Long Cryptocurrencies

Hi, humans and some robots that will flood this website’s traffic. Are you the one that brought up Bitcoin in Thanksgiving dinner? I will keep this article brief. As I started writing, I got too excited and wrote even more than I initially intended. Writing is powerful.

About 5% of my capital is in Bitcoin ($BTCUSD), Ethereum ($ETHUSD), and Litecoin ($LTCUSD). I suggest you go long these with the amount of money you can afford to lose without pain.

Mind me with “BITCOIN IS IN A HUGE BUBBLE.” Don’t waste time valuing bitcoin as it were just another type of security. There is no clear way to value these. So why not put the money you can afford to lose? It will just continue rising for who knows how long. Or you will just lose the money and continue to live as usual. Buy and Hold Cryptocurrencies.

Cryptocurrencies are a new asset class that serves decentralized applications (which allows you to do something you do today, but without the middle-man). Like stocks serve companies. Municipal bonds serve states and cities. Etc.

How can I buy Bitcoin? The easiest way to use middle-man brokerages. The most popular one in the U.S. is Coinbase.

As bitcoin price surged, so too have the number of Coinbase accounts. In the past 12 months, the number of Coinbase users increased 167% to 13.1 million. Coinbase now has more accounts than Charles Schwab which has 10.2 million accounts.

Bitcoin Price vs. Coinbase Accounts: 2013-2017
Source: Bespoke

Just today, all three cryptocurrencies, brave people and I hold hit All-Time-Highs (ATH). ATH headlines literally every day when it comes to Bitcoin.

Humans of planet Earth have been calling Bitcoin a bubble since $2000. Yet, it keeps going up and up and up…. Crashes few times about 20-30% time to time. Within days, it will hit ATH again. Like I keep saying to a countless number of people who ask me about Bitcoin. I have no idea where Bitcoin price will be at tomorrow, next week, next month, next year, next decade. But, I’m absolutely willing to put the amount of money I can afford to lose without sadness.

From what I noticed there are two types of people calling Bitcoin a bubble;

  • Inexperienced people without knowledge of basic economics and finance. Some keep comparing “Bitcoin bubble” to Tulip Bulbs, when in fact they don’t know anything about tulips. They still might turn out to be right.
  • Those people who missed out the increase in Bitcoin’s value. They still have an opportunity to buy.

At Delivering Alpha last September (which I did not attend this time around), JPMorgan CEO Jamie Dimon called bitcoin a “fraud” that will eventually blow up. Eventually.

He also joked about his daughter buying some bitcoin, and now she thinks she’s a genius. He also called any JPMorgan trader who trades bitcoin stupid and should be fired in a second.

I love and respect Jamie Dimon. But, I have to disagree with him on bitcoin. I’m a big fan of him (in addition to all other CEOs of major financial institutions haha). All jokes aside, I do respect him, his passion, his curiosity, and his opinions.

On the same day of Jamie’s comments, I along with other Baruch College students went to Goldman Sachs headquarters for a fireside chat with GS CEO Lloyd Blankfein. One of the questions I wanted to ask him was his reaction to Dimon’s comments AKA his opinion on Bitcoin. Didn’t get that chance. But, great event! Not long afterward that day, news came out stating Goldman Sachs is exploring a new trading operation dedicated to cryptocurrencies.

The technology behind bitcoin, Blockchain, is the real winner here. How can I and you benefit from it? Find companies that are heavily investing in the blockchain.

Decentralized services have a lot of challenges compared to their centralized counterparts. For one, they are slower.

  • Visa processed over 42 billion transactions in the second quarter or around 5,500 transactions per second. Whereas Bitcoin’s Blockchain is limited to less than 10 transactions per second. To put this in perspective, Bitcoin can only handle about 5% of the transactions that Paypal processes a day.
    • If you have been following Bitcoin development, you would know there was a “fork” which gave birth to a new currency, Bitcoin Cash (Bitcoin holders got free Bitcoin Cash!!!). Bitcoin cash is capable of handling about 60 transactions per second, a significant improvement I’m not going into depth about those, but to learn more about Bitcoin forks and Bitcoin Cash, check this article, Bitcoin Cash is Bitcoin. A lot of innovation in this space.
    • Remember, Bitcoin forks gives you free cash…if you own Bitcoin. If you use third-party to buy/sell bitcoin, you might run into some issues which can be worked out with the help of other Bitcoin holders and threats.

Other challenges include the cost of transactions (which Bitcoin Cash also addresses), volatile and uncertain governance, etc.

CME Group recently announced to launch Bitcoin futures at the end of the year. It could lead to more institutional investors entering the market….and more power to bears. But don’t let that stop you from buying bitcoin. Even Dimon at the same Delivering Alpha said,

“I am not saying go short. Bitcoin could touch $100,000 before it goes down. So this is not (what you) advise somebody to do.”

It is true Bitcoin could touch $100,000 before it collapses 99.99%. Or it could touch $1,000,000 before dying.

So, take 5-10% of your money which you can afford to lose and buy bitcoin and some other digital currencies with big market capitalizations.

Warning: Be careful. Some people had their cryptocurrencies stolen. Coinbase posted useful post on how to protect your digital currencies.

People who got hacked seems to be the people that announced to the public (via Twitter, blogs, etc) they are invested in the new asset class. While back, I tweeted I’m invested. And now this blog. I’m scared!!!

Twitter account: @Khojinur30

Take some precautions.

I wrote this article right after my parents asked about Bitcoin and expressed an interest to buy it. I was shocked to hear my parents say it. So now I will interview them, get access to their finances, and decide whatever they should invest in it or not. If so, by how much? #HelpPeopleAchieveTheirFinancialGoals

Disclaimer: The views expressed and any forward-looking statements are as of the date indicated and are those of the author. Discussions of individual securities, or the markets generally, are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Khojinur Usmonov disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Q1 2017 Performance: Forex

As you may know, I published my forex performance for 2016 and since inception. From now on, I will also share my quarterly performance. March 31st marked the end of first quarter, here are my performance results for FX trading.

Forex Trading Performance – Q1 2017

For currency trading, I was up 2.15%. I know, it’s low (in % terms at least). But, allow me to explain.

Before this year, my currency trades used to be in 1,000 units (or 0.01 lots), lowest I can trade. Since I usually had about 10 positions, each of 1,000 units, the nominal amount was large enough. After depositing more money and getting a clear picture of my Forex performance, I decided to increase my trades to 2,000/3,000 units (or 0.02/0.03 lots) for each position.

Getting a clear picture of my performance – average gain/loss, drawdown, trade duration, the percentage of profitable trades, etc – helped me improve my performance significantly.

This quarter [Q1], I further minimized my drawdowns. By minimizing drawdown, I minimized my returns. And that works for me. Stable uptrending P/L with a low risk.

It is true Forex is way riskier than other assets classes due to its leverage, mostly 1:50. But, that does not mean your portfolio has to include a lot of risks.

While 2.15% return this quarter from Forex trading is low, it’s still big in nominal terms for me and I’m getting a much better understanding of my weakness/strengths as I look through the metrics.

I don’t have the key metrics (besides the returns) and charts to share with you for this quarter for one reason: FXCM was Banned from the U.S. (I’m not even surprised after what happened on January 15, 2015).

FXCM is a retail FX broker and my former broker. They were banned by CFTC for defrauding retail foreign exchange customers and engaging in false and misleading solicitations.

As a result, FXCM customers were automatically changed to a different broker, Forex.com by Gain Capital Holdings, on February 24th. Unlike FXCM, this broker did not offer an analysis of trades. In addition to that, a third-party software did not offer an analysis of trades for Gain Capital’s customers since the broker did not allow the software to be connected with it.

Good news is that I’m currently in process of changing the platform to MetaTrader, which will make it easier for me to track performance metrics. The other platform, ForexTrader made it harder for tracking key metrics.

For the next quarter’s results, you can expect to see more performance metrics for FX trading.

Live On Twitter

As you may know, I tweet out trades/investments I’m making. That’s one of many reasons you should follow me on Twitter if you haven’t already. One of many ways I measure success is through twitter followers, believe it or not.

Here are some of the tweets:

My target for annual FX return is 15%, with minimal violability (less than 4% drawdown).

Interested in investing in me? Feel free to privately message me for more details. The minimum investment is $1,000.

 

Note: Equity/Commodity portfolio performance will be posted later.

Update: “Q1 2017 Performance: Equity Investments” article is posted.

Update: “Q1 2017 Performance: Equity/Commodity Trading” article is posted.

Forex Portfolio Performance: Inception & 2016

 

WHAT A YEAR! Market sell-off. Complete reverse afterwards. Full of surprises, from Brexit to Trump (not for me since I predicted them).

During the global markets crash in August of 2015, I completely lost all the money I made that year plus some more in forex. Witnessing markets free fall – faster than Luke skydiving 25,000 feet without parachute – for the first time ever crushed my account to death. (For the record, I wasn’t trading in 2008 and had absolutely no idea what was unfolding that time).

Thinking euro will go to the parity level by the end of 2015, most of my positions were crowded in shorting EUR (The Big Short). Just when I thought euro would follow the markets, it acted as a safe-haven.

Lessons learned the hard way:

  • Always keep enough cash for emergency and/or new opportunities (could not make new trades)
  • Do not keep most things in one place (EUR short)
  • Do not let the perceptions – media, traders, experts, you name it – fool you (“Euro is not a safe-haven asset”)

Taking all these lessons, I completely changed my strategy and will continue to tweak it to adapt to the current conditions. After taking a break from trading in September (2015), I opened a new forex account.

Started off strongly, with high standard deviations, but enough for me to sit through that. High-risk/High-reward. As I continued tweaking my strategy, I reduced the swings in the P/L.

Figure 1: Forex Portfolio % Returns Since Inception (09/29/2015)

Starting in August 18 of this year (2016), my returns have been very stable, trending upwards (see Figure 1). It went from 144.49% return to 184.42% as of the last trading day in 2016. Last August, I made a significant chance to my strategy which led to stable returns trending upwards. I continue to tweak my strategy little by little until significant change is needed. Repeat.

Since inception (09/29/2015), I have returned 184.42%. In the second half of this year, I deposited more money into the account. In turn, the % returns you see in the pictures above and below, has a huge difference in nominal amounts.

Figure 2: Forex Portfolio Performance Since Inception

In 2015, I returned 117.48%. This year, I have returned 32.82%. Since the inception, percentage of profitable trades are 50.70%, with the average gain per trade 3.82 larger than the amount of average loss per trade.

Sharpe ratio is 1.13 (not good yet), with average monthly return of 11.01% and 33.79% standard deviation of monthly return. Compounded monthly rate of return is 7.22%.

I predicted Brexit and profited bigly off it. 30.77% of the profit came from pair GBP/USD. Thanks Brexit. How did I predict Brexit?

Predicting Brexit – 6 tweets
Figure 3: Top 3 FX pair P/L as a % of the total P/L

Largest loss was 5.21%, from pair AUD/USD. I don’t know what to blame except myself.

As to predicting Trump’s win, the profit was a fraction of Brexit profit, via other pairs than Mexican peso currency. The day after the election, the peso suffered its largest one-day drop since the Tequila Crisis of the 1990s. Too bad I did not have access to peso pair at the time. How did I predict Trump win? Tweet 12.

If you invested $1,000 in me at the inception, that money would have been worth $2,844.23 today.

You can still invest in me. Minimum investment is $1,000. Contact me for more details.

Thank you.

Update: “Equity/Commodity Portfolio Performance: Inception & 2016” article is posted.

The Next Big Threat: Illiquidity

Liquidity is the investor’s ability to buy and sell a security without significantly impacting its price. Lack of liquidity in a security can have its consequences. Post financial crisis regulations, such as Volcker Rule (Dodd-Frank), and Basel 3, has made it more expensive and more difficult for banks to store bonds in their inventories and facilitate trades for investors. Regulations designed to make the system more safer have depressed the trading activity.

Lack of supply is one cause for diminishing liquidity. Banks, the dealers of corporate bonds, have reduced their inventories. According to Bank for International Settlements (BIS), “Market participants have raised concerns that regulatory reforms, by raising the costs of warehousing assets, have contributed to reducing market liquidity and could be keeping banks from acting as shock absorbers during periods of market stress.”

Primary Dealer Net Positions (2006 to 2016) Source: MarketAxess
Primary Dealer Net Positions (2006 to 2016)
Source: MarketAxess

According to BIS, “US primary dealers…have continued to reduce their corporate bond inventories over the past years. Since the beginning of the year 2013, they have cut back their net positions in U.S. Treasuries by nearly 80%.

Another big cause of decreasing in liquidity is technology. A technology that has changed the structure of markets, high-frequency trading (HFT), an algorithm computer trading in seconds and in fractions of seconds, account for much larger share of the trading transactions and it leads to low liquidity. Majority of HFTs, if not all, reduces liquidity by pairing selected (self-interest), leaving out others. According to BIS, 70% of U.S. Treasury trading is done electronically, up from 60% in 2012. For both high-yield bonds (not highly liquid asset), it accounts for more than 20%. About 90% of transactions on bond futures take place electronically. I have no doubt electronic trading will continue to increase.

“Greater use of electronic trading and enhanced transparency in fixed income markets typically comes at the cost of greater price impact from large trades.”, BIS said in the report. Bonds now trade in smaller transaction sizes than they did before, “… large trades seem less suitable for trading on electronic platforms because prices move quickly against participants who enter large orders due to the transparency of the market infrastructure.” “It “discourages market-makers from accommodating large trades if they fear that they cannot unwind their positions without risking a sizeable impact on prices.”

BIS in its quarterly review report (March 2015) stated (source: FINRA’s TRACE data), the average transaction size of large trades of U.S. investment grade corporate bonds (so-called “block trades”) declined from more than $25 million in 2006 to about $15 million in 2013.

This is a sign of illiquidity since “trading large amounts of corporate bonds has become more difficult.” Trades facing constrained liquidity puts investors, especially large investors, to a disadvantage.

Capacity to buy/sell without too much influence on the market prices are deteriorating. Lack of liquidity can causes wild swings in the bond prices, which then can affect the rest of the financial markets. Today’s financial markets are so connected just like the economic domino effects.

They are connected, but let me tell you why they are so important. The U.S Treasury securities market is the largest, the most liquid, and the most active debt market in the world. They are used to finance the government, and used by the Federal Reserve in implementing its monetary policy. I repeat, in implementing its monetary policy. Having a liquid market – in which having no problem buying and selling securities without affecting the market price – is very important to the market participants and policymakers alike.

Examples of high volatility in a low liquidity:

  • Flash Crash (May 2010)

In a matter of 30 minutes, major U.S. stock indices fell 10%, only to recover most of the losses before the end of the trading day. Some blue-chip shares briefly traded at pennies. WHAT A SALE! According to a U.S. Securities and Exchange Commission (SEC) report, before 2:32 p.m., volatility was unusually high and liquidity was thinning, a mutual-fund group entered a large sell order (valued at approximately $4.1 billion) in “E-mini” futures on the S&P 500 Index. The large trade was made by an algorithm. The “algo” was programmed to take account of trading volume, with little regard, or no regard at all, to the price nor time. Since the volatility was already high during that time and volume was increasing, this sell trade was executed in just 20 minutes, instead of several hours that would be typical for such an order, 75,000 E-mini contracts (again, valued at approximately $4.1 billion).

May 6, 2010 - SPY Volume and Price Source: SEC Report
May 6, 2010 – SPY Volume and Price
Source: SEC Report
May 6, 2010 - SPY Volume and Price Source: SEC Report
May 6, 2010 – SPY Volume and Price
Source: SEC Report

According to the report, this sell pressure was initially absorbed by HFTs, buying E-mini contracts. However, minutes after the execution of the sell order, HFTs “aggressively” reduced their long positions. The increase in the volume again led the mutual-fund group “algo” to increase “the rate at which it was feeding the orders into the markets”, creating what’s known as a negative feedback loop. That’s the power of HFTs.

This was nearly 6 years ago. Today, there’s no doubt the power of the secretive section of the financial markets, HFTs, are much stronger and powerful and can destroy the markets with “one finger”.

With low liquidity in the bond market and increasing HFT transactions in it, the threat is real. Automated trades can trigger extreme price swings and the communication in these automated trades can quickly erode liquidity before you even know it, even though there is a very high volume. While liquidity in the U.S. bond market is high, it’s not high enough to battle the power of the technological progress.

Let’s not forget. Fixed-income assets such as, corporate bonds, are often traded over the counter in illiquid markets, not in more liquid exchanges, as stocks are.

It’s all about profits. Some, if not all HFTs, act the way they do, to make profit. There’s nothing wrong with that. But, the creators of the algorithms have to be ethical and responsible. It’s not likely to happen anytime soon since profits are the main goal (mine too) in the financial markets. So why should HFT “be fair” to others? I know I wouldn’t.

  • Taper Tantrum (2013 Summer)

In the summer of 2013, the former Federal Reserve chairman, Ben Bernanke, hinted an end to the Fed’s monthly purchases of long-term securities (taper off, or slow down its Quantitative Easing), which sent the financial markets, including the bond market into a tailspin.

On June 19, 2013, Ben Bernanke during a press conference said, “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” That sentence alone started the financial market roller coaster.

Yields skyrocketed. The gravity took down the value of greenback (U.S. Dollar). U.S. long-term interest rates shot up by 100 basis points (1%). Even short-term interest rate markets saw the rate-hike to come sooner than the Fed policymakers suggested. Borrowings costs increased so much, as the markets was expecting tightening of the monetary policy, it “locked up” the Fed from cutting the pace of bond buying that year.

Markets' Reaction To June 19, 2013, Ben Bernanke Press Conference Source: Federal Reserve Bank of St. Louis
Markets’ Reaction To June 19, 2013, Ben Bernanke Press Conference
Source: Federal Reserve Bank of St. Louis

This raises (or raised) whatever the market prices can handle orders that are executed in milliseconds. It points to a lack of supply (dealer inventories), A.K.A illiquidity. I feel bad for funds that have a lot of corporate-bonds in their portfolio. The struggle is real.

An open-ended funds that allow investors to exit overnight are more likely to experience a run, as market volatility increases. A run on funds will force the funds to sell illiquid assets, which can push down the prices lower and lower. Recently example of that is the Third Avenue (“investors’ money are being held hostage”).

Brace for a fire sale. Coming soon in your area.

Market makers, where are you? Come back. I need to sell the investments at a current price, before it goes much lower.

  • October 15, 2014

The financial markets experienced – as the U.S. Department of the Treasury puts it – “an unusually high level of volatility and a very rapid round-trip in prices. Although trading volumes were high and the market continued to function, liquidity conditions became significantly strained.”

On October 15, 2014, the markets went into a tailspin again. The Dow plummeted 460 points, only to recover most of the losses. The Nasdaq briefly fell into a correction territory, only to rebound sharply. The 10-year Treasury yield “experienced a 37-basis-point trading range, only to close 6 basis points below its opening level”, according the U.S. Treasury Department report.

According to Nanex, a firm that offers real-time streaming data on the markets, between 9:33 A.M and 9:45 A.M, “liquidity evaporated in Treasury futures and prices skyrocketed (causing yields to plummet). Five minutes later, prices returned to 9:33 levels.” “Treasury futures were so active, they pushed overall trade counts on the CME to a new record high.”, said the report.

“Note how liquidity just plummets.”

Liquidity in the 10 year as measured by total sizes of orders in 10 levels of depth of book. Source: Nanex
Liquidity in the 10 year as measured by total sizes of orders in 10 levels of depth of book.
Source: Nanex

Again, as I said, “Today’s financial markets are so connected just like the economic domino effects.” The mayhem in in the bond market can spread to the foreign exchange (forex) market.

October 15, 2014 - World Currencies Source: Nanex
October 15, 2014 – World Currencies
Source: Nanex

These types of occurrences are becoming common, or the “new normal”. As the Fed raises rates, the market participants will be adjusting their portfolio and/or will adjust them ahead of it (expectations), these adjustments will force another market volatility. But this time, I believe it will be much worse, as liquidity continues to dry up and technology progresses.

Recent market crashes and volatility, including the August 2015 ETF blackout, is just another example of increasing illiquidity in the markets. Hiccups in the markets will get bigger and will become common. Illiquidity is the New Normal.

Hello HFTs, how are you doing? Making $$$? Cool.

With interest rates around 0 (well, before the rate-hike in December), U.S. companies have rushed to issue debt. With the recent rate-hike by the Fed, U.S. corporate bond market will experience more volatility. Lower and diminishing liquidity will “manufacture” a volatility to a record levels that the financial markets and the economy won’t be able to cope with it.  As said, “Today’s financial markets are so connected just like the economic domino effects.”, the corporate bond market volatility will spread to the rest of the financial markets.

Oh wait, that already is happening. Reversal of monetary policy by the Fed this year, as I believe the Fed will lower back rates this year, will make things worse.

Liquidity: Peace out!