To say that bitcoin and other cryptocurrency prices have skyrocketed would be a modest statement.Just look at the below charts
This exponential price rise and over the top coverage by nearly all media outlets big or small has created a FOMO (Fear of missing out) market which has attracted people who have never invested in any type of stocks before and are solely driven with the prospect of becoming instant millionaires. So, before even going into discussing the basic tips for cryptocurrency trading, let’s just come to understand the nature of this market and associated risks with the same.
Risks associated with crypto trading
- Cryptomarket is highly volatile right now with average price movements of 10–15% in a span of a day or sometimes hours.
- Bitcoin trading volume is nearly 70% of the total cryptocurrency market. So, even if you have not invested in bitcoin, a major crash in bitcoin market can take down the whole cryptomarket with it.
- Very few cryptocurrencies are actually backed by market commerce other than trading which means that the price appreciation is solely on the basis of trading volume, marketing activities, celebrity endorsements and thus highly manipulative.
- Cryptomarket is still largely unregulated with no measures taken to curb the large-scale market manipulations. Invest only what you can afford to lose.
Rule #1 — Start small, think big
Well, the first rule in any traders’ book is to minimize risk and for a beginner, it would mean to understand the market before betting anything big. If you have not jumped through the article and read the disclaimers, then you know that how much volatile a cryptomarket can be. You can easily lose out the majority of your investment on one bad day. So, its very important to not give in to the market sentiments and start trading with small amounts (like 1% of your total assets) which you are completely comfortable in not getting back.
You cannot lose more than you put in, so don’t put in more than you can afford to lose and you’ll be all right, even in the most negative case. –Rpietila, Bitcoin and commodity investor
See the patterns of top 5 currencies by market-cap and select the one which has experienced some price dip in last 7 days.
Check out the current market price and place multiple small orders at different price gaps. So, if the asset is trading at Rs. 1000, then place limit orders at 2%, 5% and 10% below the current price.
Once the limit order is set, be patient. Allow the order to test the limits of price fluctuations and don’t give in the urge of getting your order executed instantly. The more you trade, more you will learn about placing optimal positions.
Rule #2 — Buy low, sell high
Well, this seems a no-brainer, right? Well, who would not buy something at a lower price and sell at a higher price. But then why 80% of traders end up losing their money? Well to understand that, please read “Predictably Irrational” by Dan Ariely. The book itself actually has nothing to do with any kind of trading or investment strategy. But it is quite successful in highlighting that while we think we are making smart and rational choices, we end up making most of them by coming under sheer emotions and social norms.
This chart shows the typical emotions an investor may go through and how a trivial decision to ‘buy low and sell high’ becomes harder with time.
So, its always advisable to set price targets or profit/loss limits to guide you when to buy, sell and hold.
For starting days, keep a limit of 5–10% in both directions of price movements to prevent you from the market sentiments.
Rule #3 — Diversify between trading and investing (hoddling)
We will not be going in the old school debate whether returns are better in trading or investing. There exists experts in both worlds and have generated an equal amount of profits by correctly executing the respective strategies.
While trading aims at frequent buying and selling of assets to take profit from market price changes, the goal of investing is to build profits over an extended period of time by buying and hoddling of assets. We would suggest our readers balance out the portfolio by investing in stable assets like bitcoin, ether, ripple, litecoin, and trading in lesser-known assets like iota, nem, dash, neo etc.
Rule #4 — Correlate bitcoin and altcoins
Bitcoin accounts for nearly 2/3 of the whole cryptomarket and thus its price changes have a major effect on other cryptocurrency markets. Traders are always attracted to the liquidity of the market and in events of a rapid increase in bitcoin price, they would be incentivized to reduce their altcoin positions and invest the capital in bitcoin market.
The chart below shows the correlation factors of popular altcoins price trend with that of bitcoin. A positive correlation would mean that the alt pricing will rise with BTC and similarly, a negative correlation will have the alt pricing going down with rising in BTC pricing.
Positive correlation: bitcoin vs litecoin (Last 7 days)
Negative correlation: bitcoin vs bitcoin cash (Last 7 days)
Rule #5 — Spot pumps and dumps
As the crypto exchanges are not regulated in major parts of the world, it’s very easy for the major players to move the market up by rapidly buying out the liquidity and then once the small retailers start entering the market, they sell out the stocks at premium leading to prices falling back to the initial level.
It’s not necessary that a sudden surge in the price is always a pump and dump scenario.
– Small market cap: Compare the coin market cap with popular coins to validate if it would be able to sustain the rise
– Trade history: Check the price pattern for last 6 months and see if there have been any sudden peak and fall instances
– Technology updates: Check if there has been any major update released by the development team.
Rule #6 — Follow major events
Keep a close eye on the major political events related to cryptocurrency world. In past, such events have predictably led to an astonishing rise or fall in the bitcoin prices and thus can help in better placing the orders.
- Japan Declares Bitcoin as Legel Tender — April 1, 2017
Bitcoin value: $1085.03
Bitcoin value 10 days later: $1215.69
- Bitcoin “splits” into Bitcoin (BTC) & Bitcoin Cash (BCH) — August 1, 2017
Bitcoin value: $2787.85
Bitcoin value 10 days later: $3383.79
- Chinese central bank bans initial coin offerings (ICOs) — Sept, 2017Bitcoin value: $4563
Bitcoin value 10 days later:$3530.27
Rule #7 — Start reading about technical analysis
As most of the cryptocurrencies are far from real-world applications (not counting cryptokitties in one of them), there is not enough data available on how well the technology is being adopted, what are the sales figures, balance sheets etc. Thus, it is nearly impossible to do any kind of fundamental analysis and say if currently, the asset is overpriced or underpriced.
So, if you want to make informed decisions in crypto trading, you would have to start reading on how to do the technical analysis (TA). For doing technical analysis, you need only past market data, primarily price and volume. As this is a vast domain consisting of thousands of strategies, we would be covering it up in our separate series on Trading Strategies. Till that time, follow the below resources and start increasing your TA abilities.
- Technical Analysis: Introduction | Investopedia
- Technical Analysis — Zerodha Varsity
Rule #8 — On-balance volume vs trade price
Simplest market indicator for price movement is the correlation between On-balance volume (OBV) and the asset price. OBV is basically a momentum indicator based on the trading volume and the price changes. If the price trend is up and OBV is dropping, then it indicates a drop in prices and if the price trend is down and OBV is rising, then prices will eventually move up matching the OBV trend.
Rule #9 — Don’t overtrade
There would be sometimes when the trading volume is not enough to move the prices up and down significantly resulting in a phase of anxiety. In such times, many traders end up taking sub-optimal positions which most of the times result in minor losses due to not meeting commission fees or asset going slightly lower than the buy price and getting stuck there. While trading, you should always keep in mind to place orders only when there is sufficient liquidity in the market.
Rule #10 — Read, read and read
When you starting new in this field, it helps a lot to follow some well trusted and popular channels for getting latest news and trends in the cryptomarket. Below are some of the great online resources and discussion channels. These will provide you enough content to be able to take an informed decision on crypto trading.
- Twitter: @Cointelegraph, @niccary, @BitcoinMagazine, @petertoddbtc, @SatoshiLite
- Telegram: Whaleclub, coinfarm, indiabits, dashknights, Monero Enthusiasts
- Facebook: Cryptocurrency for Beginners, Cryptowarriors, cryptos news group, cryptocurrency club for beginners
- News and trends: coindance, cointelegraph, coindesk, cryptocoins news, coin market cap,
Tell us in comments how much it was helpful or if we missed covering any important terms.