Dialogue Trader Paleking: From a $30,000 small retail investor to a $50 million fund trader, how is a master trader's strategy developed?

Guest: Paleking, MVC Partner

Reporter: FC Talk

Why talk to traders? Because the most effective way to build trading strategies is to learn from those who have achieved results in the cycle.

Trading Growth Experience: Entering the Circle with EOS, Trading in Line with the Cycle, and Doing Nothing in a Counter-Cycle

FC:

When did you enter the circle?

Paleking:

I started trading cryptocurrencies for the first time in October 2017, and the first thing I traded was EOS. At that time, I turned 10,000 yuan into 100,000 yuan. I learned about EOS first, and only later did I find out about Bitcoin and Ethereum, so EOS played a role in breaking me into this circle.

FC:

How much capital did you start with, how long did it take, and what did you do to achieve today's results?

Paleking:

After EOS, I might have invested around 200,000 yuan, about 30,000 USD, to start playing in this industry. The years 2018 and 2019 were ineffective for me; I lost money throughout the entire bear market in 2018, made a little profit in the first half of 2019, and then experienced a roller coaster in the second half. I really started to make significant profits in this industry from 2020 onwards, as the pandemic led the Federal Reserve to inject liquidity, causing all assets to surge. I took advantage of this wave of liquidity to earn my initial capital, and I've continued to grow since then. One positive aspect of this process is that I didn't incur significant losses because I rarely used leverage and exited positions in a timely manner.

In 2021, I clearly felt that the big cycle had ended, so I exited my positions early (before May 19). In the second half of that year, while everyone was speculating on NFTs and games, I didn't participate. Then, throughout 2022, I was just traveling and enjoying life until the end of 2022 and the beginning of 2023 when I felt the market had dropped enough. At that time, Bitcoin was around 20,000 USD, and I returned to trading, continuing until now.

So, fundamentally, I consider myself a typical cyclical trader. One principle I adhere to is to trade during the upcycle and to go out, date, travel, and do nothing during the downcycle. This is essentially the ups and downs of my growth in the industry over the past few years.

Trading Strategy Explanation Part I: Timing the Big Cycle Through On-Chain Data

FC:

How would you summarize your entire trading strategy in one sentence?

Paleking:

My main purpose in this market is actually twofold: the first is to achieve stable profits; I'm here to make money, not to gamble. The second point is that I require myself to outperform beta. Because in the secondary market, regardless of what you are trading, there is a law—70% lose, 20% break even, and only 10% make money. Even with bull and bear markets, over a full cycle, 70% of people lose, 20% break even, and only 10% make money. Among that 10%, there might be the 80/20 rule, meaning only 20% can outperform beta. So, when you do the math, only 2% of the total cryptocurrency trading population can achieve stable profits and outperform beta. I just hope to be part of that 2%.

So my trading strategy is actually very simple: timing the big cycle. I enter at the low points of Bitcoin's cycle, and I believe that whatever I buy will rise. After exiting at the high points of Bitcoin's cycle, I don't look at anything during the long bear market. I remember an old senior in our field who said that a coin that has already dropped 99% can drop another 99%. So during the bear market cycle, I don't look at anything; I wait until it has completely bottomed out and then come back when the next big cycle is about to start.

FC:

Is there a universal method for determining the bottom of the cycle?

Paleking:

The key to determining the cycle lies in observing Bitcoin's chip structure/distribution. I believe that for any asset to rise, a market maker must first appear, absorbing the circulating supply and concentrating the chips. Once the chips are concentrated to a certain extent, the price can start to rise to market highs, after which the market maker distributes the chips, leading to a dispersed state and the end of the trend. This market maker isn't necessarily a specific person or individual; it's more of a market synergy that controls the chips of the overall market.

So, what specific indicators do I use to judge this? I mainly refer to on-chain data. The Glassnode website has several free public indicators that are particularly useful for assessing Bitcoin's big cycle.

The first is NUPL, which measures the profit/loss levels of Bitcoin holders on-chain. It presents a rainbow chart with red, orange, yellow, green, cyan, blue, and purple. Each time it turns deep red, it indicates that all Bitcoin buyers are losing money. When losses reach an extreme, people start to panic sell, and the chips will be absorbed, marking the market's low point, making it a good time to buy. When it turns blue, it means that everyone trading cryptocurrencies is making significant profits, and the profit levels are extremely high. Once the profit-taking occurs, the market is likely to crash. So, when I see the profit levels reaching an extremely high level and market sentiment becoming overly optimistic, that's the market top, and it's time to exit.

The second indicator is HODL Waves, which is used to assess the layers of Bitcoin holders. It divides users into those holding Bitcoin for less than a month (short-term users) and those holding Bitcoin for 1 to 3 years (long-term users). During Bitcoin's dramatic 70% decline, short-term users panic sold, and the data shows that their proportion sharply decreased. When it drops to a particularly low level, it indicates that all short-term users have been washed out of the market, indirectly proving that Bitcoin has bottomed. Conversely, when the proportion of long-term users sharply decreases, it indicates that "old investors" are fleeing, taking profits and selling, while short-term users are flooding in, increasing their proportion significantly. At that point, it's definitely the market top.

In this cycle, I entered Bitcoin at 18,000 and "topped out" in late April 2021, relying on the above two data indicators. I believe these indicators have been effective and will continue to be so in the future. As for macro factors, sentiment, and other miscellaneous things, I think they are meaningless when it comes to timing Bitcoin's cycles.

Trading Strategy Explanation Part II: Successfully Finding Alpha with the "Zeroing" Strategy

FC:

After timing, how do you find beta enhancement or alpha? Is it also based on indicators? What is the overall screening logic?

Paleking:

The methods for finding alpha vary across different time periods and need to be adjusted based on market conditions.

After March 12, 2020, leading up to the Bitcoin halving in May, we observed the trading patterns on major centralized exchanges like Binance, OKEx, and Huobi, and noticed that some tokens began to rise inexplicably, such as SNX. Five months later, the market dubbed this trend "DeFi." By the second half of 2020, I noticed that people started complaining about Ethereum being a "noble chain," with high gas fees, and funds began to flow into Solana, Avalanche, etc. In 2020, I primarily traded these two themes.

By the end of 2022, when we began searching for alpha again, we adopted a brand new strategy called "Zeroing." We reviewed the bull market cycle from 2020 to 2021 and found that all projects that increased by over 100 times shared common characteristics, which can be summarized into five points:

• They were born and gained momentum during the bear market, indicating that the founders were willing to start a business during tough times, showing strong determination and willingness to act.
• They had a good cost-performance ratio in terms of valuation, being cheap at the time of issuance, and further dropping in price during the long bear market, becoming extremely cheap.
• The token unlock ratio was favorable, indicating that the market was clean with little selling pressure, as large investors had been washed out, while the project team still held a significant amount of tokens and had not made profits throughout the bear market, giving them a strong incentive to pump the price.
• A solid investor background.
• Having good exchanges, indicating that once the market recovers, they would be the first to gain liquidity, as Uniswap had not yet developed at that time, so we didn't consider DEXs.

Further reflection on what it means for projects to meet all five characteristics: The founders have determination, hold chips, have the willingness to pump, and possess the ability to attract global macro liquidity. Projects that met these conditions saw a 100-fold increase during the 2020 to 2021 cycle. Therefore, at the end of 2022 and the beginning of 2023, we used this standard to evaluate the top 1,200 projects in the market, eliminating older projects that issued tokens before October 2021, and sought out entrepreneurs who dared to dive into the market after October 2021. After screening, we selected about 30 tokens to invest in and gained some alpha. By this year's Spring Festival, I felt the results were quite good.

However, I believe that the next approach to finding alpha may differ from previous ones, as the market has shifted from a comprehensive bull market to a structural bull market. The "altcoin season" will likely still exist but will exhibit two characteristics: first, sector rotation. Since industry funds are still relatively scarce, when one sector rises, others must remain flat and rotate repeatedly; second, there will be significant differentiation, meaning that most altcoins will not rise, or most will not outperform Bitcoin, with only a small portion showing alpha performance. Therefore, if we want to obtain alpha in the next three months, it will be completely different from the previous two cycles, and we need to think about how to proceed.

Trading Strategy Explanation Part III: Abandoning Fundamental Analysis and Focusing on Trend Trading of Strong Assets

FC:

Do you have a preliminary judgment on what characteristics alpha will exhibit next?

Paleking:

Actually, my team and I have discussed this question for a long time. After the past six months of market education in this structural bull market, I suddenly developed a bit of fear regarding the term alpha, even reaching the conclusion that we believe beta is the true alpha.

The market generally perceives that we are in a "non-overlapping bull market," making the pursuit of alpha more challenging. On one hand, due to high market volatility and excessive speculation on themes, the chances of successfully ambushing a particular theme from a top-down perspective have decreased; on the other hand, even when selecting specific projects from a bottom-up approach, it is difficult to gain recognition from the funding market. Therefore, I recommend adopting a more cautious strategy: invest the majority of funds (80%) in large-cap, stable-performing cryptocurrencies (like Solana, BNB, etc.) to obtain beta returns; simultaneously, use a smaller proportion (20%) of funds to seek potential alpha opportunities, engaging in some high-risk, high-reward activities. This "extreme barbell strategy" aims to maximize capital protection while capturing market uptrends as much as possible.

Going a step further, what is my perspective on alpha? I will completely abandon predictions about the fundamentals of sectors and focus solely on one thing: buying here and selling there. What does that mean? It means I want to find strong assets in the market and execute my trend trading effectively. For example, from last November to February before this year's Spring Festival, I didn't care about what was happening in the market at all, nor did I pay attention to what themes people were discussing on Twitter. I only focused on one trade: looking for new highs over nine months. I have a data monitoring bot that is responsible for pushing notifications about which coins set new nine-month highs every day. If I see a coin that has been consolidating for nine months and then breaks out with volume, and the asset looks good without any obvious pitfalls, I will jump in, and this strategy has proven to be particularly effective.

The reason is that the cryptocurrency industry is a strongly cyclical industry. Bitcoin has a four-year cycle, and altcoins have their own smaller cycles. Currently, it can be summarized that the typical cycle for an altcoin is about six months, with three months of rising and three months of falling. If a market maker wants to execute a market cap plan for an altcoin, they need to continuously accumulate chips and then pump the price. Therefore, if we find a coin that has been consolidating in a bear market, continuously accumulating chips and preparing, once it breaks through a new nine-month high, its price increase can be astonishing. This is because a major player has spent a lot of money patiently nurturing this asset over the past nine months, collecting many chips, and once they decide to pump, it proves their determination is unwavering, and you can just wait for them to pay you. For example, Solana oscillated between 10 and 30 for nine months, and after breaking out, it tripled; TON broke through around two dollars, which was a one-and-a-half-year high, and tripled; and there were also many other coins like RNDR and INJECTIVE that surged.

So, what is my simple thought for the next three months? I can't judge sectors or fundamentals, so I might as well return to my first principles and focus on whether there are market makers at work. I believe my alpha in the next wave will not come from sector themes or asset judgments but rather from the price performance of strong assets, earning money through trend following.

Trading Strategy Explanation Part IV: Correctly Identifying Which Assets Can Outperform Bitcoin is the Strongest Alpha

FC:

From 30,000 to 50 million USD, how do you think the change in scale affects your entire trading system?

Paleking:

The impact is significant. Scale is the enemy of profit; the larger the scale, the smaller the multiple of absolute returns becomes. When your scale is large, the investment targets need to have higher liquidity and larger trading volumes to meet demand, which leads to positions being concentrated in a few large assets. Additionally, an increase in scale also affects trading strategies, reducing operations like buying high and selling low, and placing more emphasis on long-term stable investments. Therefore, larger institutional investors need to be more cautious in selecting investment targets and adopt corresponding trading strategies to ensure returns.

So, to be frank, in the cryptocurrency space, there are many complex pieces of information, many so-called alphas, and many ecological projects that are meaningless to us because they are too small. A qualified fund manager who can correctly identify which asset among the top twenty by market cap can outperform Bitcoin is already the strongest alpha.

Trading Revelation: Making Subtractions to Formulate Your Own Trading Strategy

FC:

What are the key points in forming your own trading strategy? For example, who have you met, and what knowledge supports your trading strategies? If others want to replicate your success, what should they do?

Paleking:

Actually, the formation of my trading strategy has been a process of gradually making subtractions for myself. In 2018, I didn't trust cryptocurrencies and was just trying to make money; at that time, I simply categorized cryptocurrencies as emotions, trading whatever was being discussed. By 2019, the market was weak, and I began to learn to "embrace strong market makers," viewing the market from the perspective of market makers. Initially, I started with technical analysis, but later realized it was just scratching the surface because technical indicators are merely the results of market maker behavior, not the causes. So I shifted my focus to the actions and intentions of market makers: Why do they let it drop? Why do they let it rise? Why does it rise with volume? Why does it drop with volume? Why does it drop with low volume? I analyze what the market makers are doing now to judge their next intentions. This is now my main approach to trading cryptocurrencies.

The second evolution is that I have increasingly abandoned fundamental thinking. Of course, I do not deny the role of fundamentals; I just mean that for my own trading framework, I am gradually reducing the emphasis on fundamentals. I attribute the reasons for a coin's rise to just three factors: capital, chips, and sentiment. My understanding of fundamentals is that I don't care about the objective nature of the fundamentals; I only want to judge what sentiment arises from the fundamentals, whether that sentiment can coalesce into consensus, and whether capital is willing to pay for that consensus.

FC:

In the entire trading process, what usually causes you the most anxiety?

Paleking:

The most anxious state is not knowing what money I am making; it might simply be that this trade was made without following my own framework, but rather out of FOMO. People are inevitably influenced by emotions; when everyone is shouting and it seems reasonable, the fear of missing out arises. Any trade made for such reasons will likely lead to dissatisfaction and generally won't be very profitable.

FC:

Do you have a stop doing list? For example, not to FOMO?

Paleking:

I actually have only one principle: small profits and small losses regularly, occasional big profits, and absolutely no big losses. My stop-loss strategy isn't focused on individual assets; given the high volatility in our industry, I control it based on my total position, setting it within the range of small profits and small losses. I absolutely do not allow myself to fall into a big loss; if my total position drops significantly, I will directly liquidate everything with one click.

FC:

I think it's very important to maintain sensitivity to the market. What are your current methods for self-improvement? Who has influenced you significantly? What are your main sources of information?

Paleking:

Two people have influenced me greatly: one is my former boss, who helped me see the market from the perspective of a retail investor's opponent, which significantly improved my trading methods; the second person provided me with a substantial amount of capital, helping me scale my daily trading, as our fund's scale is ten times that of my own. When I have this large management scale, it naturally forces me to mature.

As for my daily information sources, to be honest, I don't actively seek information anymore. In terms of trading on centralized exchanges, I don't communicate with anyone; it's unnecessary. Because this round of the bull market only has one last wave left, I no longer focus on market hotspots and themes but concentrate on my investment targets and judge their trends based on market strength. Recently, many altcoins have been able to maintain their prices, which may be because market makers have not fully sold or have not sold completely. So, I still need to weigh risks and rewards carefully.

FC:

Can you recommend a book or a person worth following that you think would be helpful to everyone?

Paleking:

I recommend reading "The Battle of the Fashion Company." The competition between the fashion company and its stock price, as discussed by Abao and Qiaomujie, is actually very similar to the competition many cryptocurrencies face when they first get listed. I believe that if one can carefully appreciate "The Battle of the Fashion Company," trading cryptocurrencies can feel almost effortless.

FC:

Last question, is there any mechanism that keeps you sensitive to new things and alpha?

Paleking:

Three methods.

First, through organizational changes. We adopt a decentralized position system, allowing each partner to have their own positions, thereby increasing overall win rates and alpha returns.

Second, eliminate biases and follow the behavior of prices themselves. For example, Ordi has had many opportunities for building positions, but many friends I know have already made hundreds of thousands in profits on this asset. I often miss out on many opportunities because I hesitate to step in after they have made ten times the profit.

Third, clarify your position in the communication chain. Because a theme goes through several stages from inception to fermentation, mainstream consensus, and finally to the "retail investors" stage, I will assign myself a small position in the communication chain of people I know in this industry. Now, when everyone is talking about something, I don't focus on what that thing is; instead, I observe who is discussing it and at which stage of the communication chain that person is, then determine how much conviction and position I should take based on my own position in the communication chain.