4 Ways to Obtain ‘Edge’ as a Crypto Investor & Trader
Tech, order flow, technicals, and insider activity
Fact is, to produce alpha in the markets, you need an edge in some way, shape, or form.
This edge can come in many ways as markets are unstructured environments.
When one is a new investor or trader one does not understand the landscape of the ‘edge’ needed.
One has no idea what information other market participants are privy to or even exists, how to make sense of price action, momentum, and volume, nor the fundamental landscape at the time.
Here are the 4 main ways you can create an edge:
- By understanding the tech really well
- By understanding the order flow
- By understanding the technicals and charts
- By being an insider
#4 is one of the most interesting to me because this is where crypto shines and offers major advantages over equities.
But regardless of which edge you use- end of the day only one thing matters (depending on your time horizon aka investor vs intraday or swing trader, and depending on your risk).
After you buy, bigger players must be net buying after you.
After you sell, bigger players must be net selling after you.
If they are net selling after you buy, you’re in a pickle.
If they are net buying when you sell — well you misunderstood one of the 4 factors above and sold way too early, and if you’re in a short position, you’re in a pickle.
Getting deeper into each…
- Tech — This best fits a long-term investor outlook but ultimately is needed by everyone in some aspect.
Regardless of the type of market participant you are, this drives narratives and determines how assets are priced relatives to one another especially.
This is a major way, but not the only way, to value an asset. End of the day the market decides the fair value and the market is never wrong.
Because crypto has democratized access to information, all of these protocols have open access to the inner-workings of their balance sheets, supply, and any other factor you could think of — it’s all on the blockchain.
Anyone can audit this information, plus the crypto market is still a lot more inefficient than the stocks market (there are no standard valuation protocols like there are for equities so even if news does come out major impulses happen as market participants revalue assets but often this reaction may be off based on another understanding of the tech)
The challenge here is to really get deep into the tech, not just at a cursory level, you’d have to have understanding of computer science and math or be a developer — so not deeply accessible to everybody but that’s just the game we’re playing.
Still, you have an advantage over someone in tradfi who doesn’t even know the competing landscape of Layer 1 protocols or what they even are and they won’t catch up to you for months-years.
For best understanding the tech, use primary sources like the project whitepaper and institutional quality aggregation sources such as The Block’s research reports or Messari.
The nature of the tech will change over time so this requires you to have your ears to the ground but also, the scope of the tech for microcaps on DEX’s is very different than for top 50 coins.
The other challenge here is in knowing when #1 doesn’t matter at all — just because a project is technically sound and the fundamentals make it better than anything else in the current top 20 does not necessarily mean it’s going to pump.
Or — just because a coin is fundamentally terrible and has no development nor use case does not necessarily mean it’s a good short/sell at the current price.
See: Shiba inu and any other memecoin in 2021.
Sure, it may have potential with a certain time horizon.
But without the other factors below, just understanding the tech gives you no way to know whether the investment will be successful or when — ultimately the market decides if the tech is as valuable as you believe it to be.
Also keep in that “fundamentals,” doubly so in crypto, are very relative.
Given the fact that interest rates have been converging to zero over the last decade+, there is more liquidity in financial assets than ever before in modern history, the Fed’s continued QE, valuations have become a very ‘relative’ thing.
We’re in zombie market territory as a result — is Shiba Inu worth 70B USD? What’s fundamentally sound about that?
Fundamental factors such as token economics and governance procedures are included in this section — it can be an edge to intimately be familiar with the vesting and token unlock schedules of tokens.
Factors such as contribute to changes in supply/demand and therefore price. Knowing the deflationary pressures, if any, on a token can influence your long-time outlook of the investment, for example.
2. Order flow — in my opinion this is an improvement to understanding technicals and a combo of technicals + insiders — big players always leave clues on the tape/market profile.
This has quite a steep learning curve and is more suitable to futures contracts with high volume and liquidity on a shorter time horizon such as intraday trading however can also provide intel that can be used to take swing positions.
One can see when big players are accumulating for an even longer time horizon or net selling with this skill.
Essentially this skill CAN teach you how to predict direction — some of the time — with confluence of other factors and with defined risk.
The best resources for learning this will be studying auction market theory + market profile via Steidlmayer’s work.
Another resource for this is here and is one of the best guides I’ve seen, plus it’s free.
@abetrade from Twitter primarily uses this for intra-day trading and has a great blog teaching it.
This method fundamentally requires understanding market structure, risk, and you are competing with other participants, almost becoming an exercise in game theory.
It is not as suitable for a long term investor however can provide clues for theses for investing as well i.e. inflection points, entries, exits, and the positioning of other major market participants.
3. Technicals and charts — this is likely the most accessible form of edge but it’s misunderstood by retail traders and poorly used by many to the point where it can become a negative.
Big players still use technicals and market structure to define risk and for entries and exits.
You definitely want to have some technical charting skills to understand things like momentum, defining risk in your position, major market structure, when to enter a position, scaling out, and when to exit.
This is likely better for a time horizon longer than intra-day however markets are fractal end of the day so it still can workintra-day however you will lose edge due to things you cannot compete on with an algo such as execution speed, data feed access, and more.
Many newbies mistakenly think they are going to trade multi trillion $ futures markets off the 1–5 minute chart using trendlines or support and resistance and get rich with technicals.
They soon find out that unfortunately this does not work and blow their accounts.
How do you know support won’t break? Works until it doesn’t.
How do you see what is actually happening within the candles in terms of orders being executed at the bid or the ask and in what size and aggressiveness/volume?
You need order flow and an understanding of the depth of market for that, technicals is not enough.
There are no hard and fast rules with technicals — again, the market is an unstructured environment and we are here trying to impose our order and rules on it.
There are ZERO certainties with the market and technicals can make people feel like there are. There are only infinite probabilities.
The more you rely on this on a shorter time frame, the more edge you lose. Order flow will beat technicals especially intra-day.
Technicals can work to some extent with a defined system of rules and given risk being respected and a continuously +risk/reward ratio being followed but this is harder said than done.
The hard part here is executing and market makers and big players know this. Frankly if this is your only ‘edge’ — you are going to get eaten alive by their algorithms and stand no chance.
Big players will laugh you out of the room for using trendlines — they don’t work, no matter the timeframe — they can ‘seem’ to work just because other market participants also are paying attention to the same info but there is zero guarantee X will happen.
4. Being an ‘insider’ — this becomes very interesting in crypto.
Not only is the chance of becoming an ‘insider’ a lot higher here — and this can be defined by being on the team or being an extremely early adopter or investor such as a VC, or otherwise having access to information that will move the market before other participants do.
The chance of an average person becoming an insider in equities is almost zero so unless you’re an executive of a public company or a politician you have no chance.
Also, in equities, access to information re: the financial health of a company is not accessible to investors as easily and takes time to obtain and audit.
In crypto, this is much more accessible given that blockchain is an immutable public ledger and transactions are updated constantly.
As Dune Analytics says-
Getting your hands on data from the legacy financial system is hard. Data is fragmented across different organizations and business lines and formatting is not standardized. The companies that do the hard work of gathering and cleaning the data can sell it at a high price to their clients. These clients are typically analysts at investment banks, hedge funds and the like. They take that data and turn it into useful analysis sold or utilized to serve their wealthy clients. Few get access and analysis is done in private so no one other than the inner circles benefits.
In contrast, you can audit the financial health of the leading DeFi protocols right now on dune.xyz — you can see their balance sheet, their revenue, their solvency and risk, without having to worry about whether this data is fraudulent or not.
If someone takes a loan out on MakerDao, anyone in the world can verify this happened instantly and the status of said loan.
Plus, digital analytics data is real time unlike that in tradfi. Because finance is not natively digital, the use of digital products is decoupled from the economic activity (like revenue) generated from that usage.
In tradfi, data on how products and businesses are actually performing at a fundamental level is reserved for quarterly reports, a process hailing from a time when information distribution ran on paper. Something that happens in early July is published four months later in October, a third of a year later.
This is an edge but this is not the same sort of edge as being a VC who bought Avalanche at $0.50 in 2020.
VC’s share some reports and opinions publicly and can be an ok source of information given they know the landscape well however they are still incentivized to get you to buy their bags, just like everyone else.
They have a high hurdle rate and are fully ok with most of their investments failing.
End of the day, everyone has a bias, that is the game. Everyone is exit liquidity for someone else — this is what makes a market after all.
In addition, when ‘insiders’ are net buying or selling because they are privy to some information, one can also easily see this on the blockchain instantly and now there exist intelligence tools such as Nansen.ai that ascribe analytics for labeling said activity and finding trends from this.
You could also just use a block explorer and see real time transfer and trading activity, holders, and other analytics from examining the contract address.
Ultimately, if you get into a project early because of your due diligence, luck, or understanding of the tech or other insider activity, and it blows up where you become a whale holder, you are now effectively an insider.
In conclusion, you want to use all of these factors to be successful, not just one or the other.
If you master any three, you can do very well in the markets.
I believe that #4 may be the most useful ‘edge’ in crypto because ultimately, this is the most efficient way we can see whether/when big players are moving which is what actually moves price, plus the amount of realtime, open-access data this new financial infrastructure offers is a real edge if can figure out how to segment and make sense of said data and what’s worth paying attention to.
Which edge are you working on? Comment below.
