When it comes to pulling more from the market than what you initially put in, you have to appreciate the immense value of having a solid strategy.
Go ahead and look at your current holdings.
Are you holding a random assortment of assets?
Or are you holding the small pieces to a much larger puzzle?
You see – If you’re like 90% of the individuals that trade the crypto currency markets then your holdings are chosen at random. The assets that you hold are incompatible with one another.
This isn’t proper market etiquette.
You have to understand that one of the greatest forces in the market is cause and effect.
Its power lingers and flows through each and every asset in such a way that creates a chain of events.
Subsequently it is these chain of events that lead to trading opportunities.
However, when you jump into assets at random you destroy your chances of getting ahead.
When you jump into random assets you ignore the fact that correlation exists in the markets.
Cryptos don’t trade in a vacuum
The Foreign Exchange market is a crucial piece on the chess board. It is from this market that digital currencies draw the majority of their liquidity.
BTC/USD is the single largest market across the entire crypto currency landscape. It represents a foreign exchange and digital currency fusion.
The significance of this is ignored by more than 90% of crypto currency traders.
The crypto market in its entirety should be looked at as exactly what it is – an off-shoot satellite of the foreign exchange market.
An expansion pack if you will.
A tool to make fiat currencies more usable in the digital age.
We see this as being the case since crypto currency gains are only made tangible once they are sold in return for fiat currency.
This link is obvious and shouldn’t be ignored.
Becoming aware of this allows you to make investment choices that are much more rewarding.
It allows you to lend time and resources toward having a true understanding of how the foreign exchange market effects crypto currencies.
But first, you must gain an understanding about the forces that effect the foreign exchange market itself.
Understanding the link between seemingly separate markets
We previously shed light on events that occurred in the European markets in 1992 which created an opportunity that was seized by speculators such as George Soros.
In short, Britain at the time were part of a joint European initiative to create stable exchange rates across the continent.
This was called the Exchange Rate Mechanism (ERM).
Member nations were required to ensure that the value of their currencies remained within a specified range.
To achieve this, member nations with strong currencies were directed to engage in devaluation, whilst at the same time being expected to prop up the weaker currencies of member nations via intense buying.
Out of the ERM members, Britain had one of the weakest economies and had been in recession since 1990.
Their currency, the Pound, was overvalued in relation to the currencies that were already signed on.
This made devaluation inevitable and gave rise to an enormously rewarding trading opportunity.
This opportunity was seized by, among others, George Soros and his partner Stanley Druckenmiller.
The situation was simple:
…the leaders of Britain at the time were intent on avoiding devaluation at all costs to prevent forcing their country into a deeper recession.
However the economy of Germany had also slipped into recession.
To curtail this, the German central bank – the Bundesbank – boosted interest rates and requested that the British did the same.
The British refused, fearing that this may worsen their economic situation.
As a result the Bundesbank began to encourage speculation against the British Pound by releasing negative comments via the media.
Even after the realignment and the cut in German interest rates, one or two currencies could come under pressure before the referendum in France. A devaluation of sterling is inevitable.President of the German Bundesbank, Helmut Schlesinger
This is the spark that led to the panic that would ultimately cause currency speculators around the world to take out enormous GBP loans, which they would then dump on the market in return for other currencies – effectively shorting the pound.
One of these safe haven currencies was the Bundesbank’s very own German Deutschemark.
In simple terms, whilst the Pound began to buckle under immense selling pressure – the Deutschemark was gaining in value due to increased buying.
All great trades are born due to effects of Inverse Correlation
When one asset rises as another falls – this is inverse correlation.
It is this situation that Stanley Druckenmiller saw as a once in a lifetime opportunity.
If you remember, because they’d had this disastrous experience with inflation back in the ’20s, they were obsessed and certain that they would not have another inflationary experience. So, the Bundesbank was raising rates like crazy. That all sounds normal except the deutsche mark and the British pound were linked. And you cannot have two currencies where one economic outlook is going one way and the other outlook is another way.Stanley Druckenmiller – Lead Portfolio Manager, Quantum Fund
First he built up a position to short the Pound by buying German Deutschemarks.
Next he bought British stocks, betting on a boost due to lower interest rates intended to stimulate the economy.
Additionally he sold German stocks due to the higher interest rates in Germany, theorising that increases in prices relative to British prices would cause money to flow out of German stocks.
And his final play was to grab hold of as many German bonds as possible because they were to be in good shape in comparison to German stocks at the time.
I said, ‘George (Soros), I’m going to sell $5.5 billion worth of British pounds tonight and buy deutsche marks. That means we’ll have 100 percent of the fund in this one trade.’ As I’m talking, he started wincing like what is wrong with this kid, and I think he’s about to blow away my thesis and he says, ‘That is the most ridiculous use of money management I ever heard. What you described is an incredible one-way bet. We should have 200 percent of our net worth in this trade, not 100 percent. Do you know how often something like this comes around? Like one or 20 years. What is wrong with you?’ We started shorting the pound that night.Stanley Druckenmiller – Lead Portfolio Manager, Quantum Fund
This was an exercise that highlights the value of understanding cross and inter market correlation.
This particular trade produced more than $1 Billion in profit.
In fact all of the historical trades that have produced excessive returns are the trades that were made based on the exploitation of inverse correlation.
So skilled was Stanley Drukenmiller that his trade took advantage of an inverse correlation that was created between two entire economies.
The small pieces of a much larger puzzle
Trading crypto currencies is only one part of the game.
There is always a bigger trade.
Just because you’re able to pull a 10X profit from a basket of crypto currencies doesn’t mean that you haven’t left money on the table.
Crypto currencies do not trade as part of a vacuum.
The crypto market is but one small piece of a much larger puzzle.