Trader Rocky: Looking forward to a value-driven Web3 market

Guest this issue: Rocky, Co-founder of Blue Ocean Capital, Twitter @Rocky_Bitcoin

*All content is for sharing only and does not constitute any investment advice.

1. About Trader Rocky

The core of trading is "people"; an individual's experiences, background, personality, and financial attributes determine the formation of their trading strategy.

1. What is Rocky's trading strategy?

1. trading logic

• The secondary fund mainly focuses on subjective strategies, using a combination of Alpha and Beta models. Alpha seeks high returns, while Beta aims to anchor to BTC trends.

• Top-down ( investment research analysis framework from macro to micro ): macro analysis to determine trends and manage positions, industry analysis to select bets on sectors, project fundamental analysis to filter projects and manage investment portfolios.

2. capital scale

• The scale of funds depends on the acceptable risk of drawdown. For alternative investment markets like cryptocurrencies, which are high-risk and high-return, one should invest funds that would not affect their life even if they were entirely lost, to ensure a long-term holding period.

• The scale of funds needs to match the number of investment targets. Investments of $0-200,000 correspond to approximately 5 targets; investments of $200,000-1,000,000 correspond to approximately 10 targets; investments of $1,000,000-5,000,000 correspond to approximately 15 targets; investments of $5,000,000-20,000,000 correspond to approximately 20 targets; investments above $20,000,000 do not exceed 30 targets.

• Currently managing a fund AUM of 45 million USD.

Expected yield and capital cycle 3)

• As Zhou Jintao said, wealth in life relies on K-wave, and cycles are often the core factor determining returns. When studying expected returns, the key is to study the dollar cycle, because any risk market asset is highly correlated with the dollar cycle, and so is the capital cycle.

• Generally speaking, the dollar cycle lasts about 4.5 years, with a 2-year contraction period ( interest rate hike cycle ), and a 2.5-year expansion period ( interest rate cut cycle ), forming the dollar tide. Currently, we are at the end of the interest rate hike cycle, and the interest rate cut cycle is about to arrive.

• Rocky tweeted on May 25, 2022, regarding the cycle judgment: the first quarter of 2023 is the bottom of the Kitchin cycle, and the real explosion will occur after the end of interest rate cuts and the start of QE, lasting until the end of the third quarter of 2025, which is the end of the expansion period of the Kitchin cycle. At that time, U.S. stocks and cryptocurrencies are likely to reach their peak.

4. risk control

Risk control is mainly divided into three points: position risk control, portfolio risk control, and baseline risk control.

First, position risk control, which is position management. The position directly determines the magnitude of drawdown and the space for holding USDT. When the market declines, holding USDT allows for more operational flexibility. Position management mainly relies on understanding macroeconomic data, with different data having corresponding weight scores, and the composite score corresponding to specific position recommendations. Currently, in Rocky's active position management, the macroeconomic data with heavier weights are: the US Dollar Index, the 10-year Treasury yield, and M2 data.

Second, portfolio risk control, which refers to the management of held projects. The so-called fundraising, investment, management, and exit, "management" is a very important link, as it can determine the stage of the project, providing confidence and basis for additional investment when the project declines, or issuing early warnings and realizing profits when the project shows signs of recession. Management of held projects involves establishing a project Dashboard to track data, including user growth, daily active users, TVL, revenue, etc.

Third, basic line risk control. Rocky's fund currently adopts the "340" principle, which means 30% risk warning and 40% liquidation line. The liquidation and risk warning also have other internal data as support.

2. Why did Rocky develop such a trading strategy?

1. trading experience:

Rocky fully immersed himself in Web3 in 2016, earning his first pot of gold during the ICO era from 2016 to 2017. From 2018 to 2021, he worked in blockchain vertical media and investment incubation. In 2022, he established the Blue Ocean Capital fund, which currently has a net value of 4.5 times. The two experiences that had the greatest impact on Rocky's trading strategy were one that established his faith in the industry and another that instilled a sense of awe for the market.

High returns for first-time entrants into the market.

• Rocky initially thought cryptocurrency was a meaningless thing when he first got in touch with it, as in his perception, any asset needed a physical entity as a backing and support to be reasonably priced. However, out of trust for his friend, he handed over 200,000 to his friend to invest in the crypto market, and in 2 months, he achieved a fourfold return, which formed a stark contrast with the A-share market.

• The high returns shocked Rocky, prompting him to read various materials, such as the Bitcoin white paper, Hayek's "Denationalisation of Money," and theories leaning towards libertarian economics, which instilled a certain belief in him. He then fully devoted himself to the industry in 2016 and made his first pot of gold, earning nearly 20 million RMB during the ICO era.

The second time, a loss of 100 BTC on "3·12"

• At the end of 2019 and the beginning of 2020, Rocky believed that BTC had bottomed out from a cyclical perspective, so he opened a 2x leveraged long position on BTC around 7000, based on the judgment that "BTC cannot possibly drop more than 50% under any circumstances," considering it a very safe and winning strategy. However, the extreme market conditions on "March 12" led to a direct loss of 100 BTC, and Rocky locked himself in his room for two months for reviewing and reflecting.

• This incident led Rocky to three changes: First, he established his own "Three No Principles": do not touch leverage, do not touch contracts, do not borrow money to trade cryptocurrencies; Second, he began to build his own investment risk control system and formed a team, as separating the operations of ( research and investment of ) from craziness is the real way to reduce risk factors; Third, he transitioned from "technical analysis" to "value investing," as technical indicators can guide buying or selling timing at certain nodes, but cannot determine the return rate over a long period.

2. Professional Background:

Before entering the cryptocurrency market, Rocky worked as a researcher at Changjiang Securities Research Institute. His experience at the brokerage provided Rocky with two advantages: the first is a comprehensive macro strategy, and the second is a top-down investment research analysis framework, from macro to sectors and then to specific projects. This systematic way of thinking has consistently guided Rocky's investments in the cryptocurrency market.

3. What kind of person is Rocky's trading strategy suitable for?

Rocky's trading strategy, or rather his systematic way of thinking, is actually suitable for anyone who wishes to "make sustainable profits." Buy and Hold may not be difficult, but the challenge lies in how to judge one's capital cycle based on market cycles; finding an Alpha may not be hard, but the difficulty is in identifying promising tracks and continuously capturing Alpha.

2. Rocky's Trading Story

Knowledge validated by practice is true knowledge; reviewing and reflecting on specific trades can provide a more intuitive understanding and learning of the application of trading strategies.

1. How to capture Render $RNDR and Kaspa $KAS?

1. about Render

Because Multicoin's investment is focused on Render

In 2021, Multicoin invested $30 million in Render, which led to attention on the project and long-term tracking. There are two reasons why the investment from Multicoin is so sensitive:

• Rocky's investment strategy in 2021 was to follow Multicoin, including SOL, GRT, AR, and LPT, with very good returns.

• Multicoin is an investment driven by the paper ( research ), with each investment accompanied by a detailed report, which has greatly assisted in Rocky's investment thinking.

Through analysis of the fundamentals, it can be judged that Render is investable.

• The business model of Render: there is a positive cash flow.

In the context of the bear market at that time, Rocky considered what kind of projects could survive in a bear market. The answer is: projects that generate income can cover expenses and create a positive cash flow. At that time, there were very few projects in the market that met the criteria besides DeFi projects, and Render was one of them. Render's parent company is OTOR, which provides rendering services to film companies like Hollywood and Disney through its product Octane, and is quite profitable. At that time, OTOR's core issue was the high cost of computing power, so the founder of OTOR created the Render project to address the pain point of insufficient computing power, rather than to issue tokens for the sake of issuing tokens.

• Founder of Render: Extreme workaholic and geek

Rocky believes that the founder is very important when judging early projects, as the founder determines the path of the project's long-term development. The founder of Render has several characteristics: first, OTOR has been very successful and is not lacking in funds; second, from the founding of OTOR in 2008 to the founding of Render in 2017, he has been in charge of OTOR for a long period of 9 years, being a "doer"; finally, he works more than 50 hours a week year-round, being an extreme workaholic and geek, carrying his modified 10-kilogram laptop to demonstrate his software's development in the rendering field.

Communicate with the project team to discover additional potential and determine investment.

Rocky was an Ethereum miner in 2017, with a lot of GPU computing power. At that time, he communicated with the project about computing power cooperation. Although the cooperation did not succeed in the end, he received information that Render might release a consumer-end GPU interface. Rocky believes this is a significant demand because after Ethereum transitions to POS, there will definitely be a need for a new project to take on the computing power. Although it has not materialized yet, he saw the potential of the project and started investing around November 2022, with a cost of about 0.5 dollars, making it a major investment at that time.

2. about Kaspa

For the story about Kaspa, you can refer to Rocky's tweet.

• After Ethereum transitioned to POS, Rocky sought new projects for his mining machines, and thus instructed the research team to dig into it, which led them to find Y God’s project Kaspa.

• Y is the inventor of DAG, which is the Directed Acyclic Graph technology. Many projects that use this technology, including IOTA and Avalanche, have drawn from the content of Y's papers.

• The entire team consists of professors from the Hebrew University, making it a purely Israeli project. One characteristic of Israeli projects is that they do not give up halfway, which is the type of team that the Rocky team prefers.

• The mining model of Kaspa is 100% mining, with no pre-mining, no team reserves, and no VC. Based on the situation of the founders and the team, it was decided to try mining.

• Because the price of KAS is not high, there is a monthly loss of 30,000 yuan in electricity costs, but the mining output is good. Overall, the return is about close to 200 times the profit. I sold a portion and still hold a portion.

The common characteristic of the Render and Kaspa projects is that decisions are not based on candlestick charts or technical indicators, but rather focus on research. This reflects a shift in Rocky's investment methodology after the "3·12" event.

2. Which sectors are promising in the second half of the bull market? Why?

This question will be divided into two parts: first, when does the second half of the bull market occur? Second, which sectors are promising in the second half of the bull market?

1)Rocky believes that the latter half of the bull market is highly likely to occur after interest rate cuts.

By summarizing the patterns of the last three interest rate cuts, the impact of rate cuts on the market has been significant, especially in the US stock market, where there may be considerable pullbacks during the rate cut period. The main data on the three major interest rate cuts in the past 30 years is as follows:

The first time, during the internet bubble of 2000, the Federal Reserve's federal funds rate dropped from 6.5 percent in 2001 to 1 percent in 2003. The US stock market, from March 2000 to October 2002, saw the S&P 500 decline by 49%.

The second time, during the financial crisis from 2007 to 2008, the federal interest rate dropped from 5.25 to a low of 0.25, and the US stock market fell 57% from October 2007 to March 2009.

The third time, during the COVID-19 pandemic from 2019 to 2020, the federal interest rate dropped from 2.25 to a low of 0, and the U.S. stock market fell by about 34%.

The upcoming cycle is expected to decrease from 5.5 to 2% over a period of two and a half years.

2. Rocky is optimistic about 5 sectors, namely AI, RWA, DePIN, BTC ecosystem, and GameFi.

In this market cycle, there was a wave of altcoin cycles in October 2023 and another wave in February 2024. Through these two waves of altcoin cycles, we can actually determine the core narrative of this cycle. Projects or sectors that did not perform well in these two cycles basically do not require much attention. Below, I will explain in detail the reasons for being optimistic about five major sectors.

First, AI. Top VCs are betting on it, and the investment enthusiasm in the primary market remains high, with Q2 data approaching 1 billion dollars.

The second is RWA. The RWA track is equivalent to the DeFi track of 2020. Previously, the U.S. strategy was to nationalize dollar assets, and many countries allocated U.S. Treasury bonds. However, in recent years, the superior returns have not been good, and many countries that allocated U.S. Treasury bonds have been selling them off. As a result, the U.S. has also shifted its strategy to globalizing dollar assets for ordinary people, meaning that it aims to enable users around the world to allocate dollar assets. This strategy is part of this wave of the dollar.