The Unshakeable Bitmex Investment Strategy: Catch The Bottom And Let It Ride

in INVESTING IN CRYPTOCURRENCIES

Disclaimer

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Yes, we ‘mex a lot these days – the current charts are a day traders wet dream, however, an educated guess makes us feel 95% on Bitmex are just losing their Bitcoin before it goes parabolic and leaves the past all-time high of 20k behind with a smile of ease. One of the main reasons, why Bitmex breaks the neck of so many noobie traders, is that they are trying to catch the bottom. Catching the bottom with a juicy 25x leverage and let it run to 50k – isn’t it that, what the most traders over there are daydreaming about? Well, we developed a strategy which could make this (almost) possible – ok, better a with 5x  leverage though, better safe than sorry. Do you want to know more about it? Yes? It is easy and you don’t even really need more than the basics of technical analysis & math.  But the big question is, if the psyche of one allows executing this strategy – flawless, patiently and without emotions like a robot trader. This strategy is far away from scalping or day trading. Much more we will use Bitmex as an investment vehicle to catch a position near the bottom and let it ride all the way up. This is an experiment we will try out solely for educational purposes, of course.

The Bitmex Strategy in a nutshell

Basically, it is a buy/hold/add strategy, which makes use of the longer timeframe support zones, to increase your position over time more and more near to the bottom. This strategy is not for folks that have even a small doubt about a recovery of the Bitcoin price. We are true believers in Bitcoin and are very confident, that we can get through this bear phase and will be highly rewarded for our patience. If you are scared, Bitcoin could go 2k, 1k, $100 – let it go, this is not for you as your psyche is not in stealth mode to hold this position for the probably needed timeframe.  So, before you start playing with this, make sure you are completely confident that Bitcoin will recover, it is just a matter of time. Of course, nobody can say this, we are no fortune tellers, but it is about our belief – and in this case, we have to make sure we have the mindset it will need. On the other hand, if Bitcoins goes down to $100, we won’t have lost much anyways, as our deposit was in Bitcoin anyways (desperate laughter).  Furthermore, we don’t go all in with our corn but use only a fraction of it. This will give us the needed ease to let the position do its job. This is actually a very relaxing strategy to abuse Bitmex as an investment vehicle:  you are permanently in a position you can stalk and enjoy, you don’t need to chase any spikes or other stressing stuff, and you can enjoy movements in both directions, as on downward moves, you increase your position and better your current position, and well, upwards – we don’t need to talk about that.

A brief overview of the strategy: We are entering at the nearest support zone with 5% of the allocated funds and ladder down, always above our liquidation price. We don’t sell, we don’t use stop/loss, we use math instead to avoid a liquidation and average our tiny asses out until we finally kissed the bottom (hopefully).

Step 1: Creating (another) Bitmex account

No, you are wrong if you think, we take two contrary positions at the same time. However, if you are trading also shorter timeframes to Bitmex, this method will bring you in trouble, as the asset will be blocked for trading, while the whole operation, which could take months. Remember, this is an investment strategy, not a day trading model. So, if we want to be able to furtherly trade the perpetual XBT/USD pair, we need to sign up for a fresh account only for this long-term trade.

Step 2: The Basic Technical Analysis Part

While most shit traders, think of themselves as the brightest candle on the birthday cake, you are not like that – we know it. Eventually, you even doubt your TA skills, even you learned already many things on your journey, but hey this is very, very basic and we believe most know about the concept of support & resistance.  Basically, we checked for support on the daily, and confirmed it on the weekly and monthly charts of XBT. Take Tradingview, you can see the Bitmex price there.  Now we draw the long-term visual support zones, to figure out where our entry zones would be:

Bitcoin Support Zones
fig.1 Bitcoin Support Zones

Step 3: The Math Part *ugh*

Now shit really hits the fan if you were playing hooky, while others had to sweat in the math class. Oh well, maybe we can help you with that. The major part of this strategy is to average into a long position, building a starting point near the bottom. Once BTC has crossed the 10k mark again, you won’t be sad if you are $100 away from the actual bottom, but smiling your way to the bank if you are just near to it somewhere, agree? If we use a leverage of 5x, this would multiply our profits approximately by 400% (considering fees and funding rates we might have to pay – this is an X-factor and unforeseeable). So let’s start building it.

As we see on fig.1 in step 2 above we have three major zones to stagger into our position and build it:

Zone 1: 6200 – 5800   (400 dollar range)
Zone 2: 5700 – 5200  (500 dollar range)
Zone 3: 4500 – 3300 (1200 dollar range)

Let’s hope we will never reach Zone 3, but conservatively thinking, we have to consider it as worst case scenario and plan with it. If this range gets broken, we are doomed – which is the major risk of this strategy – a complete loss of the investment is not likely, but possible if we go below 3300. The ranges we need to plan our entries are increasing, as you might have noticed, hence we have to allocate the matching percentages to each of them:

Zone 1: 10%
Zone 2: 20%
Zone 3: 70%

We hope that only a fraction of the allocated money will be used for the whole operation and we never will see Zone 3 – but preparation is everything in this business.

If we run this investment plan with 2 Bitcoin we would have the following allocations for each entry zone:

Leverage: 5x

Zone 1: 0.2BTC
Zone 2: 0.4 BTC
Zone 3: 0.7 BTC


The Game Plan (Excel Calculation Sheet)


Bitmex Calculation Sheet
Bitmex Calculation Sheet

We developed a Google docs sheet for you, to see where we enter and the exact allocation for each position. It is interactive and you can try it with your own numbers. Please consider this is only for demonstration purposes – we want to point out how a proper trade planning would work.  You can play with the numbers but keep in mind, that the sheet does not consider the Funding rates for example, which can add and subtract to/from your equity over time and is not foreseeable. We don’t see the funding rates as a deal breaker for the operation, though it could decrease your profits, once BTC goes parabolic.  The sheet has a bug when it comes to calculating the purchased contracts in each buying step, so you would need to adjust the numbers manually. The used BTC for each step might be inaccurate by up to two decimals and I was not able to generate the correct formula of how many contracts I get for X BTC amount. If someone can help here, it would be appreciated. I was also not able to find a formula for the liquidation price, so this has to be calculated with the Bitmex calculator and added.

But now, have fun playing with this little thing – I am glad it is done as I can’t see columns anymore now and will be happy to get all these numbers out of my head.

THE BITMEX STRATEGY CALCULATION SHEET

(Click File – “Make a copy” to edit the figures in your Google account)

Please, guys, contribute – I am not an Excel magician and I am grateful for your comments in making the sheet better.


Zone 1 Entries: 6200 – 5800


Now we calculate our laddered buys in Zone 1 starting 5% to 100% of 0.2BTC, increasing with each ladder in this zone. We will use post-only order to ensure we get the maker rebate and decrease the fees to a maximum. We calculated 0.025% fees to be subtracted on each ladder step from the available zone funds.

Allocated Funds:  0.2BTC
Liquidation price at the end of this zone: 4905
Averaged Price at the end of this zone: 5860.99

As we have 5 buys in a $400 range, we place the first 4 orders deliberately in big to small steps – each step always above the liquidation price. To know about our liquidation price, we need to calculate our average buy price, this laddered buy would result in after all trades have been activated. After planning the first two trades we can start…


Calculating the Average Price

At this step, you will need to calculate your average buying price to ensure that you are not getting liquidated. According to the Bitmex staff, this would be the formula to do so:

((quantity_1 * price_1) + (quantity_2 * price_2)) / total_quantity = entry_price

In our case this would like this:

((580 * 6198) + (1110 * 6118)) / 1690 = 6145.46


 

After this first zone, it is already visible, that we won’t get liquidated before we enter zone 2 with fresh trades, which will furtherly decrease our liquidation price. I think you get it already where this is heading to. As we can see, in Zone 1 we already got a safety zone down to 4905, making sure to stay in the game.
The biggest part is in the last trade, as it could be that Bitcoin bounces from here already.


Zone 2: 5700 – 5200


Allocated Funds:  0.4 BTC
Liquidation price at the end of this zone: 4491
Averaged Price at the end of this zone: 5365.99

We allocate the doubled share from zone 1 in this range, to reduce the liquidation range as we could have a big move downwards ahead to zone 3.
We put trade #4 a bit above the support 5200, to make sure to catch the move if it bounces from there.
Furthermore, we put the fifth trade with the lion share of the available zone 2 funds below zone 2. This was needed as the next support starts in the 4500 area, which is a far way to go and we don’t want to get kicked out going down this route.  We end our zone 2 buys with a liquidation price of 4491.


Zone 3: 4500 – 3300


Allocated Funds:  1.4 BTC
Liquidation price at the end of this zone: 3270
Averaged Price at the end of this zone: 3907.08 

If we get into this range, it gets funky – this is where we allocate the biggest part of our funds for this operation. Not only 4500 is already very deep, it is also a wide range downwards to 3300 – we have to cover a possible 1200 move. This is the reason why our entry array is split into much more steps than in zone 2 & 3. We need to cover the full range and push down our liquidation price for the case we say hello to 3300.


Risks of this Strategy – Is it really “unshakable”?


Every strategy contains a risk, so this one as well. We named it “unshakable” as we roll with the punches and go with the flow. The risks we came across are the following:

  • Bitcoin could break 3300 – in this case, our complete investment will be lost.
  • Funding rates could hurt us hard. The funding rate fees (and the interest we will enjoy) are impossible to calculate upfront. We don’t think this is a make or break factor, though it could notable decrease our profits, – and also increase it on the way down, by being long with a negative funding rate.
  • Bitcoin could settle for a very long time somewhere between the zones.
  • Bitcoin could never recover fully and a flippening might happen. You never know what happens next in crypto.
  • We might lose patience/need the funds and cancel the operation in a loss.
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2 Comments

    • Dear Gerard, thank you for the kind words – though keep in mind the excel is a bit skewed unfortunately:
      1) the amount of contracts somehow does not reflect the exect number you get on BitMEX, but is always a few contracts less (can’t find my calc error here)
      2) at the end of zone three we would not cover the deepest point of 3,3k but would be liquidated around 3849. I am currently trying to fiddle a way out.

May we have your thoughts, please?