How To Position In Volatile Markets

Level 2 - Value Investor

Welcome Avatar!

We have been getting a lot of questions in our Q&As from paid subscribers about how to manage positioning (long/short, spot, etc.), what to do during “Chop”, and how we think about buying assets in the current environment.

Questions like:

• “Do you like X asset at Y price?”

• "Should I short now after this down move?”

• “When should I DCA

• “How do you think about xyz war?”

As with anything in markets, there is a ton of nuance and there is no right answer because it depends on you, your portfolio, and the time + expertise you are able to deploy into markets.

That said we will shed some light on how we manage our portfolios and you can take what works best for your personal situation.

Preamble: Trading vs. Investing

We have over 40,000 readers of DeFi Education with varying backgrounds. While our readerbase is heavily weighted in the finance/tech/crypto industries, there is still a lot broad spectrum when it comes to income, portfolios, and financial expertise.

Generally speaking most people will be best off taking a percetange of monthly income and investing in crypto assets periodically. The mix of good quality assets can change a few times a year.

Every once in a while there are risk-on periods where lots of massively asymmetric opportunities are available. Opportunities like Hyperliquid, Solana memecoin mania, Ethereum DeFi/NFT mania, etc. During risk-on periods for altcoins, being more active with a discretionary slice of your crypto stack can yield outsized gains.

For those who do elect to go the path of trading, it should be treated with the same level of seriousness as trying to build a successful startup — an all consuming endeavor with extreme uncertainty that will take you years to build up and provide no guarantee of success at the end.

Our goal at DeFi Education is to help our readers indentify major pivot points. For paid subscribers we identified the bottom in August 2024, the top in January 2025, the ETHBTC bottom.. The list goes on. We often give our thoughts on prices we’d like to position for both our investment allocation and for our trades. As a cycle progresses and valuations increase, we tend to focus more on allocating into trades and less into long-term investments.

The lesson? For most people, being overweight Bitcoin, patient during the chop, and highly selective in altcoins is the winning strategy.

All that said, let’s dive into some specifics around how to position at this stage in the cycle in a volatile, unpredictable market backdrop.

Allocating on Dips

One of the most common questions we receive is “do you expect that we will see X price again to buy the dip?”

You can think probabilistically drawing from prior cycles and current market conditions but no one knows for certain. The market is constantly adapting to everyone else’s positioning. And if you’re an investor with a long-term crypto thesis, this question shouldn’t be a driving factor holding you back from deploying more capital.

The more important principle: allocate on dips based on context. Focus on how the market is reacting to major catalysts. Things like:

• Wars

• Rate changes

• Elections

• Liquidity inflection points

What those reactions tell you about underlying demand/supply strength matter a lot more than price.

If you have a long term view that BTC will be $500K+ one day or even $200K at the top for the cycle, buying at $99k vs $90k is not particularly relevant. If you have dry powder and you’ve gotten a decent enough dip, it’s better not to miss the buy and be underallocated because you thought you could time a 10% fluctuation.

Your accuracy in timing dip buys is going to depend on how good your track record is in shorter term forecasting/trading. If you don't have a track record proven out over years (most people) you need to assume that you'll guess right as often as wrong and therefore don't try to time it.

If you're using cash flows to add some a small percent of your networth to your investments by DCAing then its not material whether you added 0.5% of portfolio at $99k or $90k. If you make $350k/year, have $1.2mm saved, and you just inherited $10 million in 2 year bonds from your risk averse uncle then your allocation strategy is going to differ.

Having written this, we realize that many people want to find out if they do have a talent for market timing, and provided it can be done quickly and cheaply enough they probably should (as the rewards for developing an actual talent here are high).

Here’s what we suggest.

Basic Strategy: Try To Improve Your DCA

A tried and true strategy is to use excess cash flows to buy assets. For those with a regular paycheck this typically means setting aside some money each month to buy a stock index - “dollar cost averaging” into the market. For example:

You have target weights in your portfolio, say 50% equities 30% crypto 20% ‘other’.

Every month you take your post tax savings and DCA in that ratio. Within your crypto sub segment maybe you buy 70% of BTC and 30% split between farming stables and buying HYPE. So far, so simple.

A drawback is that DCA doesn’t automatically buy more on dips. If you’ve been paying attention to crypto you’ll notice that the market panics a couple of times a year. Historically it has paid well to buy those “dips”.

Although market timing is difficult, in our opinion buying the most extreme panicsper year should be accessible to most investors. Simply learn to spot the few times a year where emotions (and therefore volatility) are at peak. This could be the FTX insolvency (front page news in mainstream media), a time of ‘record breaking’ crypto leverage liquidations, or economic crisis like the Trump Tariffs crash (hint: there’s no tariffs on virtual Internet money).

If you have stable cash flows and recognize a dip buying opportunity you simply allocate the next few months’ allocation immediately. Take the amount you’d expect to invest over the next 3-4 months and just click buy while the prices are crashing. How? Simply borrow a small amount against your existing holdings.

Unless you’re just starting out in investing, your monthly add is going to be a very small percentage of your portfolio, so you’re not at much risk borrowing single digits of your portfolio value as an advance against your next few months cash flow.

Then allocate the next few months income payments towards paying off the leverage.

You’re now getting some exposure to ‘market timing’ but in a low risk way (assuming stable cash flows - do not allocate six months of DCA on a dip and then get laid off the following month). Use a simple spread sheet to track how your market timing approach performed against just blind DCA buy same amount each month. Over time you’ll get some data around how good you are at timing the market. If you have a talent for this, you can gradually increase the amount of debt you take on to buy dips.

Equally if you don’t have a talent for this, you’ll get some data showing you for a relatively low cost compared to overestimating your abilities and trying to actively manage a larger percent of your portfolio.

“Buying the panic” in crypto has been an evergreen strategy and one of the simplest to execute even if you don’t have time to watch the markets. You can set price alerts, and just plug into the market when we’ve had big moves up or down, check how much money has been liquidated, plug into the news and see if you can get a pulse on the levels of fear and greed. There are some DeFi services which allow you to automate buying out liquidations, for those looking to do some work to get a larger edge.

Opposite Example: Talent For Spotting Euphoria

It’s hard to know when to sell your investments. Most people underestimate the extremes of market bubbles. There are many tales of investors who allocated early and would have earned life changing returns if only they had held their investments. We’re not advocating trying to time the tops of markets. However, it is worth experimenting to see whether you have a talent for spotting euphoria.

In this example, rather than bringing your buying forward using borrowing, you’re going to “save” your DCA into a yield bearing asset. Could be TBills for your stock portfolio, could be delta neutral / stablecoin / DeFi interest bearing strategies in crypto (covered on the paid substack). The idea is not to increase your exposure to investments when prices are high and potentially unsustainable. Instead you try to avoid DCAing during the most euphoric periods and allocate the capital back in either when emotions are flat (nobody paying attention) or when the market is crashing (if you have a talent for allocating on panics - see above section).

If you do find that you have a repeatable talent for spotting mania, then you’re going progress beyond just “pausing your DCA” and actually sell out of some of your investments (paying long term capital gains, or if you’re set up properly in a tax haven - zero. Your tax rate is an important consideration here). Again set up a simple spreadsheet to track how deferring buying when the market was overheated improved your performance. If the results are good, then perhaps sell 10-15% of your portfolio into cash each time you pause your DCA. This isn’t enough to hurt if you get sidelined for a few months but could materially increase your cost basis.

Both of these options don’t take much time, don’t carry a lot of downside risk, and give you a real track record to benchmark whether you *might* have a talent for market timing (based on either buying panic or fading euphoria - some people only do one of these well). In a few years you’ll have hard data on whether this is worth more of your attention and potentially putting some real risk into.

Summary

Many of the questions we get in Q&A for paid subscribers, different and specific though they are, can ultimately be boiled down to the questioner asking “how confident should I be that I can time the market”

There’s a few ways to find this out, but as most people do not have talent in this area it makes sense to pick one of the low risk ways which still gives valid data while not wasting valuable time. Simply put a structure in place where you vary a part of your DCA according to your views on market timing and track how you did over a few years. If you did very well then it justifies further investigation and risk, if you didn’t beat the average by a lot then you probably don’t have a talent worth developing here. (which is fine, crypto participants make more money on average being early to the right investments and holding than trying to time the market)

Long-term Positioning

Long-term positioning in spot is where the vast many of us have made our most meaningful gains. Whether that came from Bitcoin, ETH, HYPE (which our paid subscribers farmed for free a year before it became the largest airdrop in crypto history), or some altcoin, buying and holding the right asset will give you more gains with significantly less time investment (and skill) required compared to trading.

You want to differentiate from how you think about large caps (BTC/ETH) and other, more speculative coins. In other words, positioning for longer term holds should be reserved for:

1. Coins that have a long multi-year track record of survival, or

2. You have high conviction the coin will survive crypto market volatility while generating a high enough return to justify the risk you’d be undertaking

The less time you have to focus on crypto, the more you want to position into coins that fit category #1. Even if you only became a master of one asset (Bitcoin) you could perform extremely well across market cycles due to the volatility it provides.

Factors we consider in long-term positioning:

• Market context

• Prevailing newsflow and its recent market impact

  • Is the market pumping on good news or has it stopped? Is it dumping on bad news or has it stopped? These are simple heuristics anyone can use

• Narratives and remaining catalysts (hint: fewer remaining catalysts has been a driver of BTC stalling out this year)

• Magnitude and velocity of a selloff

• Price relative to key pivot points (previous cycle all time highs, current ATH, other areas with significant reactions)

• Stage of cycle (early/late)

• Seasonality

• Structural considerations (e.g. is an asset falling due to unrelated factors or is there a broken narrative, competitive displacement, regulatory kill-shot, etc.)

For long-term positioning you don’t need to catch the exact bottom. You can average down per our strategy above as long as your long-term thesis stays in tact (e.g. BTC will outperform fiat long-term) and a selloff is driven by short-term fear. Remember that most participants are short-term focused and end up with less BTC every cycle. Do the opposite. We have nothing against trading around with a smaller portion of your portfolio but don’t lose your main bag trying to “make it” trading short-term.

Here’s an example framework using BTC that can be applied to any asset where you have a longer term thesis:

Let’s say your thesis is that BTC will hit $250K in the next ~5 years. You plan to DCA $2,000 per month into BTC. You also keep 20% of your stack in cash aggressively scale into pullbacks of ~20–30%. You can either use this to sell into bounces or keep as part of your longer term exposure.

If you’d be interested in more of this style of content, become a paid subscriber today. As a subscriber-driven publication we prioritize based on reader demand as expressed in our regular Q&As.

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.

• We now have a full course on crypto that will get you up to speed (Click Here)

• Security: Our official views on how to store Crypto correctly (Click Here)