Crypto Market Wizards, Episode 3: McKenna

Crypto Market Wizards is RabbitX’s series of interviews with professional, sophisticated DeFi traders and investors. We discuss their background, strategies, psychology, risk management, and other interesting topics that helped cultivate their process and make them successful.

We do this because it’s interesting, and we want to help everyone learn to be better investors and traders. Part of what makes DeFi great is we’re all learning in public together, every day. This content is our way of contributing to the community.

Our third interview is with McKenna. A well-known DeFi trader and investor in crypto. Enjoy.

RabbitX: Thanks for joining us for our Crypto Market Wizards series. You’re well known on Twitter, why don’t you start by giving us a background on yourself.

Mckenna: I'm McKenna. I previously worked at a South Korean hedge fund called ROK Capital. My position there was pretty broad. My main focus was technical research and then applying it to markets. I'm was basically managing the liquid portion of the book as well as doing catalyst trading. Now I’m focusing on angel investing and advisory.

Before crypto, I studied Chemical Engineering at university. I was focused on climate science, renewables, and materials engineering.


RabbitX: When you were at ROK Capital, how much capital where you managing?

Mckenna: It was in the range of $20-30M AUM.


RabbitX: Tell us about your crypto backstory.

Mckenna: My crypto journey started in 2017. I invested £500 and saw it grow to £2,000 and my interest was sparked. I delved into the Bitcoin white paper and started exploring various related fields like economics, cryptography, and distributed systems.

While planning for a machine learning PhD at the Turing Institute, I was also completing a master's in computer science. My dissertation centered on Ethereum scalability, particularly the scalability trilemma. This process made me appreciate Ethereum's potential.

Deploying my first smart contract on Rinkeby and realizing it was uncensorable was a defining moment. To me, this represented immutable free speech with the power to disrupt various modern networks.


RabbitX: I didn’t know you had such a strong CS background. Do you have financial markets experience too?

Mckenna: I come from no money, and I basically used my student finance loan for my initial investments. At the time, I was around 20 years old, so finances were something that had never really interested me prior to that point. I wasn't very well-versed in financial markets before crypto.


RabbitX: You managed the fund for ROK and have been in crypto for a while now, would you describe yourself as a trader? What do you find so intriguing about markets?

Mckenna: Yeah, absolutely. Market behavior fascinates me due to its psychological aspects and risk-taking dynamics. Markets reveal human psychology and recurring patterns, illustrating how history often repeats itself. They offer a unique window into collective and individual thinking.

Markets are clear-cut: you either make money or you’re wrong. I love this binary outcome. I also enjoy the fact roughly 80% of trading follows the trend, and the remaining 20% is contrarian.

I love betting against these deviations and it brings me a lot of satisfaction when I’m proven right.


RabbitX: Do you have a difference in philosophy depending on what you’re trading? For example, is there a different approach with meme coins?

Mckenna: Definitely. I understand herd mentality, but there are times when I find it difficult to make sense of the behavior around meme coins - it's either 60 IQ or 160 IQ. I see them as lottery tickets or out-of-the-money call options. I dedicate about one percent of my portfolio to them. If profitable, they can surpass the rest of my portfolio.

I also acknowledge the wisdom of 'the trend is your friend,' and it’s not something to fight against unless there are extreme signs of euphoria or depression. Being too contrarian can be negative expected value (EV). Personally, I get more enjoyment identifying contrarian opportunities in the market and betting against them more than simply following the trend.


RabbitX: You touched on a really important point, which is psychology of the trader and how emotions have such a big impact on trading. Do you have a process for managing this?

Mckenna: Absolutely. One book I recommend is "The Hour Between Wolf and Dog," which discusses the biology of risk-taking. A memorable quote suggests you countertrade your euphoric signals, recognize your instincts and. An example is when FTX saw major negativity, and I sensed capitulation, so I increased my allocation to the market by about 80%. That ended up being the bottom.

As for a mental checklist, I often revenge trade and try to buy bottoms and sell tops, known as glory trading, and I know it's not optimal. So I focus on taking on more risk when the market structure breaks with clear validation. While I don't currently have a checklist, I used to consider factors like recent losing trades and their frequency.

A key question I ask myself is, "Do I have a plan, and is the risk adjusted to the probability of each scenario?" This is where EV comes in. Over years of chart observation, you develop intuition. Recognizing unconscious patterns in charts is sometimes unquantifiable, which can be tricky for a fund, but it often works. Once confident, don't ignore your intuition; it identifies patterns you've previously observed that have proven successful.


RabbitX: Got it, good decision-making alpha. Can you walk us through your thought process from beginning to end of how you form a trade idea to execution.

Mckenna: My bias is primarily influenced by higher time frame market structure. I look for a trending environment since markets are either trending or not. In non-trending situations, I opt for a range trading strategy, buying deviations within the range from highs to lows. When volatility increases, indicating a range is being tested and a trend is nearing its end, I see this as a sign of accumulation or distribution. This helps me identify when to enter trades based on the market structure break on higher time frame charts.

I use the Ichimoku trending indicator, which is great for spotting high time frame trends and switching between bull and bear markets. It allows me to anticipate trend changes before they happen. I also use TD Sequential to identify trend exhaustion, buying signals of extreme exhaustion often coupled with RSI deviations from the mean.

So yeah market structure greatly informs my bias. While others may flip their biases based on information, I consider that to be noise, as the market price already reflects all relevant information. I go with the flow, guided by the market structure.


RabbitX: So the chart informs where you should be positioned and news is mostly noise. Does macro analysis ever come into your trading?

Mckenna: In the last cycle, macro events like CPI prints and FOMC meetings with hikes made an impact. But recently, I've noticed that the crypto market's volatility is less tied to these events. Many focus on upcoming events like the Fed meetings, but I think it's questionable how much these events influence price action right now. Their impact used to be significant, but now it's waning.

I appreciate Soros's understanding of trend reversals. As he stated, the worse the situation, the less energy needed for a trend reversal. This was evident during the FTX scenario when a small amount of positive news reversed a dire situation. I find this concept extremely valuable and try to apply it often.


RabbitX: Soros is a legendary trader. I remember when FTX collapsed and prices dropped like 30% in a week. A lot of people calling for 13k Bitcoin. What did you see at the time that made you decide to get long?

Mckenna: I appreciate Twitter as a tool to sense market sentiment from a diverse range of participants, from fund managers to retail traders.

Sentiment and confidence significantly impact prices. In bullish periods, people grow confident; in bear markets, they feel depressed and anticipate capitulation. I consider the perspective of marginal buyers and sellers. In the FTX and Ethereum case, the price held firm after three FOMCs despite the turmoil with FTX, indicating strength and a likely upward move. The likelihood of a worse event driving the price lower seemed minimal, so I took that risk on and went long.


RabbitX: So as price moves up, you want to be reducing risk and taking some profits.

Mckenna: Definitely, cash is a position. I want to have cash ready for unexpected market events, to buy dips. I've changed my view since I began trading, when I was always fully invested, 100% risk on. That was my retail mindset. But when I was liquidated during the Covid crash, losing everything and ending up in overdraft, I realized cash is vital. Unless it's a high EV situation, I don't think increasing your position as the trend grows is ever a bad decision.


RabbitX: Some view cash as an opportunity cost. And sometimes that can create a sense of FOMO and they end up making mistakes, like buying the top or using leverage at the top. Thoughts?

Mckenna: Absolutely, cash is indeed a position. It's crucial for seizing unforeseen market dips. This was a shift in my mindset as I moved from a retail perspective of always being fully invested and 100% risk on. The Covid crash, where I faced huge losses underscored the necessity of having cash on hand.


RabbitX: So let's talk about your venture bets and how you identify new opportunities.

Mckenna: Although I'm relatively new to venture markets, my approach centers around identifying breakthrough technologies and new applications. Being a software engineer, I dig deep into technical aspects, examining code quality, and interact with teams. I look for a clear product-market fit and its problem-solving capacity.

Take NFT Perp, where I'm an advisor. I identified the challenge of high capital requirements for some NFT speculation (like BAYC or Crypto Punks), which often excludes retail. NFT perpetuals with floor prices offer a solution, tapping into sidelined capital and potentially outdoing spot trading volume. This can possibly sustain higher fees and more revenue.

Another aspect I've contemplated for quite some time is the inherent instability of crypto cycles due to speculation-driven behavior. I’m bullish web3 gaming because I believe gaming, with its focus on entertainment and socialization, can temper this volatility. I also think better gaming experiences can be gateway to improving crypto UX, which is badly needed. I look at the market's trajectory over the next five years, pinpointing what changes are needed for genuine product-market fit.


RabbitX: Tell us more about some significant losses you’ve had

Mckenna: There are two instances that come to mind. During the Covid crash, I lost a derivative account due to a mishap while I was drunk; I inadvertently cancelled a stop loss order and got liquidated. As for big losses, I've mostly avoided them by using stop losses. There was also a project I got rugged on called S Dog that resulted in a $40,000 loss. But generally I've managed keep my losses below 10% of my portfolio.


RabbitX: Where does your conviction come from?

Mckenna: I might be down 20-30% due to unfavorable circumstances, but my conviction in the catalyst and risk management keeps me in the game. I hold positions for their potential catalysts and, despite short-term losses, I focus on the long-term prospects. I’m willing to stomach the volatility associated with that. Conviction matters.


RabbitX: Besides stop losses, what other risk management methods do you use?

Mckenna: My risk allocation depends on the expected value of a trade. I avoid allocating over 50% of my portfolio to a single position. Sometimes high-conviction positions grow to dominate my portfolio, and then I trim them. Staying delta neutral and having cash on hand are strategies I also employ, depending on opportunities I see.


RabbitX: Do you hedge your positions?

Mckenna: I don’t hedge too often, but I do do it. Not all of my support positions have perpetuals that I can hedge with. Excessive hedging means you don’t have that much conviction. If you're hedging too much, why buy the asset?

A lot of my friends really want perps to hedge. If an asset has perps listed I think the ability to hedge creates a catalyst for the upside. One of the things you see, a lot of the VCs with locked coins want to hedge that position so they go delta neutral and actually results in a squeeze and it propels the assets further. I see perps listings as potential catalysts for assets.


RabbitX: Could you delve into your approach to setting stop losses? Many traders struggle with this. Any guiding principles?

Mckenna: Sure. I avoid setting stop losses in areas prone to liquidation. Placing stops just below resistance or support can be risky as whales can trigger liquidations in those zones. I prefer to avoid resting liquidity areas on spot or derivatives. I also consider positions of other traders through tools like Hyblock Capital to avoid liquidation-prone areas.


RabbitX: Any recent trades or investments you're proud of?

Mckenna: Absolutely. I played a recent BTC long well, from 20,500 to above 25k. I also entered an AI coin early, ImgnAI, riding the surge of AI coins. Image generation's cultural significance drew my attention. I also successfully played the merge trade, buying ETH around 900 and selling near 1800. These strategies followed principles we discussed earlier.


RabbitX: Could you share more about the setup for The Merge trade?

Mckenna: At the time, ETH had a prolonged downtrend with historical significance. Amid negative sentiment and impending merge news, I saw a setup. I bought around 900, I observed a consolidation period, followed by a breakout past 1200. The Merge's upcoming one-month timeline and bearish sentiment aligned for a mean reversion trade. I sold around 1850.


RabbitX: Are there any breakout/momentum trades that stand out to you?

Mckenna: Yes, this reminds me of when I longed ETH around 1200 and was also getting into Optimism around 80 cents. This setup interested me per my Layer 2 thesis. I initiated spot positions and expanded into derivatives as volatility increased. I aimed to ride the momentum as Optimism surged to 3.2. Despite the fundamentals, speculative premium impacts the market, and I try to always keep this in mind. The profit was good, although I exited too early at 1.8. This trade also revealed an important mindset shift.


RabbitX: What shift is that?

Mckenna: This trade highlighted the need to avoid being overly concerned with P&L. I suggest hiding P&L to stay focused on technical setups and trade execution. This is crucial to keep emotions in check and avoid being swayed by the P&L aspect.


RabbitX: What final advice would you give new traders?

Mckenna: For beginners, leverage Twitter for learning. While trading is personal, Twitter is a great resource to accelerate learning and get exposed to new ideas.

Journaling is essential. It helps you track your trades, analyze your emotions, and learn from market events. I recommend both digital platforms like Notion and physical journals. Staying aware of your past actions and rationale can help you avoid mistakes and reinforce good habits.


RabbitX: Appreciate your insights and thank you for taking time to talk with us. Looking forward to seeing you put on size with RabbitX!

Mckenna: Likewise, thank you for the conversation.

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