Equity trading strategy for Bitcoin

10 min readJun 20, 2021

Since this is going to take up quite a bit more text than what Twitter is suitable for, I decided to write my very first Medium post on this subject.

First things first: Nobody knows where the markets are going, speculating on price is always a gamble. Do not blindly trust any random (Bender) avatar, always verify data (math) yourself and be aware of the risk you are taking.

For the uninitiated I will go over some basics first before getting to the point.

Margin

Your margin is the amount of money you have in the account.
If you send $100 to an exchange, your margin is $100.
If you send ₿ 0.05 your margin is ₿ 0.05

Initial Margin is how much your required to have available to open a position.
Maintenance Margin is how much is required to keep your position(s) open.

Different exchanges have different formulas for calculating Initial and Maintenance margin.

For our purposes Initial and Maintenance Margin are not important.

Leverage

Leverage is your position size / your equity (more on that later).

If you have a $1000 position open, and $100 margin in your account, your leverage is 10x. Simple as that. Where the $1000 is the current value of your position. This of course changes as the price of the underlying changes.

Some exchanges offer what they call “isolated margin”. Which basically means a predefined amount of your balance is used as margin for this position. If you want to open a $100 position and have set the leverage to be 20x the assigned margin would be $5.

It is my opinion that Isolated Margin is deceitful product meant to attract gamblers, who will likely take on higher risk. I find it reminiscent of a roulette wheel. If you want to risk less margin, put less money in the account or use subaccounts and have cross margin active. Cross margin tends to allow leverage up to 100x or 125x with emphasis on up to. Your leverage should never ever get anywhere near that!

Leverage is a highly complex tool which should not be used for naked positions in order to gamble with larger position sizes.

You will lose money if you start day-trading.
You will lose your money faster if you start day-trading with leverage.

Inverse swaps

An inverse swap is when you have Bitcoin as your margin. As opposed to fiat (Dollar)

If you have ₿ 0.1 in your account, no open positions and BTCUSD is currently trading at $35000 then this ₿ 0.1 will remain ₿ 0.1 but the Dollar valuation will fluctuate. Should Bitcoin lose 50% versus the Dollar then you would still have ₿ 0.1, now worth $1750

It is very important to realize the implications this has. If Bitcoin loses value against the USD so does your margin.

example:

You have ₿ 0.01 in your account, currently worth $350.
You open a $100 long position. At the time of opening this position is a 3.5x leveraged position.

If Bitcoin loses 50% of its value against the USD you’d still have ₿ 0.01 margin but that would now be worth $175.

If you close your long position now, your loss is $50 worth of Bitcoin, which is close to 30% of your margin. So you just lost 30% of your Bitcoin, and on top of that the remainder is worth 50% less than what you started with.

Dollar Cost Averaging

Dollar Cost Averaging (DCA) is a very effective method of taking emotion out of the equation. Without bias, without looking at current pricing or charts, at a predefined day of the month, at a predefined time buy for a fixed USD value.

DCA is by far the best investment strategy!

You can do this on a monthly basis, for example each first day of the month at 12 o’clock make a purchase worth $200. Or do this on a daily or even hourly interval. The key is to choose an amount you not only feel comfortable with, but also choose an amount and interval that aligns with your income. You should be able to keep this up for months without worrying about the price of the underlying asset.

Don’t worry to much about fees. A 0.1% fee may seem like quite a lot, but then again Bitcoins price fluctuates much more than 0.1% on a daily basis so worrying about fees is like speculating on price, on a 5-minute timeframe. It’s not worth your time and effort.

Equity

Now we come to the magic word: Equity.

Simply put: the equity is the total value of your account.

This means; the value of your margin plus the value of all your positions should you close them all right now.

So take the USD value of your margin and add the uPnL of your position(s).

example where the market moves in your favor

You have ₿ 1 in your account as margin
You open a $70000 position, with Bitcoin trading at $35000
If you close your position now, ignoring fees you will have made zero loss and zero profit so your equity is still ₿ 1.

Your leverage is currently 2x ( $70000 / $35000). But of course this is dynamic and will change as the price of the underlying and the value of your margin changes.

Should the USD value of Bitcoin go up 10% then your unrealized profit is $7000 and your ₿ 1 margin is worth $38500.

Your equity is now $45500. Should you close out all positions, then this is the remaining value of your account / balance. Equity includes unrealized profit and loss.

So your leverage went from 2x, down to 1.54x (70000/45500)

If you feel comfortable with having a 2x leverage and you believe prices will keep going up, this means you could add 0.46x to your position.

L(everage) = P(osition) / E(quity).
For L = 2 and E = 45500, P = 91000

So to get back to 2x leverage you’d add $21000 to your position.

As opposed to taking short term profits, thus closing or reducing your position, you’re using your unrealized profits to increase your position.

For this reason I dismiss posts on Twitter where people boast about their “good” trade by showing charts that have their entry shown as a line far away from current price. If you trade your equity your average entry will also change as you try to maintain a fixed amount of leverage. This can vastly increase your profits.

Of course the market can very well turn against you!

This is where you would apply the same logic!

example where the market moves against you

Your leverage is currently 2x ( $70000 / $35000). But of course this is dynamic and will change as the price of the underlying and the value of your margin changes.

Should the USD value of Bitcoin go down 10% then your unrealized profit is -$7000 (negative) and your ₿ 1 margin is worth $31500.

Margin + uPnL = Equity
$31500 + (-$7000) = $24500

Your equity being $24500, and your position still $70000 this means your current leverage is 2.86x (70000/24500)

If you close your entire position now, the remaining value of your account is $24500. You will have lost $10.500. You will have ₿ 0.78 left and instead of losing 10% you will have lost 22% because you had a 2x leverage, plus your margin is in Bitcoin which also lost 10% of its USD value.

But if you feel comfortable with having a 2x leverage and you believe prices will go back up, this means you would remove 0.86x off your position to bring your leverage back down to 2x

L(everage) = P(osition) / E(quity)
For L = 2 and E = 24500, P = 49000

So to get back to 2x leverage you’d remove $21000 from your position.

Keep doing this, and your equity will decrease (you are realizing losses after all) but you are also constantly minimizing your risk and maintaining a 2x leveraged position.

This works both ways! For both short and long positions!

You have to decide for yourself what you believe will happen and what timeframe and leverage you will apply.

Think Bitcoin will go from 35000 to 1000 in the next 24 months? Go short.
Think Bitcoin will be 100K in 24 months time? Go long.

Personally I believe that Bitcoin will keep going up in the long term.

Of course weekly 20% increases in value are absolutely not sustainable. Too many traders are sitting on too much unrealized profits. Which require an exponential inflow of new money. So pullbacks in price are to be expected. This is why we don’t fomo into anything. If you put all your money in at the top, you don’t have any money left to buy the bottom.

If you start thinking about daily or hourly price moves, you start day-trading. And if you start day-trading; a fool and his money are soon parted.

DCA + Equity = 💕

Putting these things together we can do something like this;

On a monthly basis purchase $200 worth of Bitcoin.

Transfer $100 to your own wallet, transfer the other $100 to a derivatives exchange.

Keep a long position open which does not exceed a 2x leverage. Preferably less. Since a 50% drop in price will liquidate your entire account if you use 2x leverage. I’d suggest keeping your position size at 25% or even 10% of your equity.

You would increase your position only if price has moved in your favor. Do not increase your position if price moves against you. Do not double down, do not buy any “dips” (you don’t know how far it will dip). You are exponentially increasing your risk if you do this. Instead consider decreasing your position if price moves against you, thus maintaining the same (low) leverage.

Of course maintaining a fixed leverage means constantly adjusting which negates any profits.

So consider a safe zone where you decrease your position only if the position size > 25% your equity and increase your position only when its size goes < 15% your equity.

You might even consider never reducing your position, only increasing it if price goes up. Say your position size is always 20% the value of your margin and you increase your position back to 20% should it fall down to 15%;

Then for every $100 you have in the account, you have a $20 long on Bitcoin as well. Your entire margin would liquidated if Bitcoin drops 80% in value.

Imagine BTC’s price drops 50% and stays there until your next monthly DCA. Then you’d have bought another $100 worth of Bitcoin for your trading account (plus $100 hodl towards your own wallet) bringing your margin from $50 back to $150 and if you apply the 20% rule you would now add another $10 to your long position to bring it back up to 20% of your margin ($30 long).

If Bitcoin then increases 20% in value, your margin is worth $180 and your $30 long has an unrealized profit of $6 so your equity is $186.

This way you have you monthly DCA, going towards your own wallet (since putting any amount on any Exchange is a counterparty risk). Plus you are stacking sats by compounding a long position.

This may not sound sexy but it is a much safer way of speculating where you still compound profits. This is meant as a long term strategy. It does not make you rich quick. But higher potential returns means a greater risk of losing everything. You win some, you lose some. Minimize your losses, maximize your profits.

Know your risk: consider all the money you have on the exchange to be at risk (your $100 monthly) and even consider your $100 in your own wallet to be at risk (loss of private keys, malware, you name it). The amount of money you put towards this each month, should be something that you can stand to lose. Even though the risk is very, very low it is still there.

My personal recommendation for a derivatives Exchange is Deribit

I’m not shilling my referral because I do not want to see any affiliate kickback for degen gambler market orders or liquidations. I suggest you use maker orders (post only limit) which are zero fee, and trade as little as possible.

Instead of using the perpetual swap, for which there is a funding rate (you may consider 0.01% on your position each 8hrs) consider opening a position on a futures product like March 2022, which do trade at a slight premium but you can roll-over to new futures expirations when they open up and maintain a longer term bullish position that way.

Slow and steady wins the race.

Do not look at price by the day or hour. This may lead to getting a false impression that you are losing out and should be trading more.
The less you trade, the more you make.

Of course I am open to any comments, suggestions, inquiries or critique you may have.

The best way to get in touch with me is through my Twitter at:
https://twitter.com/BitcoinDurp

-BitcoinDurp