Another Perspective: Making Money with Data-Driven Trading Strategies

This issue's dialogue features Benson, the founder of CoinKarma. Benson shares in detail his trading strategy shifts across different cycles, as well as how CoinKarma's indicators guide trading in varying market conditions. Benson has always used a non-consensus approach to think about how to build his trading structure to outperform others, as essentially, contract trading is a game of how to win over the majority.

All content is for sharing only and does not constitute any investment advice.

1. About Trader Benson

1. What is a trading strategy?

• In a volatile market, Benson looks for positions with a high margin of safety based on indicators to participate in the market; at the same time, he pays attention to BTC's inflow and the exchange's CVD indicators to assess market trends.

• Benson allocates most of the positions (more than half) to quantitative strategies for coin-based appreciation, mainly focusing on holding coins; about 40% of the positions are primarily in stablecoins, used for guerrilla trading, participating in on-chain transactions or initial contract trades.

• Benson's trading strategy does not seek explosive growth, but focuses on stability. His goal is to outperform the market index, with performance year-to-date approximately between 2 to 3 times.

• Different assets have different operating methods. For assets that may become market hotspots, Benson will hold them until the market attention or bull market ends; for tokens with larger market capitalization, he will assess potential price trends through technical analysis or fundamental analysis.

2. Why does such a trading strategy form?

• Initially, Benson, like many novice traders, frequently set stop losses and suffered significant losses due to chasing highs and cutting losses. This experience made him realize that market fluctuations are often manipulated by major players, especially in the contract market, where the main players create volatility to harvest liquidity from weaker retail investors. Contract trading is a game of how to win against the majority by aligning with the direction of the main players. To this end, Benson began to think about how to use data to follow the operations of the main players.

• During the period from 2019 to 2022, Benson discovered that the funding rate has a significant impact on trading. When the contract open interest is high and the funding rate reaches extreme values, the market trend may reverse. Benson profited by operating against market sentiment during the bull market.

• However, in 2022, the Federal Reserve began to raise interest rates. Benson believes that the Federal Reserve's rates act like a stabilizing anchor, influencing the entire financial market and determining how to price risk assets. Bitcoin has never encountered such rapid interest rate hikes during its growth cycle, which affected the sensitivity of the funding rates in the crypto space, leading to the failure of Benson's original trading system. Subsequently, Benson started to study order book data and developed the CoinKarma indicator to find safer trading positions.

2. Benson's trading indicators

1. About the market

1. What data should be used to guide trading in a one-sided market and a volatile market?

• A cycle can simply be divided into a one-sided market and a volatile market:

Unilateral Market: A unilateral market characterized by a rapid rise or fall usually lasts for a short period. For example, this year, the market that rose from the end of January to around mid-March lasted for about a month. At that time, it was observed that the market price buying intensity was very strong on major exchanges with large spot trading volumes, and the net inflow of funds for a certain cryptocurrency investment product was also quite exaggerated.

Consolidation Market: After a one-sided market ends, it usually enters a range where the coin price fluctuates widely within this range. The consolidation market occupies a large part of the entire market activity. For example, in the past six months, Bitcoin has been within a wide consolidation range, with the bottom around fifty to sixty thousand and the top possibly at seventy thousand.

Unilateral market conditions are relatively rare, while oscillating market conditions are more common. When assessing the market, one can determine whether it is a unilateral or oscillating market by observing indicators such as the exchange's CVD (Cumulative Trading Volume) and the net inflow of a particular cryptocurrency investment product.

• CoinKarma is a data website developed by Benson that connects to the real-time APIs of major exchanges with substantial spot trading volumes to obtain order book data. It utilizes various algorithms to transform this data into indicators, assisting traders in assessing market conditions.

• Overall LIQ (Overall Liquidity Status) is an important indicator in CoinKarma. Its principle is to judge potential price reversal points by depicting the liquidity status of the market. Specifically, CoinKarma obtains order book data through real-time APIs from exchanges, and then compiles this data into a database to depict the current liquidity status of the market. When the price approaches the upper or lower limits determined by Overall LIQ, a market reversal is likely to occur. In a volatile market, it helps traders find positions with a higher margin of safety. For example, during the wide fluctuations of Bitcoin in the past six months, the Overall LIQ indicator has generally been able to accurately reflect local tops and local bottoms.

• CVD (Cumulative Trading Volume) is another indicator used in CoinKarma to assess market conditions. It determines whether the market is in a sideways trend or a one-sided trend by observing the strength of market orders. When there is heavy selling pressure on the order book, low CVD strength, and weak market order power, the probability of a decline is higher, indicating the market is in a sideways trend; conversely, when CVD strength is high and market order power is strong, a one-sided trend may be expected.

2. How to determine the cycle through data?

• Market peaks are typically characterized by increased attention from outside individuals in the field. For example, the peak of NFTs occurred in the first quarter of 2023 when many Web2 and Web3 projects were linked to NFTs. A trading platform's app download ranking was among the top three in North American financial apps during the last bull market, but its current ranking has not reached that level. Additionally, the page views of Bitcoin on Wikipedia can indicate whether there are signs of retail investors entering the market on a large scale.

• If Bitcoin is to break through its historical high, it must be driven by external capital forces; relying solely on internal funds is very difficult. For example, this year, Bitcoin rose sharply from the end of January to mid-March, forming a one-sided market trend, because it was observed that the market price buying strength on major exchanges with large spot trading volumes was very strong, and the net inflow of funds into a certain cryptocurrency investment product was also quite exaggerated.

2. About altcoins

1. Why is SOL considered promising?

• Technical Perspective: In the crypto market, most public chains with large market capitalizations and numerous users are EVM compatible, whereas Solana is different as it is written in Rust. This means that developers need to learn a new language from scratch to develop applications on Solana. In terms of application purity and developer skill level, Solana is clearly superior to other chains.

• The community's value is supported by core developers: Solana experienced turmoil such as the collapse of a certain exchange and the intention of a certain exchange's creditor committee to sell coins. However, during the most difficult times, it received vocal support from Ethereum's big shot Vitalik and MakerDAO founder Christensen, as well as support from the external ecosystem, demonstrating strong community cohesion and resilience against setbacks.

• From the perspective of the ability to be reborn from the ashes and the BTC pair price: Solana has been able to keep up with the market despite experiencing numerous difficulties. It is one of the few Altcoins that has not entered a long-term downward trend in the BTC trading pair since the last bull market. In terms of price trends, fundamentals, and the cyclical ability to be reborn from the ashes, Benson believes that if one were to choose an asset that might break through the previous bull market high, Solana has a relatively high chance.

3. Benson's trading experience

1. What mindset is needed for high win-rate trading?

• Benson believes that the main players clear positions by creating price fluctuations, aiming to achieve the maximum return at the minimum cost. Investors can only better understand the operation of the market and formulate appropriate trading strategies if they understand the sources of market fluctuations, the main entities creating the fluctuations, namely the market leaders, as well as the costs and potential returns associated with creating those fluctuations. After gaining a basic understanding and knowledge of the market, they can then develop their own trading strategies, which will enable them to succeed in the market.

• Establish a correct mindset, and be aware that most people in the market use technical analysis to trade. Therefore, it is necessary to have a different perspective or focus on different things. For example, when using technical analysis tools, consider the reflexivity of trading, think about what many people will do when they see the same pattern, and then make different decisions.

• The effectiveness of the indicators will change. Sometimes useful and sometimes useless indicates that the validity of this indicator is decreasing, and new certainty alpha needs to be sought to adapt to market changes.

2. What is the daily trading routine?

• First, check the overview of market liquidity in the morning, assessing the liquidity of mainstream coins and the overall market liquidity released hourly through the Telegram channel. Determine whether to take action, only entering the market when a reversal is more likely to occur. The decision to operate as net long, net short, or simply hedge the spot position is based on the certainty of the opportunity.

• Check whether the current holdings of altcoins meet expectations, and whether the reasons for holding them still exist. If expectations have been met or there are no reasons to hold, then consider selling.

3. How to avoid significant losses in trading?

• Avoid buying tokens like buying stocks: Investing in some tool-type projects that seem reasonable based on PE ratios may lead to losses when the trends change quickly in the crypto world and the hype fades. Benson believes that investment should focus more on projects that have a sense of mystery and imaginative potential but are not fully realized, rather than purely tool-type projects. It is also important to pay attention to whether the project's demand is a last long demand that won't fluctuate significantly with cycles.

• Sell in a timely manner: When a project has reached expectations or the reasons for holding are no longer valid, it should be sold in a timely manner.

• Leverage Control: In the cryptocurrency world, leverage is generally very high, but the fluctuations are significant, making it easy to be liquidated by the market makers when using high leverage.