The first thing to do to start trading in the world of cryptocurrencies is to learn about the risks.

As it is still an unregulated market, trading this asset class can carry more risks than traditional markets.

In this video, we will look at the most common risks associated with trading cryptocurrencies and try to understand if systematic trading can protect us from some of these risks.

Watching the video, you’ll learn:

-What are the most common risks associated with crypto trading (hacking, phishing, scams, etc.).
-How the collapse of FTX, one of the world's largest crypto exchanges, happened
-What would have happened if we had run a trading system on the FTX token
-How systematic trading would have helped us compared to simple Buy & Hold

Enjoy! 😎

Transcription

Introduction

Hey everyone, and welcome! One of the coaches at Unger Academy here, and due to the recent Luna and FTX cases, there is a lot of talk about the risks associated with the crypto world.

So, in this video, let's take a closer look at the most common cases and the risks that are associated with this new world.

Blockchain or Wallet Exploit

Alright, so the first risk we see is the exploit or hacking of a blockchain or online wallet.

It’s possible to witness the exploit of a wallet or a blockchain, which would then be nothing more than hacking.

And this has been happening a lot recently. For example, the Ronin case, where Ronin was hacked in March 2022.

Ronin is an online wallet built on a blockchain called Ronin as well. And a hacker managed to steal as much as $628 million, they were split into $173,600 Ethereum, to be precise, and $25.5 million USDC.

These practices are done through complex mechanisms where the hacker could get their hands on multiple validators of nodes on a blockchain and validate any type of transaction they wanted, and then obviously transfer the money or cryptocurrencies to a wallet of their own.

Phishing

Another risk or another scam, if you will, is phishing, with the "ph", so unfortunately it doesn’t deal with one of the most popular sports, which is fishing.

On the contrary, this fraudulent behavior consists of deceiving any owner of private keys, or more simply, an account with an exchange, by impersonating that exchange.

Indeed, these scammers, through well-articulated emails that look identical to the ones sent by the exchange, so, they use the same logos put in the same place, etc., they request you to send your private keys or general credentials, which are very sensitive data, and that, if transmitted, will grant free access to your account.

So, I’d recommend that if such a case happens to you, don’t fall into that trap because an exchange, I mean, I want to be very clear about that, or any wallet, or let's say a blockchain that isn’t a fraud, will never ask you for your credentials, just like your bank would never ask you to forward your Pin by email to the bank itself.

Most common scams

Other scams that we might call more common also occur through other channels, so not only phishing through email, but also through phone messages or YouTube or social media, such as, for example, Twitter, Discord, or even Telegram, where often these people pretend to be, for example, VIPs like Elon Musk or other people related to the crypto world.

And they ask you to send them a certain bitcoin amount with the promise to return twice that amount in bitcoin immediately.

In short, it seems like a no-brainer to double your Bitcoin fund instantly.

But of course, all of this can’t be true. So, I’d also recommend in these cases to be very careful not to fall into this trap and always check who is on the other side and with whom you might be trading Bitcoin, tokens, stablecoins or also fiat money, of course.

Exchange failure

Finally, we remember the FTX case, which represents the default of an exchange.

We can find ourselves as investors in the crypto world in different ways. For example, we can be simple holders of a particular token, or we can have invested in more complex projects like DeFi or other lending platforms, for example.

So, if the exchange or the platform in service, instead of keeping customer funds in, for example, segregated wallets (meaning wallets where the exchange can’t get its hands on that money)

and instead the exchange invests the money in high-risk activities, perhaps through third-party companies....

In the case of FTX, a subsidiary of FTX called Alameda was precisely the entity that, in practice, executed and used FTX's funds, which were essentially their clients’ funds.

So, this Alameda subsidiary was financed by the parent company FTX, which, in turn, invested in risky assets like cryptos or other projects that are still just as risky but no less expensive.

When Pandora's box was uncovered, these chickens came home to roost, triggering a rush of withdrawals that put FTX in default and causing the arrest of Sam Bankman-Fried, the founder of FTX, he was in the Bahamas at the time.

This is certainly not the first time an exchange or, as they would say in the traditional financial world, a broker has run off with the loot.

Unfortunately, crypto regulations are still pretty poor, but they are working on it, especially in the United States.

So, we’re saying that these types of exploit are definitely more common than for what we would call traditional brokers.

Of course, there are also various ways to scam or cheat us retail investors, such as the more traditional Ponzi schemes that we have discussed in a previous video.

So, the thing to remember here is, if you smell a rat, you better stay away and, for example, entrust your cryptocurrencies to physical wallets that have private keys that only you know about and that they are more secure than more traditional custodial methods like exchanges.

Now let’s switch to MultiCharts to see how an automated trading system that only enters long on FTT spot market, namely the FTX token,

to see if at least an automated strategy would have limited the damage the one would have had with the simple Buy and Hold of this token, which would have left us pretty much in the doldrums after a drop of more than 95%.

Strategy for FTT token

Well, here we are now on MultiCharts, where we’ve uploaded the chart of the FTTUSDT pair.

The data is from Binance, which after the collapse, delisted this pair.

And indeed, you can see that the data has stopped in November 10, 2022.

We used a 60-minute time frame and entered this very simple strategy.

Our goal now is not to recreate something after the fact, namely after the events that have already occurred.

The exchange has already defaulted, so we don’t want to go into too much detail, but we want to try to create a simple strategy that does nothing more than buy on the highest high, in this case, that means a price channel that is essentially calculated on the highs of the last 48 bars.

48 bars calculated at 60 minutes are equal to 48 hours. So, we could say that when there is a breakout in trend-following mode, the strategy enters long on the highest high of the last 48 hours, basically on the highest high of the last two days.

Because this market, before it was delisted, was open 24 hours a day, including Saturdays and Sundays.

After that, we’ll sell on virtually the opposite side of the channel, so on the lowest low, of course, calculated on the lows of the last 48 periods, so the last 48 hours again with stop orders.

Now let’s go and take a look at how this strategy would have performed.

I’ve also plotted the price channel indicator here. As you can see, it updates every 48 bars and more or less configures the highs that could be relevant for the strategy.

This is a trigger that could be described as relatively standard and that tries to follow what are the trends in the market.

The report of the strategy is this, so we see that when the market went up, this strategy followed the market movements and also managed to make some very good money.

We used a fixed size of $10,000 per trade in this case.

Obviously, to trade this market and the crypto market in general with a fixed size of $10,000 would probably require a lot more than $10,000, because it's a really very volatile market.

We see that the strategy went into drawdown at the end of 2021 when the crypto market, in general, started to settle down a little bit.

Remember that there is no stop loss in this case, but there’s an exit mode on the lower side of the channel.

Comparison with Buy and Hold

But let's look at the results of the strategy and compare them with the Buy and Hold.

You can see how abrupt the drop in FTT was, such that it wiped out or nearly wiped out all of the gains previously generated by the Buy and Hold in this market.

If we had still used an exchange like FTX to trade with this trading system, we still would have had the risk of not being able to withdrawal our money, for example, because obviously, the exchange defaulted, and as a result, the withdrawals were also blocked, as mentioned above.

So, it would still have been a risk with any strategy to operate on a market on the verge of collapse, especially on an exchange issuing those types of tokens.

But what indeed reassures us is the fact that as soon as the volatility broke out in this market, our trading system stopped working because the market just went down without touching the price channel and therefore the upper channel.

Let's try to change… let's try to use another channel.

We’ll try to put 24 hours, so we’ll make it shorter and have the strategy work even more often.

And even here, with 24 hours, fortunately, the strategy wouldn’t have worked during the collapse.

And at this point here, of course, it wouldn't be possible anymore because Binance and other exchanges have delisted this pair and also...

Well, I mean, we would have to be a little masochistic to continue after a 95% collapse for pretty well-justified reasons, so well-founded that we saw the founder of FTX in handcuffs today, that's for sure.

So, it’s clear that we wouldn’t operate at this stage after the collapse.

We would have stopped the strategy anyway, and I’d also advise you in cases like this, if it ever happens to you, which I hope it doesn't, but if it does, if you suspect even with trading systems, shut down the strategy for a few days and then realign and reactivate it later.

Well we hope that you found this video helpful. If there is anyone among you who's interested in the world of systematic trading, I suggest that you go and click on the link in the description of this video. From there, you can watch a free presentation by Andrea Unger, you can get our best-selling book by just covering the shipping costs, or even book a free call with a member of our team.

If you enjoyed the video, please leave us a Like, subscribe to our channel, and click on the notification bell to stay updated.

And with taht, we will see you soon in our next video, bye bye for now!

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