A Trading Guide for Crypto Beginners: Protect Your Principal, Don't Add Funds During the Bull Run's Final Phase

2024.11.18

A Trading Guide for Crypto Beginners: Protect Your Principal, Don't Add Funds During the Bull Run's Final Phase

If you can effectively protect your capital, profits will eventually come.

2024.11.18 - 08:11:33

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Navigating Web3 tides with focused insights

If you can effectively protect your capital, profits will eventually come.

Author: Eugene Ng Ah Sio

Translation: TechFlow

Good morning — as Bitcoin recently breaks new all-time highs, some of you may be stepping into the world of cryptocurrency for the first time. After years navigating this space, I've gathered valuable lessons I'd like to share, so you can avoid common pitfalls while learning how to trade. If you're starting with a smaller capital (a four- to five-figure portfolio), I'll also offer suitable market strategies.

Golden Rules

If you can effectively protect your capital, profits will eventually follow.
You can succeed without using leverage.
Decide in advance how much money you intend to allocate to crypto, and never add more funds later in the market cycle.

1. Minimizing Losses Is Key to Success

The crypto market is filled with fantasies of 100x returns, often fueling extreme fear of missing out (FOMO). Many such profit screenshots are achieved using 10x to 100x leverage, which frequently leads to the permanent loss of capital. However, due to survivorship bias, you typically only see the winners, not the many who lost everything. When analyzing a trade setup, I always ask myself: "What's the maximum amount I'm willing to lose in this trade?" Based on that, I work backward to determine an appropriate position size. In nearly every case, the amount I'm willing to lose is the most important factor in my decision-making. Here’s my personal guideline:

Low conviction – Max loss = 1%
Normal conviction – Max loss = 2%
High conviction – Max loss = 5%
Very high conviction – Max loss = 10%

2. Leverage

Leverage is one of the biggest risks for market participants—and an extension of Golden Rule #1. High leverage (beyond 5x) is completely unnecessary, because our focus should be on minimizing downside volatility. Leverage amplifies two-way volatility in the market. The urge to use leverage often stems from greed—the desire to generate higher returns from existing capital. This mindset is flawed. Instead, we should prioritize executing high-reward trades with clearly defined risk. For example, going long on a 4-hour retest or buying at a historical support level can be reasonable, as the stop-loss is well-defined and close to your entry. Thus, even if the trade fails, the loss remains small.

3. Capital Outflows, Not Inflows

The only time you should enter the crypto market is the day you decide to fully commit as an investor or speculator. While there are exceptions, following this rule generally helps you avoid the second most common cause of financial ruin: adding more money as prices rise. During bull markets, the typical pattern is starting small—because early on, you lack a winning track record and haven’t yet experienced the accompanying greed and euphoria. At this stage, people usually make small bets, perhaps allocating only 1–5% of their total assets to crypto. After a few wins, confidence grows and a track record begins to form, leading you to believe you’re capable of scaling up. But what many fail to realize is that in a bull market, everyone looks smart. When you increase your exposure late in the cycle, a position that started at 3% of your portfolio might balloon to 30%, leaving you exposed when the bubble bursts. By setting a strict rule to never add more fiat, you avoid this trap. If you find yourself needing to replenish your capital, perhaps speculation wasn’t suitable for you in the first place.

Starting Today (Q4 2024)

If you're reading this as someone just getting into crypto or preparing to take it seriously, here’s my current market outlook and strategy.

Overall Framework:

In crypto, there are two primary ways to participate:

Centralized Exchange (CEX) Trading
On-chain Investing

Each requires different strategies for success. You don’t need to master both—but you should develop competence in at least one. In centralized exchange (CEX) trading, the goal is typically quick, small trades aiming for percentage gains, where tight stop-losses are essential to minimize losses. A simple and effective risk/reward trade example looks like this:

Entry price: $1.00
Target price: $1.25
Stop-loss price: $0.95
Risk/reward ratio = $0.25 / $0.05 = 5.0

How you identify these opportunities or set these levels is up to you, but the overall strategy is to use tight stops to protect downside risk. You’re not necessarily looking for a home run; but if you can consistently execute trades like the one above, I guarantee that even without leverage, achieving 3x to 10x growth in your account is entirely possible. On-chain investing typically involves small, early-stage investments with the hope of multi-bagger returns. The strategy here is to minimize loss through low valuation entry points. A solid on-chain risk/reward trade might look like this:

Entry: $2M FDV
Target: $20M FDV
Stop-loss: None
Risk/reward ratio = 10.0

As you can see, early on-chain investments often lack a clear stop-loss, but you protect yourself by managing your risk curve—keeping individual positions small while retaining enough upside to make them worthwhile. For larger accounts, I recommend targeting 1% of total supply in on-chain plays. At a $2M FDV, that means investing $20K. If you're managing a mid-sized six-figure account, such an investment is manageable without excessive risk, and if you're lucky enough to find a "meme coin" about to list on a Tier-1 exchange, the payoff can be substantial. This is the most common path I’ve seen people take to earn seven-figure profits (e.g., buying 1% of supply at $5M FDV, holding until $500M FDV, and exiting with a $5M profit).

Conclusion

Choosing your investment path depends on your personal style. I suggest small accounts start with on-chain investing, then gradually incorporate CEX trading as your portfolio grows. Eventually, on-chain may only play a minor role in your overall strategy—but this shift typically only becomes relevant with portfolios in the high seven figures or above. Remember, the two require very different risk management mindsets, so excelling in one doesn’t guarantee success in the other (in fact, sometimes the skills may conflict). Although you’re no longer among the earliest entrants, I believe this could be the easiest period for generating profits since early 2021. You’ll be facing seasoned players who have survived the PvP market over the past three years—but you hold a crucial advantage: a free, unburdened mindset untethered by past experiences. Use this to your advantage, and you may just outperform the old guard in this new cycle. Bok Bok, Pigeon

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Author

Eugene Ng Ah Sio

@0xENAS

A Trading Guide for Crypto Beginners: Protect Your Principal, Don't Add Funds During the Bull Run's Final Phase

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