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The Wolf Den #505 - The Pareto Principle Revisited

May 23 · Issue #505 · View online
The Wolf Den Crypto Newsletter
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In This Issue:
  1. The Pareto Principle Revisited
  2. Bitcoin Thoughts And Analysis
  3. Altcoin Charts
  4. Legacy Markets
  5. Dollar-Cost Averaging Vs. Lump-Sum Investing
  6. Bitcoin Pizza Day
  7. Legislation Proposed Will Include Bitcoin in 401(K)
  8. Doge Creator Speaks Out
  9. My Recommended Platforms And Tools
The Pareto Principle Revisited
I have discussed the Pareto Principle (also known as the 80/20 rule, the law of the vital few, and the principle of factor sparsity) many times. It feels relevant again now. It states that, for many events, roughly 80% of the effects come from 20% of the causes.
The original observation was in connection with income and wealth. Pareto noticed that 80% of Italy’s wealth was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.
This also applies to life - 20% of your clients likely waste 80% of your time, 20% of the people in your life give you 80% of your pleasure etc.
As a trader, it is likely that 20% of your trades will result in 80% of your profits - so focus on riding winners and cutting losers. Learn to implement a proper position sizing methodology to your trading, ensuring that you can withstand a string of consecutive losses without going bust.
Traders tend to fail to cut losers and then impatiently take profits too soon. It doesn’t matter if you have multiple losing trades over the past several months as long as your overall risk on each trade is less than 2%. The Pareto Principle will even out your results in due time, assuming you have developed a known expectancy on your system and employ risk management (position sizing).
Ride the winners and cut the losers and never be discouraged that more often than not, your trades will be losers or will be a wash (smaller winner or small loser). It is the small minority of trades and investments that will make you a consistent winner at the end of the year and over the course of a lifetime. Trend trading is boring and will probably give you a home run every one in ten trades with a couple of doubles and triples in between. Be patient, you will be rewarded.
It is equally important to consider the 80/20 rule in investing. Not all asset classes and sectors will give you the return you seek, and many will likely flop. The key to taking advantage of the 80/20 rule for investing is being exposed wide enough to catch the gains of best performers. I believe crypto will be that winner but haven’t placed all my eggs into that basket.
This concept is especially important at a time when we increasingly have seen friends and public figures going “all in” on cryptocurrency. It’s never a good idea to be all in on anything.
Here is more information from wikipedia:
Bitcoin Thoughts And Analysis
8 red weekly candles in a row. Depending on the exchange, we had never seen 5, 6 or 7 before.
What goes up must come down. The opposite is also true, even if only for a relief rally. Hard to guarantee that it will happen now, but with each passing week and more fear in the market, the odds of a sizable bounce rationally increase.
The last candle could be considered a bullish hammer, although the wick is not particularly long. What I do like is that the wick bottomed almost exactly at the key support, but pierced slightly, giving a second bullish SFP. There is a TON of buying interest around $28,800.
The last two candles both have wicks down, which could be a signal that the tide is turning, sellers are exhausting and buyers are interested.
I think we are bottoming, as you know, but bottoming is a process. Look at last summer. The “bottom” took months.
We have an uninspiring low volume weekend breakout. But beggars can’t be choosers, we will take what we can get.
Technically, this invalidates a bear pennant idea and we should see price rise to the top of the descending line, around $32,600.
The volume is nonexistent, so it is hard to get excited about this “breakout.”
Altcoin Charts
I do NOT share signals in this section. I share setups and charts that I am watching, in an effort to help show you how I view a chart and what criteria would be necessary for me to consider taking a trade. NEVER blindly buy something because it is listed in a newsletter or posted on twitter. You need to have a plan when you enter a trade. These are just ideas, and are almost always “if, then” scenarios. If a certain set of things happen, then I would consider a trade.
To be clear, charting Bitcoin Dominance is a bit of a meme. It is NOT a traded assets, therefore patterns and lines are not formed by actual traders and orders. Charts “work” because of humans making decisions, which is not the case here. Still, we can get an idea of where the market is at.
Take this with a grain of salt.
As you can see, Dominance is in a local ascending wedge, which should break down. That would technically be good for altcoins. Further, RSI is massively overbought with bearish divergence. Almost every time this has happened, Dominance falls off of a cliff and altcoins outperform.
I am hoping for a large altcoin bounce this week, which would likely benefit these coins across the board.
I reserve the right to be completely wrong!
Legacy Markets
Friday’s candle was a likely reversal signal, requiring a bullish candle today to confirm. Some would call the candle a hammer, although the slight wick on the top could invalidate this definition. Otherwise we would call it a high wave spinning top, or even a long legged doji, but the latter is not supposed to have as large of a body.
Regardless, we have a long wick down on significant volume with potential bullish divergence. We want to see a more definitive “elbow up” on RSI to confirm.
$137.07 is a key support, which is currently holding.
The thing that gives me pause is that APPL has not yet hit oversold on daily RSI, or weekly for that matter. This is not necessary, but generally is likely in this scenario.
I would wait for a confirmed divergence and also confirmation of that hammer.
Coinbase appears to be forming a bull pennant. Confirmation would be a break of the upper resistance. This could drop down and form a flag, which often happens when you have ascending support. Target, depending on if/where breakout happens is about a 2x.
Gaps to fill all over the place, including just below $100.
This also had major capitulation volume of off the lows and a monster reversal candle.
I have been dollar cost averaging into this since $300, so I am obviously under water. My premise is that mainstream adoption of crypto is inevitable and that Coinbase is the likely to benefit the most.
Stocks Rise After Biden Comments; Dollar Drops: Markets Wrap
Like Bitcoin, the Dow Jones just completed it’s 8th red week in a row, the first time that this has happened since… 1923. That should offer some context as to just how bad the past few months have truly been for markets.
I am an eternal optimist and tend to start to feel bullish when the gloom and doom moods strike. As you likely know, I believe the bottom is near, that valuations here are nearly reverted to the mean and that we have a number of signals that things could get better, if you dig deep enough. I am willing to continue buying, but that does NOT mean you should.
Some of the main moves in markets:
  • The Stoxx Europe 600 rose 0.5% as of 9:50 a.m. London time
  • Futures on the S&P 500 rose 0.4%
  • Futures on the Nasdaq 100 rose 0.3%
  • Futures on the Dow Jones Industrial Average rose 0.4%
  • The MSCI Asia Pacific Index rose 1.5%
  • The MSCI Emerging Markets Index rose 2%
  • The Bloomberg Dollar Spot Index fell 0.5%
  • The euro rose 0.6% to $1.0629
  • The Japanese yen rose 0.2% to 127.60 per dollar
  • The offshore yuan rose 0.4% to 6.6709 per dollar
  • The British pound rose 0.6% to $1.2554
  • The yield on 10-year Treasuries advanced three basis points to 2.81%
  • Germany’s 10-year yield advanced two basis points to 0.96%
  • Britain’s 10-year yield advanced one basis point to 1.91%
  • Brent crude rose 0.6% to $113.24 a barrel
  • Spot gold rose 0.8% to $1,860.54 an ounce
Dollar-Cost Averaging Vs. Lump-Sum Investing
Dollar Cost Averaging or Lump-sum: Which Bitcoin strategy works best regardless of price?
I found an interesting article on the data behind these two competing strategies. The standard advice for most investors is to just dollar-cost average. This strategy makes sense for many reasons: it works for all budgets, removes exogenous factors, and is historically proven. Less discussed is the alternative to this strategy, the lump sum investment. 
As its name implies, LSI can be defined as “investing a large sum of money all at once, rather than by making smaller investments over time.” A study by Vanguard that you can read HERE, actually shows that this strategy outperformed DCA from 1926 to 2015 by 2.4%. This is what the study found:
We conclude that if an investor expects such trends to continue, is satisfied with his or her target asset allocation, and is comfortable with the risk/return characteristics of each strategy, the prudent action is investing the lump sum immediately to gain exposure to the markets as soon as possible.
Of course, this isn’t practical for many investors for a number of reasons, but it does make sense based on the simple fact that markets trend up over time.
Depending on your skill, if you mix the two strategies together to do a little bit of DCA throughout the year and then do LSI during the major downswings, this could also be extremely effective. You should talk to a financial advisor before you change anything.
Bitcoin Pizza Day
Bitcoin Pizza Day, A Day Of Celebration - Bitcoin Magazine: Bitcoin News, Articles, Charts, and Guides
12 years ago, the first recorded transaction of Bitcoin as payment for a physical good took place - 10,000 Bitcoin for 2 Large Papa John’s Pizzas. Did you know that 6 months after this pizza was paid for, one random user on the internet posted this comment? “Will this eventually become the world’s first million-dollar pizza?” Well, it turns out that this incredible prediction was off by a factor of three hundred. Today’s USD equivalent of the Bitcoin spent on that pizza is $300M.
Moral of the story? Just HODL your Bitcoin.
Legislation Proposed Will Include Bitcoin in 401(K)
Bitcoin And Retirement: U.S. House Bill To Include Crypto On 401(K) Plans |
Fidelity has already made a bold move to allow investors to include Bitcoin in their 401(K)s. Now US Rep Byron Donalds is initiating a bill to the US House to allow all American to hold Bitcoin in their retirement account.
This would be a major move, even if it is a long shot to pass.
Doge Creator Speaks Out
Shibetoshi Nakamoto
the reason why people think crypto is 95% scams and garbage and most crypto people are assholes is because crypto is 95% scams and garbage and most crypto people are assholes

let’s change that. it starts with you - what you support, and how you behave.
It’s always been my belief that Doge has worked well because of its unapologetically honest ethos. What other major cryptocurrency makes fun of itself as much as Doge? Doge is, and always has been, a satirical comment on the market.
It’s no surprise that DOGE co-founder Billy Markus believes 95% of cryptos are a scam. I disagree, frankly, but do believe that 95% of them will completely disappear in the end.
Nobody knows the future of Doge or memecoins and it shouldn’t really matter. Unless you’re an expert trader, just have fun with Doge, that’s what it was designed for.
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to “Buy,” “Sell,” or “Hold” an investment.
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