Doing that with a smart strategy results in about 800% better yield.
That’s why it’s important to understand the structure of indices because even if
they are holding the exact same companies (or coins) some will outperform others.
And when combined with a smart trading strategy, you will get massively better
results.
Paid subscribers (Crypto and Bubble Riders) get access to the basic economic cycle
indicator which I use for trading things a little more exciting than the main stock
market indexes.
This lesson, however, will give even them a better sense of what to do with these
signals–as well as why I sometimes choose to do what would otherwise look
strange. Let’s start with the basics here.
What Is an Index Good For?
In a line, saving money, time, and, as a result, offering more effective management.
If you wanted to recreate the RSP yourself, you’d have to divide your portfolio into
500 equal segments and buy each stock. Then, when it is time to rebalance (likely
every 3 months), you’d have to sell the relevant stocks, etc.
You’re going to lose to slippage (= getting slightly less than the ideal amount during
a trade), and you’re going to spend a lot of time managing that. So, it’s worth it to
pay .5% up to 1% to an ETF manager to get the same effect.
With cryptos, the problem is even more pronounced. Here’s the DPI, which you can
get on Indexcoop. All of its coins are decentralized finance coins that run on the
Ethereum blockchain.
Typically, it costs between $8 and $80 for a transaction on the Ethereum
blockchain, given what time of day you’re buying. Sometimes, it’s more.
At 16 different coins, the DPI saves you likely better than $1200 in transaction
fees (to say nothing of slippage and the pain that it is to manage all of these coins). I
think it’s a no-brainer why this approach makes sense when investing in
cryptocurrencies.
The downside, of course, is that you can’t pick and choose yourself how much to
allocate to each coin or stock. So, let’s look at that problem a little more closely.
The Standard and Poor 500 Index
This is generally considered the“stock market.” It represents the consensus view on

which 500 companies will do the best of those that are publicly available, and it
weights each one according to its size (= market capitalization weighting).
The methodology of the S&P500 is such that it must represent each of the 11 major
sectors in the United States economy. These are the following (with their respective
weight).
• Communication Services: 9.9%

• Consumer Discretionary: 10.2%
• Consumer Staples: 6.7%
• Energy: 6.0%
• Financials: 13.7%
• Health Care: 14.9%
• Industrials: 9.7%
• Materials: 2.5%
• Real Estate: 2.7%
• Technology: 20.8%
• Utilities: 2.8%
There used to just be 10 sectors, but 1 was added in September of 2018 because it
didn’t make sense to classify companies like Amazon as a telecom company. So, the
S&P 500 is a bit of a moving target, changing both the stocks in the index and the
composition of the index itself.
No similar index exists for cryptos, because the three main use sectors,
decentralized finance, NFTs and web 3.0 technologies, are scattered along different
blockchains (ETH, SOL, LUNA, etc.) without any clear winner as to which platforms
will survive.
The DPI, for example, is representative of decentralized finance only on the
Ethereum blockchain. I don’t know of a similar product for SOL or LUNA yet.
There are some crypto top 50 indexes, but these can’t, by definition, have the same
rationale for composition as the S&P 500. There’s just no reason to think that the
top 50 coins are representative of much. As the industry matures, I imagine that
better indices will be developed, but we are not there yet.
For the present, with cryptos, it’s not as easy to exploit index inefficiencies. But with
stocks, it certainly is.
How Flaws in the Index Create Opportunities
Knowing index composition helps you to determine what might be mispriced.
For example, when the stock market rebounded after COVID, obviously smaller
stocks did better. But the energy sector did even better still. Here’s an image of the
SPY (in black) relative to the XLE (in green).
The reason is pretty obvious. Once people realized that COVID wouldn’t crash the
economy forever, oil stocks bounced back as investors recognized that eventually
people would drive cars and start flying again.
So, maybe rather than buying the SPY as a rebound, it would have made more
sense to buy the XLE. It’s been a bumpy ride, but you could have entered
at both later and with a lower price to get a better return.
The only similar logic that holds with cryptocurrencies concerns market rotations.
Often, you’ll see decentralized finance shoot off. Well, it might be worth looking at
Web 3.0 or NFT coins. The MVI (MetaVerse Index) on indexcoop combines these two
areas of the crypto world and you’ll notice something close to an inverse
relationship between them.
Here’s the DPI over the past year (peaking in May).
And now here’s the MVI over the past year.
They’re not strictly inverse images of each other, but they do seem to take off at
different times.
So, just as it’s often predictable that a sector of the S&P will outperform, so it’s
predictable that a sector of the crypto world will outperform. Eventually, lagging
sectors in the crypto-world catch up–and this is a mean-reverting strategy that’s
useful to keep in the back of your mind (explained in fuller detail here).
Concluding Thoughts
This lesson had a lot of images and concepts, but the basic points are these:
• Indices are systematically composed aggregates of stocks or coins that tend

to represent the consensus view of key assets.
• Buying these often saves you quite a bit of money and time (relative to
buying all the same coins or stocks individually).
• Cryptocurrencies don’t have the level of development that the stock market
has because it is so young, though there are crypto indices and they are
still helpful.
• If you learn the structure of these indices, it’s not too hard to find missed
price opportunities–either because of obvious tendencies (oil rebounding
after COVID) or because of market rotation (from decentralized finance to
NFTs).
When you put all that together with a set of basic indicators, you’ll get better
performance from buying and holding exactly the same coins and stocks. Even on
basic indexes, the combination of these insights does produce about an 800%
better return over two decades.
My subscribers get access to the signals from my proprietary algorithms, which

obviously do quite well. But even if you don’t subscribe, this information in
combination with this lesson will help you get better returns.
Lesson 4
How to Identify the Value of Stocks
Warren Buffett is widely considered the world’s “best investor,” despite the fact that
his fund has been making average returns for about a decade. Moreover, he called
Bitcoin “rat poison squared” and failed to invest in it. He also failed to invest in
Microsoft early on, failed to invest in Amazon early on, failed to invest in Netflix
early on, failed to invest in Apple early on, failed to invest in Google early on … you
get the idea.
There is a reason for this string of extraordinary misses and it has to do with mis-
identifying the value of stocks or other items. Once you understand what the
source of his mistakes is, you can handily outperform him in picking the right stocks
or coins.
In fact, that is why I was able to identify the value of LUNA when it was trading at
just $6.34 (now over $42 = 6.62x in 2 months) and SOL when it was trading around
$33 (now over $170 = 5x in 2 months).
Now, in order to avoid picking on Buffett too much–I do still admire the man–I’m
going to begin this lesson with a story about the costs of misidentifying value.
Back when I was in graduate school, my wife and I decided to take the money that I
had earned from trading and investing and used that as a down payment to buy a
home. Everyone said it was a “no brainer.”
Initially, our house went up in value, but then the 2008 financial crash ruined
everything. Our mortgage exceeded our home value and I graduated into the great
recession job market. I was fortunate enough to get a job, but it was in New York,
so we had to move and rent out our Boston house at a monthly loss.
To afford everything, we eventually moved into a tiny apartment, leaned on family

for help, and took on extra work (teaching extra classes and designing websites). I
used that additional money to buy data so that I could write better algorithms,
invest, and eventually sell off the burdensome assets at a significant loss.
Combining those approaches it took most of the 2010 to 2020 decade to climb out
of that mess. By March of 2020, when COVID crashed the market, my primary
financial concern was that my Porsche would be delayed in its shipping from
Germany.
Here are some of the lessons I learned from that experience.
1. Never listen to anyone who doesn’t have a proven track record of success
in that area. That home purchase was not a “no brainer.”
2. Things always do have a real value.
3. The easiest way to calculate that real value is just to add up how much
money it would produce for you over time.
The point of this lesson is to spell out points #2 and #3 looking specifically at stocks
(the next lesson looks in-depth at cryptocurrencies). But, we’ll start with real estate,
in a rough and ready way, because it’s easier to imagine.
Those points are going to explain why I like using the “delta neutral” yield farming
strategy so much: it produces regular cash flows. As a result, you can come up with
a real value for that.
If my $100,000 in liquidity providing on the Spectrum Platform gives me just 40% in

a year (I’m getting better than 63% now), then that $40,000 in cash flow gives me a
way to value that asset.
The Do It Yourself-er package (DIY-er) on Patreon includes weekly updates of my

positions for that (along with Moonshots and other picks). It honestly beats every
major hedge fund in the world for returns. It’s always a portion of my Coaching
clients portfolios because it makes money whether the market goes up, down, or in
circles.
The value of that isn’t always clear, and I’ve not always done a good job at
explaining it. This lesson will give you a sense of how to place those returns in their
proper perspective, even relative to real estate. … which is where we’re going to
start.
A Simple Case
Let’s go back to rental properties. In hindsight, it’s obvious how I messed up buying
an overpriced home (1 unit in a duplex). I could only realistically rent that home for
$1400 a month (remember that price reflects rates 12 years old). That’s only
$16,800 a year.
Over the next 10 years, that means that its total revenue would be about $168,000
— assuming continuous renting and ignoring all costs (and inflation). That gives you
a ratio:
• (P) Price of $168,000

• (R) Annual Revenue of $16,800 =
• P/R = 10
We paid $280k (roughly) for the home, so our P/R ratio was 16.67. A good P/R for an
investor is between 5 – 8. We simply overpaid.
When prices crashed down to $130k during the recession, they were just returning
to about what an investor could make from the house. There are a lot of costs
associated with renting, after all, so $130k is near the break-even number.
I’ve learned my lesson.
I’ve also explained an intuitive way to think about intrinsic value. It combines both
of the standard methods used for valuing stocks and isn’t really how people
evaluate commercial properties (which generally turns on net operating income).
Still, it’s an illustrative start: sum up future cash flows and use a comparison ratio.
Let’s look at some stocks with those ideas in mind.
Relative Valuation with Stocks
This is easier to think about with some concrete cases. Is Apple or Tesla a better
buy?
Well, if you head on over to a site like finance.yahoo.com (it’s free), and you type in
AAPL, you’ll get a page that gives you this information.
Most of those numbers aren’t super helpful in figuring out AAPL’s value. The Beta,
for example, just represents how much the price moves up and down relative to
the market average. Higher than 1 means that it’s more volatile.
The number that does matter, the one that’s like the P/R ratio we looked at with
real estate, is the PE ratio. This is the Price (per share) to Earnings (net income)
ratio. It has a (TTM) after it meaning that those earnings are taken from the “trailing
twelve months.”
On an historical basis, most companies in the stock market have a PE ratio of

around 15. On that basis, Apple is expensive (with a PE of 27.93). It’s also the world’s
most valuable company, so you’d expect a premium. Also, tech stocks always trade
at something of a premium.
Finally, some people say that the market is in a bubble because the average PE ratio
right now is 33.99 (from the Nobel Laureate’s website Robert Shiller).
Apple is actually cheaper than that, so all things considered, in this market, Apple
isn’t terribly over-priced. If the market came back to historical norms, you might
expect AAPL to drop about 25% (putting its PE ratio around 21).
Now if you go check Tesla (TSLA) on finance.yahoo.com, you’ll get this image.
You’ll notice immediately that it has a PE ratio of 408!
That means that at the present rate of earnings, it would take 408 years for you to
get your money’s worth for buying 1 share of stock.
So, Apple is a better value than Tesla, right?
Probably, but it’s not that simple. Tesla is also growing a lot faster than Apple and
it’s the leader in a completely new industry. Tesla not only does electric vehicles,
but is changing the model of making cars.
A Tesla has a 1,000,000 mile warranty. Most cars have about 100,000 miles
warranty. A Tesla is designed to last a person 30 years, while most cars have a
“primary” life of about 10 years. Conventional cars are designed to be aesthetically
obsolete in 5 years, because car companies make money selling cars. Tesla is
looking at 30 year replacements.
How will Tesla make money?
The answer is that they’ll sell you a subscription to their autopilot (and other
software upgrades). In short, they’re moving to the Netflix model of revenue. That
AI will also be sold and deployed in other areas, again with subscription services.
It’s hard to price in all that possible growth, but it should be done. There’s a way to
do this with the PE ratio and it’s the PEG ratio, or PE divided by possible growth.
Anything under 1 is considered good. But, again, the real trick is to be accurate in
your assessment of growth.
To deal with this deficiency, namely dealing with future possible growth, it might be
helpful to move from relative valuation models, e.g. comparing Apple to Telsa, to
absolute or “Intrinsic value” models.
Absolute Valuation (an Outline)
This is considered the gold standard of valuation. It’s also the most complex and
subject to significant errors in miscalculation. Since this will take some
concentrating, I gave you an image of a Tesla with a dog to make this portion of the
lesson go down easier.
Alright, let’s get started. You need to figure out three things.
Thing 1: Discount Rate
The idea is really like the rental model. There, we summed up the value of all future
rents. But there are a few problems with that idea.
• Technically $1400 ten years from now will be worth less than $1400
presently–as there will be inflation costs.
• Also, $1400 ten years from now is less useful to me than $1400 today. There
is opportunity cost in waiting.
• Finally, $1400 ten years from now is riskier, since I have to hope that the
mechanisms that give me that money still exist then.
To account for these additional factors, then, what I need to do is take that future
value and discount by some percentage to give me a better sense of its value today
(= net present value).
How much should I discount it?
That amount is called the discount rate. It’s applied annually and its absolute
bottom line is usually the Federal Reserve’s US 10 year treasury rate. Almost
anything in the world is riskier than that. Then you should add some additional
premium depending on how risky you think the returns will be and given how many
unknowns there are. Tesla would have a significant premium (maybe 10%).
There is no exact science to that process. Also, how great a discount rate you
provide dramatically affects your overall valuation of the company, since it
compounds negatively over each year of your analysis.
Thing 2: Cashflow Growth
You’ll also have to start with your current cashflow (roughly net earnings) and then
project how much you expect the company to grow each year. The way that work is
by looking at each segment of the company and estimating how much it’ll grow.
For example, you might have:
• Tesla’s car sales up 10% each year for the next 10 years.
• Tesla’s subscription services, starting 2 years from now, blasts off at 200% a
year for 5 years, then, 50% each year for the remaining 3 years.
• Tesla’s home energy installation services grow by 30% each year for 10 years.
Now, you’ll need to sum up those figures and average the resulting growth rate for
each year.
Thing 3: In Perpetuity Sum
Finally, you’ll notice that we did this for a 10-year period on Tesla, but hopefully it
lasts for more than 10 years. Since that is so far out in the future, what you do is
use a separate standard formula for valuing the in-perpetuity portion of the
company.
Then you add it all up:
• Cashflow each year with growth rate – discount rate

• In perpetuity value of the company
• Result: intrinsic value of the company
Now compare your results here with the results from other companies that you’re
considering buying and the one with the best intrinsic value is the best company.
Yes. This is hard and professionals mess it up all the time.
Concluding Thoughts
If you managed to get through that, congrats!
Financial professionals tend to prefer the absolute valuation methods, but the
problem with that preference is that you can only get tolerably accurate growth and
discount numbers if the industry is established.
In new industries, you have no basis for comparison and you’re often just guessing
at total market share growth. Investors like Warren Buffett, then, always compare
new technology to old technology and miss the value of the new tech.
That is why Buffett missed so many of the biggest and best investments out there.
Intrinsic valuation methods just can identify that value. Heck, relative valuation
methods can’t identify that value well either.
Tesla’s PE ratio has gone down after shooting up 10x over the past 18 months. It’s
less “over valued” now than it was then.
There is, honestly, a real value to stocks, or cryptos, or homes. BUT you can only
really identify that value when you are looking at something that doesn’t have a
large potential market share in a completely unknown area.
My house in Boston wasn’t going to “grow” like Tesla and it’s in an established
market. So, I should have taken the time to figure out its intrinsic worth first.
Bitcoin has neither of those characteristics, so you need a different approach

(which is the purpose of the next lesson in this guide).
Yield farming, however, does provide you with a known return to your portfolio,
which is why I have about 20% of what I would allocate to cryptocurrencies
dedicated to it. At 40%-60% per annum DIY subscribers can beat the returns of
every major hedge fund for the price of $15 a month.
In sum we’ve covered:
• Why Warren Buffett’s approach will always miss the opportunities of growth
stocks and investments,
• Why I messed up in buying a house in Boston (which wiped me out financially
for 10 years),
• How to value a stock relatively using the PE ratio,
• How (in outline) to value a stock absolutely, using a discounted cash flow
analysis,
• Why a 40% – 60% per annum return is so extraordinary (because it’s so
predictable)
Lesson 5
Bitcoin’s Intrinsic Value
Wall Street veterans hate Bitcoin.
Warren Buffett has called it “rat poison squared.” Jamie Dimon, the CEO of JP
Morgan, still doesn’t support Bitcoin. Ray Dalio, the founder of Bridgewater, which
is the world’s largest hedge fund, hated Bitcoin for years, before finally coming
around to it just last month … and just before the crash.
Now, they all represent “the establishment,” and all have large billion-dollar stakes
in the existing financial system. So, it’s easy to conclude that they hate Bitcoin
because of personal self-interest.
But I think the issue is deeper than cynicism.
Mohammed El-Erian, an economist and now President at Cambridge, bought

Bitcoin at $5000 and then sold it at $19,000 thinking he was the smartest person
around. So, clearly, he is no Bitcoin hater. Yet, the reason he didn’t hold longer–
unlike me–was that he couldn’t find a clear metric to value Bitcoin.
And that’s the rub. Wall Street wants to buy things based on their intrinsic value.
They employ legions of specialists who can assess the intrinsic value of companies
and then they go to buy the cheapest ones based on that analysis.
But since there is no consensus around how to value Bitcoin, those legions report
back that Bitcoin has no clear value, and then the veterans dismiss it.
What I want to explain is a paradox: the old-timers are right about this
uncertainty and it’s perfectly rational to ignore them.
The Art of The Bubble does find firm footing in macro-economic cycles–because
prices do reflect reality in a broad way.
Importantly, there are macro conditions that preclude the possibility of any
bubbles. During a prolonged recession or depression, for example, you will not find
people bidding up $GME or $AMC, because no one has any money.
Just look at Bitcoin’s performance during the stock market crash of 2020 (Bitcoin is
in black, while the S&P 500 is in blue).
No money means no bubbles. That’s why Daily and Weekly Bubble subscribers pay
to get access to algorithms that track macroeconomic cycles.
But it’s important to understand why the valuation problem exists, both to avoid
charlatans and to find a strategy that works.
Let’s get started with the most basic question.
Is Bitcoin an Asset?
This one seems obvious, right? Well, from a financial standpoint it is–and in just
about the opposite way that most people think.
Most people think Bitcoin is an asset, and I call it an “asset” by analogy. But it’s not.
An asset is something that produces cash flows.
To explain, my university is in a “college town,” meaning that it’s the largest
business there. Obviously, there are a lot of college students, and they buy a lot of
alcohol.
They also get the munchies late at night, when everything else is closed–except for
one pizza place. It’s a narrow shop that has almost no seats and sells pizza by the
slice. They also do deliveries and they make tons of money.
How much is this Late-Night-Pizza-Joint worth?
Well, theoretically, if you had infinite knowledge, you could just sum up all the
company’s earnings–their cash flows (to speak loosely)–and then discount those
back to present dollar amounts.
You have to discount the $10,000,000 it makes in 2050 to today’s dollars because of
inflation (at least).
So, Late-Night-Pizza-Join is worth the cash flow of 2021 + 2022 + 2023 … for as long
as the business is in operation, and then you discount that back to today’s value.
Doing that for a real business is hard because no human has infinite wisdom. But
there are standard ways to approximate how to do this–and this is what finance
specialists do.
Now, does Bitcoin produce cash flows? Not really. You could stake Bitcoin, and then
you would have a Bitcoin staking business, and that would produce cash flows, but
Bitcoin itself doesn’t do that.
So, Bitcoin isn’t an asset. You can’t find its intrinsic value that way. So, what do you
do?
Well, you have to use a different value model. There are quite a few proposals out
there on the internet, and for nerds like me, this is a fun, ongoing debate.
I’ll only talk about one wrong one here–because it is used in scams–and then I’ll talk
about a model that does work theoretically.
Why The Stock-to-Flow Model Is Wrong
The idea behind this model is simple: when something has a scarce supply, it’s
worth more. Also when the flow (of gold out of the mines for example) is low, it’s
worth more. You should be able to combine these points and get a sense of value–
expressed as a ratio.
Here are the Stock to Flow ratios (SF) as calculated in the Medium post that made
this idea a big deal in the first place.
See, gold has the highest stock to flow ratio, so it’s worth the most.
Now, let’s apply this to Bitcoin, which has an ever-decreasing stock, and a flow that
halves every 4 years. Using those two ideas you’ll get the following projection of
price.
You’ll see that Bitcoin’s early price history mostly tracks the stock to flow model.
Yet, that model also predicted that by sometime around April, Bitcoin would hit
$100,000 US Dollars. In the years after, it’s supposed to go to $1,000,000.
Now, you might have noticed that there are a few problems with this model. First,
it’s past April 2021, and Bitcoin never hit $100,000. Next, if you really follow this
chart out, you’d find that Bitcoin’s value will be infinite because its stock will be
exhausted–which is obviously absurd.
These problems result from a root cause. Stock to flow models only make sense
when the supply side isn’t limited. It works for beef, for example, because that’s not
running out any time soon.
But, Bitcoin isn’t in that situation. Logicians (like me) call this a category error.
It’s like the following scenario. Suppose someone asks you “Where’s Manhattan?”
and you give them directions. They go there and come back and complain: “There
was no Manhattan where you described. Just Broadway, and Times Square, and the
Empire State Building. No Manhattan.”
It’s clear that they have confused what sort of thing a city is. They got the category
wrong and thought it would be a thing like a building.
The same error is happening here. When you don’t have both supply and demand,
then you can’t determine price by that interaction. Here are just a few
articles explaining this point in a lot more detail than I have here, but I’ve already
told you what matters.
Ok, so let’s look at something that would actually work.
Why Metcalfe’s First Law Works in Theory
Imagine for a moment that the telephone is just being invented. You are setting it
up in the “Wild West” with one person across town. How valuable is that “network”
of two people?
Well, let’s say value, V = 1 because the two of you just have one connection.
What if you added 1 more person, how much more valuable would that be?
Well, V = 3 because even though you can call 2 different people, they can call each
other, so there are three connections.
If you keep going this way, as Robert Metcalfe did, you’ll find that the number of
unique connections for each node (user) = n(n-1) / 2. This is asymptotically
proportional to n^2 in the long run.
Here’s a little graphic that explains it:
So, Metcalfe’s Law states that the value (V) of a network is proportional to the
square of its nodes, V= n^2.
Now, to be really technical. That’s just the first of Metcalfe’s laws. He had a second
one about the adoption rate among users — and for the math nerds, it’s a sigmoid
function (of course).
All of this looks like a good way to figure out the value of Bitcoin.
Why, after all, is it still the most valuable coin, despite the fact that its technology is
terrible (relative to competitors like Ethereum and Cardano)?
The answer is that it has more active users, hence more nodes, and hence more
value.
Way back in 2017, I was the first to propose on SeekingAlpha (a site for finance
nerds) that Metcalfe’s first law could be used to find an intrinsic value for
cryptocurrencies. I even developed a ratio for doing it.
The actual modeling is more complex (you need to find a scalar constant for the
n^2 value by regression analysis), but I still think the idea works in theory.
It just doesn’t work in practice.
Why Metcalfe’s First Law Is Hard in Practice
The problem is that it didn’t take people long to figure out that Bitcoin is
a public blockchain. It’s the opposite of private. So, if you actually want to launder
some money, or just hide the fact that you are paying for your mistress’ apartment,
then Bitcoin is among the worst technologies ever.
–Nefarious aside: use Monero for that–
When this problem was recognized, people invented crypto laundry services
called coin tumblers at places like Coin Gape.
It turns out that this doesn’t really work. The NSA can still figure things out if they
need to–it just takes higher skills and more effort.
What these tumblers definitively do accomplish is to add lots of unnecessary

transactions and fake wallet activity to the blockchain.
As a result, you can’t just go to blockchain.info and see how many unique daily
users there are, because that information is skewed unpredictably by how often
people are using tumblers.
Now to apply Metcalfe’s law, you might treat the number of unique wallet
transactions as “nodes.” But, because of the tumblers, you don’t really know how
many nodes there are. So, you can’t use Metcalfe’s law to find Bitcoin’s intrinsic
value.
Of course, there are some ways to algorithmically clean up this data, but it is not a
trivial problem. For a little while, I used a service that did this for me. But when I
added this new data into my own algorithms, it didn’t improve returns much.
(Or, at least, the advantages it did confer fell within the range of statistical noise
that made me suspicious and I wasn’t going to bankroll an expensive idea for years
on a hunch.)
Maybe the data I was paying for was still not accurate. Maybe it didn’t integrate well
with my algorithms. I don’t know. The point is, I found it quite difficult to apply
Metcalfe’s law to assess Bitcoin’s value from early 2018 forward.
I did find a better solution though.
The Macro and Momentum Approach
The better solution was to combine an analysis of macro-conditions with an

industry-wide level momentum analysis.
The process is simple:
1. Check the macroeconomic conditions (Lesson 9 of The Art of The Bubble).

2. Check the industry health (Lesson 7 of this Guide).
3. Buy and sell individual coins (what we talk about on Discord).
Basically, as long as the macro-conditions are good, you can just buy and sell
following simple moving averages. I explain exactly how to do this with Lesson 7.
To illustrate, the 200-day simple moving average has ample empirical support for
picking out winners in stocks. It’s the black line in the image below.
If you bought when Bitcoin’s price crossed above it and then sold when it dropped
below it in 2016-2018, you would have earned 26x on your investment.
I used a modified form of this to earn 17.7x on Ethereum in about 13 months this
bull run (as opposed to the 25 months of Bitcoin’s previous bull run).
So, that’s the lesson. Bitcoin has an intrinsic value even though it’s not an asset. The
problem is that you can’t practically figure out that value in a way that could inform
your trades.
Despite all that, you should ignore the Wall Street establishment and just use a
different strategy for investing. The one that I’ve found which works is to combine a
macro-economic analysis with momentum.
That’s why paid subscribers get access to both signals.
Now, momentum analysis is part of technical analysis, and I need to disambiguate

the two. So, that’s why Lesson 6 of this Guide covers that problem, while lesson 7
(as noted) explains in detail what to do with momentum trading.
Lesson 6
Trading With Tea Leaves (How Not to

Trade on Emotion)
The human mind is predictably irrational. To give you a sense of what I mean, just
answer this question. Would you rather:
• A) Get a broken leg,

• B) Hurt your knee so that it ached when the weather got rainy for the next
year.
Even if we assume that option (A) hurts more, the strange thing about our brains is
that they have a psychological immune system. We’ll re-adjust our expectations
about what we can do with a broken leg—no soccer practice or jogging, for
example. But with (B) we’ll not adjust and, as a result, just be continually irritated.
Psychologists have found that (A) is the more tolerable result (read Dan
Gilbert’s Stumbling on Happiness for more such studies).
A version of this kind of irrational reasoning is at work with people who have steep
losses (80%+) in the market. They are supported in their view by a way of trading
that is just as popular as it is unhelpful. That “method” is called chart reading.
My goal is to explain what it is, why it doesn’t work, and why people are drawn to it.
If avoiding mistakes could have a dollar value, then this lesson might deliver the
biggest bang for your buck of the entire Absolute Beginner’s Guide.
To put it in perspective, consider this. Suppose that you stumbled across a magical
lamp with a greedy, but helpful genie. For freeing him, he offers to help you avoid
just 10% of your trading errors throughout the course of your life. How much would
you be willing to pay?
Would it be more than the annual cost of a 1.2 Labs data subscription? I’m guessing
so.
As a topic, chart reading has come up on our Discord server. The reason is that
people turn to this method when their trades don’t go as expected. We’ve gone
over better strategies there and you can join us for daily chats for free.
To be precise, chart reading is one part of what is often called “technical analysis.”
Technical analysis is an unfortunate grab-bag of techniques, some of which are
genuinely useful and others of which are no better than trading based on astrology.
It includes, to my mind, three main ideas:
1. Chart Reading
2. Precedent Reading
3. Momentum Analysis
A discussion of momentum analysis and the hundreds of academic articles that

support its superior performance to other strategies is the substance of Lesson #7
in this Guide (and it’s already written).
This lesson is going to explain what is both alluring and problematic about the first
two dimensions of technical analysis. Let’s start with some images.
Patterns in Price Movements
Here’s an example of chart reading taken from Investopedia (obviously). It’s called
the Head and Shoulders pattern.
The idea is that when you see a formation of price movement that looks like this,
it’s bad news for the stock price.
Here’s another, called the cup and handle.
When you see this formation, it’s considered a bullish signal, meaning that the price
will go higher.
These are fun to spot—a bit like seeing patterns in clouds, or fortune-telling by
reading tea leaves or palm reading.
My wife, whose PhD covers human cognition, likes to read people’s palms at
parties. She’s always a big hit.
But we don’t invest using her palm reading techniques and neither do we invest
using technical charts.
A little better notion than chart reading is precedent reading, which is based on
resistance and support. Here’s an image of a support line for a stock (again from
Investopedia).
The idea is that there is support for the stock at that $51.25 price range because it
hasn’t fallen below it before.
Here’s an image of resistance.
The idea here is that the stock has a hard time going above $39 because it’s failed
to break out above it so many times.
What’s wrong with these strategies can be illustrated with a story.
Jason’s Dr Pepper Story
Jason is my collaborator in the YouTube series we’re putting together on these

lessons. It’s a Pod-Cast styled chat with screen captures, illustrations, and
experiments to help people learn.
Like me, Jason also majored in philosophy as an undergraduate student. So, he

studied logic and knows about what makes for good scientific theories.
He jokes that drinking Dr Pepper makes you taller.
If you find a person who drinks a lot of Dr Pepper and is short, he’ll say: “Well, they
would have been shorter.” If you find a person who doesn’t drink any Dr Pepper
and is tall, he’ll say: “Well, they would have been taller.”
As a result, there is literally no factual condition that could dis-prove his “theory”
that drinking Dr Pepper makes you taller.
In philosophical terminology, his “theory” is non-falsifiable.
The problem with non-falsifiable theories is that they don’t actually tell you
anything. Because they can’t possibly be wrong, they hold a logical status like the
following claim: “either it will rain tomorrow or it won’t.” Of course, that’s true, but it
doesn’t tell me whether to bring an umbrella for a trip.
Such “theories” secure invulnerability at the price of being empty. And if you have a
vacuous strategy, then it literally can’t tell you how to trade.
Now, I need to show you how chart and precedent reading fall into this trap.
How Chart and Precedent Reading Are Non-Falsifiable
Look at the following chart of Bitcoin’s price action. Can you see the head and
shoulder’s formation?
Well, just like the chart theory said, a head and shoulders formation is bad and
Bitcoin plunged afterwards. So, true theory right?
No. That’s confirmation bias. Have a closer look.
Do we have two heads here? Like a tiny head and a large one? And how many
shoulders are there exactly? It looks like two left shoulders at least.
The moral is simple: chart reading is too ambiguous to be rigorously testable.
People have similarly wanted to use resistance and support analysis to understand
Bitcoin’s bottom. Here’s how that might look.
While those are previous resistance/support levels, I challenge you to show me how
this is any more informative than claiming: “either it will rain or it won’t.”
Reading the precedent, the chart says that Bitcoin will fall to just under $50k, and if
not that, then just above $45k, and if not that, then just under $40k and if not that,
then $33k …
So, what’s the ultimate bottom?!
At some point, Bitcoin will hit some previous year’s level of resistance, making it
“true.” But this isn’t a kind of truth that is informative, which leaves us with an
obvious question.
Why Do People Use This?
As a professor of logic, I’ve been fascinated by why people, myself included, fall into
irrational patterns of behavior. We do it a lot.
Fortunately, the field of behavioral rationality—which spans philosophy, economics,

psychology and other social sciences—has made some pretty significant advances.
In Thinking: Fast and Slow, the Nobel laureate Daniel Kahneman points out that our
brains try to conserve energy. Often, they do this by substituting an easier task for a
harder one. Think, for a moment, about the following question.
• Are there more words that start with “R” in English or that have “R” in the
third position—as in “three”?
Most people get this wrong. There are vastly more words with “R” in the third
position than words that start with “R.” The reason people get it wrong is that
it’s much easier to think of words that start with “R” than those with “R” in the third
position.
You go: “railroad,” “roadmap,” “rooster” … and then compare that with “for,” “fork,”
“forward”… those come, but they are hard.
What you and I (and everyone) does is substitute the easier task of recalling words
for the hard task of actually looking up the answer.
The same thing happens with chart analysis.
It’s a lot easier to look at a chart and see two points of “resistance” and
conclude, “oh, $30,000 is the bottom,” than it is to do a statistically significant
historical analysis of all of Bitcoin’s price movements.
So, people have an immediate emotional fear and go for the quickest and easiest
answer that will satisfy their fears. This, in brief, is why people make poor trading
decisions.
Concluding Thoughts
Why do people feel good while losing 80% of their trade?
What the above suggests is they gain a false sense of control over that 80% loss by
looking to a chart pattern that tells them “the bottom is in.” By doing this they
exchange a short term sense of control for a longer-term satisfaction at having
made a good trade.
Resistance analysis on its own will lead you to hold Bitcoin until, ultimately, it
drops to the statistically significant range of about an 80%-90% price decline
in a crash. In that whole process, you might feel in control, but you won’t earn
money.
So don’t use it.
Instead, just recognize that hard work is needed to answer questions like: how far
will Bitcoin fall? And then you need to be prepared for caveats like, “if the future
follows the past roughly.”
In sum, chart analysis is too prone to ambiguous answers ever to be more than
reading tea leaves. Resistance is only meaningful with a statistically significant
sample–as a rule of thumb, at least 30 incidents. Anything less is no better than
Jason’s Dr Pepper “theory.”
Lesson 7
Trading Momentum
The standard advice for investing and trading is “buy low and sell high.” But there’s
a much better idea out there. Hang with me on this one, since I’m going to show
you what it is with ordinary stocks first.
Back in 2018, I developed a counter-intuitive trading strategy that used a different

idea:
“Buy high, sell higher.”
Being an academic, I had researched the heck out of it, back-tested it and published
the results on SeekingAlpha–a speciality website for finance nerds–in 2019. It did
astronomically well.
After a two-year real-life test through the COVID crash, it’s done even better. Here’s
a general image, with the strategy’s return in red and the stock market in blue.
Remember, these are ordinary stocks. That 20% annual return is better than
Warren Buffett’s done and it has a lower draw-down than the stock market itself.
That means it has both greater returns and lower risk.
Here’s its performance over the past 22 years, including 2020, where it got more
than a 61% return.
How good is that? It’s so good that it put me in the top five of all major hedge-funds
of 2020, beating the pants off quant hedge funds like Renaissance, Ray Dalio’s
Bridgwater, and of course Warren Buffett’s Berkshire Hathaway.
The idea behind it is just this: the trend is your friend. When an asset is going up in
price, it tends to continue upwards. When it’s going down, it tends to go down
more.
Now, I was applying this idea to buying individual stocks that would be usable in a
retirement account. But what if you transferred that idea to cryptocurrencies and
other “bubbly” sectors like green energy and cannabis?
Well, that’s the strategy behind The Art of The Bubble. And since very late April of
2020, my bubble trades have yielded right around 700%.
The purpose of this lesson is to teach you how to use this strategy for yourself.
Of course, I have a paid subscription. There are details that I can’t explain in one
lesson, so for $9 per month, I’ll provide you with more of those details on a weekly
basis. For less than $1 a day, if you buy the annual subscription, you can follow my
trades on a daily basis to learn exactly what I’m doing and why.
I dare you to find a university course that will come close to those prices. (You also
won’t find this taught in universities.)
Anyway, since I’ve explained the basic idea behind momentum trading, here are the
main topics that I’m going to review today.
• How to Find A Moving Average

• Evidence For Its Effectiveness
• Some Bad Ways To Use Momentum
• Combining Momentum With Value Investing Through Economic Signals
As a reminder, any terms you need to look up can be found in my terminology

guide here (use CTRL + F to find a specific word).
Let’s start with the basics. You measure momentum by using moving averages, so
you’ll need to start with finding and using moving averages on freely available sites
yourself.
How To Find a Moving Average
Just go to a website like finance.yahoo.com. Then type in the ticker of what stock
you’re looking for. If you don’t know the ticker symbol, then you can usually just
type the company name and you’ll get a list of options.
Tesla is TLSA, while Bitcoin is BTC-USD. Cryptocurrencies are a little weird because
you are measuring the price of Bitcoin in terms of US Dollars, hence BTC-USD.
When I get to the page for my stock or cryptocurrency, I click the chart tab and
usually go full screen.
When you are looking at your chart, the first thing you’ll want to do is change the
line graph to something where you can see individual movements for each day. I
like the colored bars more than the candles because it’s easier to see what’s going
on.
For each bar, the opening price is the tick to the left. The closing price is the tick to
the right. The bar goes up and down to mark the high and low prices of the day. If
the bar is red, that means the stock went down for the day. If it’s green, it went up
for the day.
After you change to the bar chart, you’ll want to add in your moving averages by
clicking on the “indicators” tab and choosing moving average.
You’ll be asked how long a span of time you want. This is crucial. For stocks, the
number of days you choose will be trading days, so if you pick 200, then that’s
about 10 months since the stock market isn’t open on weekends or holidays.
I often use 160 days, which is about 8 months worth, though Yahoo will default you
to the 50-day average. Some people prefer even shorter times like 20 days. I don’t
like doing that for reasons I’ll explain below.
You’ll also be given the option of choosing a simple or exponential moving average.
Choose the simple moving average, since the exponential gives you a faster
response to various events and that will introduce false signals.
Finally, pick a line color that you can see. I usually just pick black. That line
represents the average price over the period of time you picked. Your screen
should look like this (if you’re using TSLA).
You’ll notice that if you had decided to buy TSLA as soon as its price was above the
160-day simple moving average (SMA 160), you would have stayed in the stock and
not traded anything for more than a year.
That’s the kind of “traditional bubble” that is the focus of my trading approach
(other bubbles explained here). This is NOT day trading. And that’s a good thing.
If you do this right, then you should be able to live your life like normal. You’ll get up
in the morning and check a few of your indicators, then go about your day. Repeat
for the next morning. It should take no more than 5 minutes. (You don’t want to
actually work for your money do you?!)
Evidence For Its Effectiveness
Now, I’ve already shown you evidence for the effectiveness of momentum trading
using the strategy above. That combines three kinds of momentum to achieve its
results. The bubble trading strategy I use here combines momentum with macro-
economic conditions for its effectiveness.
These are more complicated strategies, then, but even this simple approach does
well. I want to review, very briefly, some of the academic articles in support of it.
Robert A. Levy, in 1967, used the computers of his time to analyze the results of the
basic idea: the trend is your friend. He called his approach “relative strength,” but it
later became known as “momentum” trading.
In 1968, he developed his initial study to cover 625 New York Stock Exchange
stocks, using a 26-week time frame, and found that momentum outperformed
significantly.
Later, Akemann and Keller (1977) demonstrated the superiority of the approach
even including transaction costs. Those are the costs of buying and selling stock.
With Robinhood, or most brokers now, you don’t have transaction costs, but with
any cryptocurrency broker, you still do.
Transaction costs are a key reason why faster strategies–one’s with shorter time
frames like 50 or 20 days–don’t work well.
Not only do you have to buy and sell a lot, but you also spend a lot of money paying
transaction fees. And those fees add up.
Robert Shiller, the Nobel laureate, wrote a paper in 1981, titled “Do Stock Prices
Move Too Much to Be Justified by Subsequent Changes in Dividends?” which
showed that stocks do not trade on their intrinsic value.
He was joined later by De Bondt and Thaler (1985) and together they paved the
space for the conceptual adequacy of momentum trading, rather than Warren
Buffett style value investing.
With the additional advances of computer technology, the 1990s proved a

watershed for this approach. Jegadeesh and Titman (1993) showed the superiority
of momentum trading for the time period between 1965 and 1989. They used 6
and 12 month time frames.
Since that period, momentum trading exploded with more than 300 academic
articles supporting its superiority to buying and holding the market itself. Those
studies went on to show how general the persistence of the momentum trading
advantage was across any time frame with basically any asset, from stocks to bonds
to derivatives … to Bitcoin.
Chabot, Ghysels, and Jagannathan (2009) demonstrated the superior performance

of momentum trading in UK equities all the way back to the Victorian Age. Geczy
and Samonov (2012) showed that momentum trading was successful in the US all
the way back to 1801!
The lesson? The outperformance of momentum trading is a robustly supported

phenomenon by academic research.
There are some bad ways to use it though.
Some Bad Ways To use Momentum
I noted above that having a short timeframe increases transaction costs that make
momentum trading less profitable, especially for cryptocurrencies.
An additional problem with short timeframes is that you will have slippage. If you
used the SMA 160 as your indicator for Bitcoin in 2020, then your signal would have
told you to buy Bitcoin the day after 4/28/2020.
You would do that because you check to see if the closing price of Bitcoin is higher
than the average. But the next day, Bitcoin traded above $9300 and below $8600.
Where exactly would you have bought in?
It’s hard to tell. But a starting price at $9300 is definitely worse than a starting price
at $8595. That difference is slippage.
You almost never get exactly what an historical analysis suggests, then, because
you encounter transaction costs and slippage. Both of those costs increase
dramatically—so that the accuracy of your expected returns decreases
proportionally—if you have a fast timer (using a 20-day or 50-day moving average).
Another trap is to overfit your moving averages. What if you changed your moving
average to the faster exponential moving average (EMA) and moved its day tracking
count to 140 days? Well, you’d get this signal.
Using closing prices as indicators, you would have purchased Bitcoin right around
$7807. That’s much better than the best price of the 160-day SMA of $8595.
The thing is, you can only know that now.
A 140 EMA is a weird length of time and it’s hard to know why you would have been
following that signal in the first place. As a result, there’s no reason to think that it
would return especially better going forward. Following it in the future is pure
hindsight bias. So, be wary of overfitting your moving averages.
The Lessons:
• Fast-moving averages increase transaction costs.

• Fast-moving averages increase slippage.
• Quirky moving average times are subject to hindsight bias.
Now, let’s conclude with a real way to improve performance.
Combining Momentum with Value Investing Through
Economic Signals
A better way to get a better signal is not to mess with your momentum indicators.
It’s better to stick with conventional long-term indicators, like the 200 or 160-day
averages, and then use something with a completely different information source.
That’s why I combine value-based indicators with momentum indicators. The way I
do that is by having a really good macro-economic indicator (which I explain here),
and when that is good, I look to the industry-specific momentum indicators.
This combined approach also has strong empirical support for outperforming on a
risk-adjusted basis for a whole range of assets. And it makes sense why. When you
do this, you will be using different sorts of information as inputs for your strategy.
Because they are conceptually different kinds of information, you are more likely to
avoid trading on the wrong signals.
Of course, paid subscribers receive access to the basic economic cycle information
that my algorithms track.
Yet, even if you are not among that group, you’ll have learned enough with just the
above about momentum trading to pick out strong trends when you see them.
You know:
• How to find your moving averages.

• That this approach has strong support in academic research.
• What the pitfalls of picking your moving averages are.
• Why you might want to combine it with other approaches.
References
Akemann, Charles A. and Werner E. Keller (1997), “Relative Strength Does Persist!”
Journal of Portfolio Management 4(1), 38-45.
Antonacci, Gary (2011), “Optimal Momentum: A Global Cross Asset Approach,”

Portfolio Management Consultants.
Antonacci, Gary (2012), “Risk Premia Harvesting Through Dual Momentum,”
Portfolio Management Consultants.
Antonacci, Gary (2013), “Absolute Momentum: A Universal Trend-Following

Overlay,” Portfolio Management Consultants.
Antonacci, Gary (2015), Dual Momentum Investing: An Innovative Strategy for

Higher Returns with Lower Risk, New York: McGraw Hill.
Brush, John S. and Keith E. Boles (1982), “The Predictive Power in Relative Strength
and CAPM,” Journal of Portfolio Management 9 (4), 20-23.
Chabot, Benjamin R., Eric Ghysels, and Ravi Jagannathan (2009), “Price Momentum
in Stocks: Insights from Victorian Age Data,” National Bureau of Economic Research
Working Paper no 14500.
Geczy, Christopher and Mikhail Samonov (2016), “Two Centuries of Price

Momentum (The World’s Longest Backtest 2018-2012), Financial Analysts Journal 72
(5).
Jegadeesh, Narasimhan, and Sheridan Titman (1993), “Returns to Buying Winners

and Selling Losers: Implications for Stock Market Efficiency,” Journal of Finance 48
(1), 65-91.
Jegadeesh, Narasimhan, and Sheridan Titman (2001), “ Profitability of Momentum

Strategies: An Evolution of Alternative Explanations,” Journal of Finance 56 (2), 699-
720.
Lesson 8
A 3-Step Method for Late-Start Trades
This piece focuses specifically on how I make decisions about “traditional” bubbles
like Bitcoin (I outline the three kinds of bubbles here). What I’m going to review is
how to think about individual trades and what you should be shooting for. I follow a
simple 3-step method. Then I’ll apply that to Bitcoin itself.
Let’s start with a little arithmetic.
Good Reward / Risk Ratios
To understand how this works, think of trading as a series of bets placed over time.
Assume you are going to make multiple bets, wagering $100 each time. What you’ll
want to know is simple. What reward to risk ratio do you need to make money
consistently?
If your reward to risk ratio is 1 to 1, so that you stand to gain as much as you stand
to lose, and if your probability of reward is greater than 50%, then you will make
money. To illustrate, think of it this way.
• Bet 1: Win $100

• Bet 2: Win $100
• Bet 3: Lose $100
• Bet 4: Lose $100
See, that was exactly 50% right and you ended up even. If you had better than a
50% chance of winning, and you bet enough times (4 isn’t enough), you would make
money long term.
If your reward to risk ratio is 2 to 1, then so long as you have better than a 33.3%
chance of a pay-out, you’ll make money long-term. To illustrate, think of it this way.
• Bet 1: Win $200

• Bet 2: Lose $100
• Bet 3: Lose $100
See, if you continue this process with a better than 33.3% chance of winning, you
would end up winning money.
Inversely, suppose that you have a reward to risk ratio of .5 to 1, but a probability of
winning that was better than 66.67%. Then you would still make money.
• Bet 1: Win $50 (in addition to keeping your original $100).

• Bet 2: Win $50 (in addition to keeping your original $100).
• Bet 3: Lose $100
In this scenario, then, your reward to risk ratio was bad, but because your win ratio
was so high you still broke even. Even at the .5 to 1 ratio, as long as you win more
than 66.67% of the time you will make money.
To combine the ideas, you will make money if you have a strong reward to risk ratio
with a high probability of winning.
This is why the art of the bubble makes sense. Bubbles pay off a ton. And the Basic
Economic Cycle indicator that I use, and which subscribers get information from,
has better than a 70% win ratio.
But What About When I’m Late to A Bubble?
It’s pretty easy to see why, when you catch bubbles early, you will make money.
That’s why my 782% return from last week on cannabis stocks is pretty normal for a
dedicated bubble trader.
But when you’re late to a bubble, you need an extra guideline. Here’s how I think
about it.
When you are late to a bubble, your trade will make sense as long as you have
a 1 to 1 payout ratio.
The reason is that, after joining late, you are unlikely to be in a position to have
better than 50% probability of success. There are just too many unknowns.
The Basic Economic Cycle indicator, and the industry-specific indicators that I use,
will tell you when you must sell. But they’re not specific enough to tell you when to
buy after the beginning of a bubble.
To figure out if you should buy, you need to think in terms of these risk-reward
ratios. Just ask yourself: does this trade give me at least a 1 to 1 ratio with a 50% or
better chance for winning?
You can answer these questions by looking at history and price momentum. Let’s
make all this more concrete with a Bitcoin case study.
Case Study: Bitcoin With All-Time High of About $50,000
At the moment of writing, Bitcoin has an all-time high of just a little under $50,000.
Momentum indicators would tell you to sell when the price of Bitcoin drops below
the 200-day simple moving average (SMA). It’s not a great indicator but it is a clear
one.
A slightly better indicator I developed emerges from an historical review of all of

Bitcoin’s pull-backs during its bubble runs. What counts as a “pull-back” is not super
clearly defined, but using common sense, I found that there have been 37 of these
and that makes the sample set statistically significant.
While there are some exceptions, if Bitcoin drops more than 36% from an all-time
high, it is likely that the bull-run is over. If it doesn’t drop that much, then just keep
your money in. That’s how I do it at least.
So whenever you start a position in any bubble run, you just need to be aware of
your risk. Let’s say that you bought in at $46,000 and will sell if the prices drop over
36% to $31,600. In that scenario, 31.3% is your downside risk.
What’s the upside? Well, a lot of people are thinking that Bitcoin could break
$100,000. At $88,000 that would be 10x the beginning of the run and that would
represent the smallest bull run in Bitcoin’s history by a factor of 6. So let’s assume
that $88,000 is a fair target (if it goes higher, then great). Your upside target, then,
represents a 91.3% gain.
Now apply the analysis from the reward to risk section. You want a ratio greater
than 1 to 1. Right now you have a 91% to a 31% reward to risk ratio, just shy of 3 to
1 (2.935 to 1 actually).
Our estimate on the top side is based on history with a healthy margin of error. The
2017 bubble ran up more than 62x from when it first crossed the SMA 200. We’re
basing our estimate on a bubble 1/6th that size.
Let me give you a little summary of the ideas:
1. Upside: 91% with better than 50% probability based on history.

2. Downside: -31% with less than 50% probability based on history.
In fact, as long as you think Bitcoin could hit $62,000, then you still have better than
a 1 to 1 reward to risk ratio.
Concluding Thoughts
My point here is that a little bit of arithmetic will tell you whether it makes sense to
buy into a bubble if you are late. In summary form, here is how I do it.
1. I check to make sure that the macro-environment is good (the Basic
Economy Cycle indicator is at least a Yellow 3 on a scale of 1 to 5).
2. I check to make sure that the industry indicator is good, ideally a Green 5.
3. Then I do a reward-risk analysis and make sure that I’ve better than a 50%
chance of reward (in part secured by the above two steps with a little bit of
historical analysis) and that the payout is 1 to 1 or better.
If the trade meets those conditions, then I buy and stick to my sell strategy.
With that process, you should be able to trade bubbles successfully over the long
term. Unlike others, I’m not trying to sell hype. The plan here isn’t to get rich in one
trade or one year. That takes a lot of luck. I’m a reasonable trader who prefers to
keep his gambling in Las Vegas where the booze is free.
This approach helps me trade well and it’s pretty manageable.
Lesson 9
The Simplest Way to Make Money During

A Crash (2.4x Better Than HODL-ing)
Sometimes dumb is better than smart.
For example, professionals debate endlessly about the best stock pick. But what if
you just bought the cheapest stocks with the best leadership team (as can be easily
measured)?
Well, you’d get the following chart. The red line is the portfolio, the blue line is the
stock market — over the past 22 years.
This cheap + good portfolio performs in the top 5% of all major hedge funds over
the same time frame. I use this for my retirement portfolio obviously.
Let’s do another one. What if you just bought and sold stocks using the standard
momentum signals (covered in chapter 7)? What if your only twist was to rank and
review them every 3 weeks?
Then you’d get the following chart. The red line is my triple momentum strategy,
the blue the stock market over the past 22 years.
Incidentally, that does even better than cheap + good portfolio and picks different
stocks. It also beat the world’s “smartest” momentum trading hedge fund in the
world, Renaissance Technologies, through COVID. I use it in my retirement accounts
too.
The point is simple: great strategies don’t have to be complicated.
In this lesson, I’m going to review perhaps the simplest of such strategies, which
nonetheless results in a little better than 2.4x its more popular HODL-ing approach
(= just buy and hold Bitcoin).
I call it crash cost averaging.
Technically, this was one of the last planned lessons for this Guide, but I’m writing it
now because it seems timely.
Bitcoin’s wild week led to a lot of concern. I also got a lot of questions on
our Discord server about what to do (it’ll take no more than 5 min to set up).
Paid subscribers, of course, will get Weekly or Daily updates on my actual

execution. Even small refinements make for a big difference with bubbles.
Yet, everyone can benefit from this approach, which is just a twist on dollar cost
averaging informed by a statistical analysis of Bitcoin’s history.
Let’s start with the basics.
What Is Dollar Cost Averaging?
Basically, this is just the practice of making regular purchases at regular intervals,
regardless of what the market is doing.
Jack Dorsey, the founder of Twitter and Square, makes $10,000 weekly buys of
Bitcoin.
That is dollar-cost averaging in action. Over time, you get a fairly low buy-in average
and you benefit from many of the upsides.
It’s easy to improve on Dorsey’s strategy, though, just by tweaking your buys. We’ll
call this the smart dollar-cost averaging strategy.
When Bitcoin falls, it falls a lot. Historically, that range is between 82% (the most
recent) to 97% (during the early days).
Using that knowledge, it makes sense to buy in at fixed per cent declines. Rather
than choosing every week, choose something like every -3%.
To give you a sense of how impactful those returns are, let’s run a little simulation.
We’ll start with some basic assumptions.
1. First, assume that the bubble crash happens in an orderly fashion–every 16

days. Obviously, things won’t turn out that way, but the simplification gives
you a good enough picture of what the strategy will look like in real life.
2. Let’s also assume that Bitcoin falls a little over 74% this time around. I think
that’s reasonable, since Bitcoin now has institutional support, and that
means less volatility.
3. To add some pessimism, let’s also say that you bought Bitcoin at $41,000
and it did nothing but fall from there. So no gains until the bottom at all.
4. Let’s assume that the bubble continues to fall until the end of the year, and
makes a slow 3% weekly gain from there–until about 2 years from now.
That’s not quite long enough, so I’ll come back to the relevant fix in the
conclusion.
5. Finally, we’ll assume that you had $10,400 to invest and that with the
Hodling strategy you bought all at once, while with the smart dollar-cost
averaging strategy, you bought in $100 increments.
With those assumptions, here’s how that strategy would play out with Hodling
Bitcoin in blue and smart dollar-cost averaging in orange.
Bitcoin still puts in a remarkable 247% return over this period–beating basically
every major index on Wall Street.
Our smart dollar-cost averaging strategy, however, returns an even better 415% in
the same period. It even has a smaller drawdown too! So it is safer and returns
more money.
To put those terms in dollar amounts, recalling you had $10,400 to invest initially, at
the end of this period you’d have:
• HODL-ing: $25,683
• Dollar Cost Averaging: $43,128
So this is a good idea, but can we do even better? Yes.
What Is Crash Cost Averaging?
It’s a little silly not to use a deeper understanding of Bitcoin’s past history to inform
our approach. The above smart dollar cost strategy beats Jack Dorsey’s approach by
choosing 3% percent intervals rather than time intervals (Jack’s 1-week approach).
We can do even better by limiting our buys at the beginning until Bitcoin has fallen
at least 65% from its all-time high. It’s very likely to fall more than 70%, but since we
don’t know exactly how much institutional money will affect it, let’s start re-buying
more aggressively when it hits a negative 65% from Bitcoin’s all-time high.
That assumption is also more pessimistic, which I like.
Just like last time, let’s again assume that you and I have $10,400. This time,
however, we’ll put in only half the ordinary amount until Bitcoin hits that -65%
number. So, we’ll buy $50 each -3% until we get to -65% rather than $100.
After Bitcoin crashes passed -65%, we’ll double the contribution until we run out. So
we’ll buy $200 each 3% move.
Using that knowledge, and the other pessimistic assumptions from the previous
scenario, this is what you get (with the crash cost strategy in green).
For comparison:
• Bitcoin Hodling: 247%

• Dollar Cost Averaging: 415%
• Crash Cost Averaging: 593.6%
So the Crash Cost Averaging strategy is a little better than 2.4x as good as HODL-ing
and adds about 180% more to your return than even smart dollar cost averaging. It
also falls the least of all strategies making it the safest.
Concluding Thoughts
Now you could even do better if, after BTC declined 65%, you started buying coins
like $ETH or $ADA that will bounce more than $BTC. Those coins bounce more, so
your bounce up would likely be even better.
That focus on alt-coins is exactly how I ended up with a 17.7x return on $ETH this
last run.
As a caveat, I’m not going to go crazy picking alt-coins with this approach for a
simple reason: a lot of them will not survive a crypto-winter. Most of those winters
last about twice as long as the simulation–so bear this in mind.
That’s why I only like coins in the top 10 for Bitcoin declines, and I really only like
coins that have a strong future. Ultimately, I think that $ETH will surpass $BTC as
the top coin.
And as far as platforms are concerned ($ETH is a platform coin that supports other
coins), $ADA and $BNB have proven themselves the best competitors–at least right
now. So, I might buy them for this approach.
I’ll be doing lots of other stuff too, including setting up an ETH 2.0 node, staking my
coins while I’m hodling (to return more money while I wait), and buying crypto-
miners on the bounce.
Paid subscribers will get the play by play on all that.
Even if you’re not a paying subscriber, I try to give you something in each lesson
that will deliver at least 100% or better returns. This time I’ve given you an
alternative to HODL-ing that’s about 2.4x better. It’s also amazingly simple to follow.
Lesson 10
What To Do When
You’re Late to Exit a Crash?
The previous chapter explains how to get about 180% better returns during a bear
market than dollar cost averaging. It’s also about deliberately buying into a bear
market.
A related question–one that I’ve had a lot lately–turns on what to do if you’re

caught, accidentally, in a bear market downturn. What if you either missed a signal
or decided to override a signal and it turns out you were wrong?
In that case, you’re stuck down some 30% to 50% in your portfolio and you know
that cryptos (and even tech stocks) can lose a lot more. You know that 80% declines
are real and that they lose parabolically. For example, a 60% decline from BTC’s all-
time high brings you to $27,000. An 80% decline brings you to $13,500, which is
50% less than $27,000.
What do you do now?
Well, option one is to take the cut, expand your time horizon and try to manage the
signals better next time around. This might especially be something you need to do
if you have leveraged bets or borrowings on your cryptos that need to be repaid.
But if you are going to have an expanded time horizon, you might also want to
think about your portfolio strategy differently–at least through the bear market.
Let’s call it crypto maximalism.
Even in the worst of environments, where BTC goes through a massive winter and
never recovers to better than 61% of its all time high, this strategy (if combined with
crash cost averaging) can make you money.
Let’s start with the broader background.
What is Crypto Maximalism?
You’ve likely heard of Bitcoin maximalism. Jack Dorsey (CEO of Block and founder of
Twitter) is one of these guys. He thinks that Bitcoin is the only needed
cryptocurrency and everything else is a sh*tcoin.
That view is what’s behind his recent Twitter feud with the VC firm Andreessen
Horowitz (a16z).
Well, a crypto maxi is nothing like that.
The Crypto Maxi credo is pretty simple:
1. A crypto maxi believes that cryptocurrencies will have an enduring place in

our world 5 to 10 years from now.
2. They hold that we’re not going back to a world of only fiat currencies.
3. They hold that very many current forms of social life, from video and music
streaming to card and video games, will move onto the blockchain in some
form.
4. They hold, finally, that some forms of decentralized finance will continue to
persist on the blockchain, likely working alongside some traditional finance
systems.
This next point isn’t part of the Crypto Maxis credo, but most Crypto Maxis probably
also worry about the long-term future of the US dollar and its place as the global
reserve currency.
Ray Dalio (the founder of BridgeWater Associates–the world’s largest hedge fund) is
among those people.
This line of reasoning explains why Dalio owns some Bitcoin and Ethereum.
Now, you think those 4 main points are right–and especially if you also think the
point about sovereign currency devaluation is right–then you are at least a Crypto
Maxi sympathizer.
That’s the view you need to take–coupled with a longer 3 to 5 year time horizon–to
make sense of the strategy involved.
The Crypto Maxi Strategy
There are two key ideas behind the crypto maxi strategy.
The first is impatience arbitrage. They look at panic selling in a crypto crash as a
mistake. Unlike other people who want to be wealthy in a month or a quarter,
they’re happy to accumulate intergenerational wealth over a span of about 5 years.
Come on, that’s not very long. Most people, however, are too impatient for that.
The second is that they use relative analysis to get the most amount of crypto for
their trade. Typically, since data for tracking alternative cryptos is hard, they look to
maximize their base holdings of BTC and ETH.
Let’s assume that you executed this strategy in the worst environment on record
for it: the 2017-2018 crypto crash and you only used it through the 2019 “mini-bull”
run. So, you started here – December 17th, 2017 at the height.
Bitcoin eventually fell to a price of $3192 from a top of $19,648 = 83% decline. It
then eventually rose, in 2019, to $12,951. Notably, it never recovered its all time
high price–not until 2020.
Would this strategy have made you money in that environment?
I have a better algorithm for this–obviously this is why I have paying subscribers–
but let’s do something basic. TradingView has a Least Squares Moving Average that
is standard with its indicator set (the LSMA).
We need something like that to catch the volatility of a crypto decline. To dampen
false signals, we need to slow it down to a 160-day length.
Here’s what you see initially (for BTC-ETH).
You would have sold your BTC as the market crashed to hold ETH at .03773 BTC
and sold out back into BTC at .0891 for an 82.6% return on your BTC.
You then would have had a series of mostly wash trades for (slightly negative)
through most of BTC’s decline where it outperformed ETH. Then on Sept 19th, after
the BTC mini-run, you would have switched into ETH again. You would have sold on
Dec 7th for another 14% gain.
Notably, as the 2020 cycle started, you would have massively added to your BTC
gains. But our point here is that in the worst environment for this strategy, you
would have turned 10 BTC into 20.748 BTC.
In raw numbers, if you had invested at the absolute worst day, your 10 BTC would
have cost $196,480.
• Hodling BTC until Dec 7, 2019 = $75,400 = 61% loss

• Crypto Maximalism until Dec 7, 2019 = $154,404 = 21.4% loss
This does roughly 3x better than Hodling.
But, I know what you’re thinking: I want to make money, not lose less money! Let’s
turn to that now.
Concluding Thoughts
To make money in this scenario, had you been crash cost averaging, which more
than doubles the performance of dollar cost averaging, a conservative estimate is
that you would have tripled your BTC holdings.
Finally, remember that this result obtains during a period in which BTC lost 61% of
its value. We are talking about earning money through a decline by staying long
only (not shorting anything).
And, of course, with my own algos I do much better (about doubling those returns).
So, I think I’ve delivered on my promise. This is a patient way to fix your portfolio if
you are caught in a bear market unprepared.
How to move forward?
The Next Logical Steps
I hope you learned many interesting new ideas, concepts, and strategies, that will
help you achieve your financial goals.
With that guide, you have everything you need to implement those strategies on
your own.
However, there are 3 aspects you need to consider:
1. Those “do it yourself” strategies work but they are still sub-optimal. Our
algorithms are better.
2. There is an execution risk involved, meaning that you could make mistakes in
the strategies’ execution, or let your emotions take precedence.
3. Even if you never make mistakes, gathering the data and executing the
strategies takes a fair amount of your most valuable resource: TIME.
For these 3 reasons, you might be interested in joining our various data
subscriptions.
You’ll get timely updates (weeky, daily) based on our best performing
algorithms, plus a lot of other benefits.
To discover all the details and take your trading to the next level, click here.
Sebastian Purcell, PhD

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The Absolute Beginner's

General financial disclaimer: I am not providing advice on financial investments and I

Potential Conflicts of Interest: At the time of writing, I own a variety of

My purpose in this work, originally a series of newsletters for my followers, is to

• Where can I buy both stocks and cryptocurrencies?

Why Doesn’t Everyone Do This?

I think there are three main reasons:

3. Can’t Monetize Other People’s Money

Now you know:

The Mechanics of Exchanges and Trades

That’s 10% of her initial investment in transaction fees!

Unfortunately, this is not uncommon in the cryptocurrency world. Gemini and

In sequential order, we’ll cover the following.

1. Where Can I Go To Buy Stocks for Bubble Trading?

For right now, let’s get on with the lesson.

1. Where Can I Go To Buy Stocks for Bubble Trading?

That matters because you won’t receive forked coins.

To be clear, a wallet is another application you need for cryptocurrencies. It is a

3. Where Can I Buy Bitcoin and Other Cryptocurrencies,

But how do you buy and actually own those coins?

4. What’s a Bid-Ask Spread?

5. What Are Limit Orders and Why Should I Use Them?

We’ve reviewed the following three items in this chapter:

Learn the Structure of the Stock Market

Sometimes nothing is something.

What Exactly Is “The” Stock Market?

Why Do Companies Go Public?

The short answer is also the truest: to make a lot of money.

When a company becomes a publicly traded company, by contrast, it usually can

Clearly, $15,000,000 is a lot better than $3,000,000.

The Exchange Trade Up – With Stocks

They are, as a result, penny stocks.

The Exchange Trade Up – With Cryptos

So, that’s the lesson.

1. “The” stock market is actually an assembly of markets.

The Structure of Stock and Crypto Indices

Why did one perform better?

Because they don’t hold the same amount of each stock.

Here’s the performance of those funds over the pandemic.

The Standard and Poor 500 Index

This is generally considered the“stock market.” It represents the consensus view on

• Communication Services: 9.9%

How Flaws in the Index Create Opportunities

Knowing index composition helps you to determine what might be mispriced.

Here’s the DPI over the past year (peaking in May).

And now here’s the MVI over the past year.

• Indices are systematically composed aggregates of stocks or coins that tend

My subscribers get access to the signals from my proprietary algorithms, which

How to Identify the Value of Stocks

To afford everything, we eventually moved into a tiny apartment, leaned on family

Here are some of the lessons I learned from that experience.

If my $100,000 in liquidity providing on the Spectrum Platform gives me just 40% in

The Do It Yourself-er package (DIY-er) on Patreon includes weekly updates of my

• (P) Price of $168,000

I’ve learned my lesson.

Let’s look at some stocks with those ideas in mind.

Relative Valuation with Stocks

On an historical basis, most companies in the stock market have a PE ratio of

So, Apple is a better value than Tesla, right?

How will Tesla make money?

Absolute Valuation (an Outline)

Thing 1: Discount Rate

How much should I discount it?