Lessons Learned – Cryptocurrency Trading

Today’s post is a little different. We’re going to share some lessons learned from the past year of cryptocurrency trading. Many of these recommendations apply to all sorts of assets – stocks, coins, and options, but some are tailored specifically to the wild world of Bitcoin and altcoins.

There are no guarantees or foolproof strategies for trading. Past performance is not an indication of future events. Technical analysis can be helpful to find timely entries into quality assets, but relying on charting without fundamental research is a recipe for disaster. As always, do your own research. Cryptocurrencies can be an important piece of your overall portfolio. Contact us for more information on building a portfolio that suits your investment goals and adheres to your risk tolerance.

Buy with Conviction

Let’s cut to the chase. The majority of altcoins will not survive. After spending some time in the crypto space, most people come to realize that the most important characteristic of a blockchain is immutability. This means that past transactions cannot be invalidated, funds cannot be frozen, and there is consensus on the state of the ledger. Immutability comes from decentralization and proof of work (PoW) mining. Which cryptocurrency has a massive lead in these areas? Bitcoin.

Bitcoin is the most secure blockchain with the longest track record. The best developers in the world are working on Bitcoin scaling solutions including Lightning Network, Schnorr signatures, and Merkelized Abstract Syntax Trees (MAST). Does this guarantee that Bitcoin will stay king? No, but it gives holders conviction. They buy and hold Bitcoin because it has history, infrastructure and vision. Holders believe that the world needs a borderless, immutable currency that cannot be printed by a central bank. Holders believe the world needs a currency to facilitate instant machine to machine transactions. Holders believe the world needs data integrity through Proof of Existence blockchain storage.

This conviction leads to strong hands during times of uncertainty. January saw a 55% dip in the price of Bitcoin, the largest pullback in years. If you held Bitcoin at $20K, but did not have conviction that it would succeed, you may have sold the dip. Bitcoin, and all cryptocurrencies are extremely volatile. It is very difficult to hold onto something that you don’t believe in, or don’t know much about.

Buy and Hold

Along the same lines, the most profitable strategy for most cryptocurrency investors is to buy and hold. Many newcomers see price volatility as an opportunity to short-term trade. Not many day traders survive. What gives a newbie the confidence that they can be profitable day traders? Chartists. The internet is full of “trading experts” who draw lines on graphs and predict how the price will move in the future. If you think a few hours “learning” about bull flags, descending triangles, and long-legged dojis is going to help you outsmart the wall street quants, you may be in trouble.

Technical analysis does have some merits, but many principles fall apart when you trade in illiquid alt-coin markets. Even Tone Vays, who makes a living off of technical analysis will tell you, Bitcoin is not recommended for day trading. Do not use margin to buy Bitcoin. Do not take loans to buy Bitcoin. Do not short Bitcoin. Short selling can quickly lead to oversized losses and margin calls.

Establishing a Position

We’ve talked to many potential Bitcoin investors who were interested in Bitcoin and even had money earmarked to invest, but they were “waiting for a good entry”. In the majority of these cases, they saw the price of Bitcoin rising, wanted to take part in the price appreciation, but didn’t want to “overpay”. Many potential investors waited for a pullback that never came. They sat on the sidelines as Bitcoin blew past $3K, $5K, $10K.

This is common, and hard to avoid. A useful strategy is to buy in thirds. Got $6K earmarked for Bitcoin investment? Buy $2K NOW, regardless of the price. This ensures that you have skin in the game, and may even get you to learn more about Bitcoin and gain conviction . Next, develop a time frame for your next two buys, maybe a couple of weeks or a month apart. If the price of Bitcoin goes up, congrats, you made money. If the price of Bitcoin goes down, congrats, Bitcoin’s on sale for your next buy. The same principles apply to doing weekly or monthly buys. Cost-dollar averaging in this way helps many investors stay sane.

Keep Some Powder Dry

Say you have $100K earmarked for Bitcoin investment. Would you rather be fully invested ($100K in BTC), or have some cash ($80K BTC, $20K USD) on hand to buy a future dip? This depends on the investor. For the most part, it’s good advice to think very long term and ignore day to day price movement and stay fully invested. This will help you tune out the noise a resist the urge to guess Bitcoin’s short-term price movement. However, many investors like to keep a bit of cash on the side to buy dips.

When you “keep some powder dry” (keep cash on hand) you’ll be able to buy the dips. This can be profitable, as Bitcoin is very volatile. Perhaps more importantly, this strategy can help your overall mood. Bitcoin drops 40% on China FUD? Your fleeting sadness is hedged by your ability to buy cheap Bitcoin. This strategy falls apart quick if you end up FOMO buying with your cash when Bitcoin rallies and pushes all-time highs, however.

Storing Your Coins

It’s important to protect your coins. Storing your coins on a hardware wallet, like the Ledger Nano S, will keep them safe from hackers, and prevent the need to trust an exchange. In addition, it may help your conviction/buy and hold mentality by default, as coins will take a little more time to transfer and sell, since they’re not sitting on an exchange.

If you keep coins on an exchange, ensure that the exchange has a good reputation and backs your cryptocurrencies with insurance and adequate reserves. Spread your coins across reputable exchanges so that you’re not at risk of losing all of your funds if a single exchange is compromised. Always protect your accounts with two-factor authentication (google authenticator) and additional security measures.

Crypto “Dividends”

Airdrops

Many projects airdrop coins to Cryptocurrency holders in order to increase awareness and adoption. During an airdrop, a project will credit holders of a certain coin with coins from their new project. In August 2017, OmiseGo (OMG) did just this. Every Ethereum wallet with more than 0.1 Ether was credited with a few OMG tokens. If you held Ether on an exchange at this time, you likely did not receive the airdrop. Each exchange has their own policies for crediting customers with airdrops. To ensure that you receive airdrops, you should hold your Ether and other assets in wallets that you control the private keys for. For Ethereum airdrops, MyEtherWallet is perfect. This wallet is easy to set up and manage.

Forks

2017 saw quite a few Bitcoin Forks. There may be many more in the near future. Forks can work sort of like airdrops, but we won’t get into the details here. Instead, check out our blog post about forks here and here. The same general principle applies. If you’re holding Bitcoin at the time of the fork, you will be credited with the new, forked coin. Two examples of recent forks are Bitcoin Cash and Bitcoin Gold. Most exchanges decide to credit Bitcoin holders with forks if the forks prove to be valuable and safe to distribute. However, there are no guarantees. Bitcoin gold has been trading at $300 for months, and exchanges like Kraken and Bitcoin Gold have not credited Bitcoin holders with these forked coins.

The only way to guarantee access to forked coins is by controlling your Bitcoin private keys. Unfortunately, claiming your forked coins is not always easy. In order to claim Bitcoin gold, for example, users had to find a wallet that supported Bitcoin Gold and import their Bitcoin private key to claim the coins. If you do not have experience with splitting coins, it is advised that you contact bitconsult for help. At a very minimum, never import your private key without first moving your actual Bitcoin to another wallet. Also, do not use untested, unproven software. If the coin’s creator comes out with their own wallet software, wait until the experts review the code before trying to claim your coins.

Trading “dividends”

Forks and airdrops have been called “dividends” (thanks Adam Meister) because some people view them as free money. For the most part, if free coins are easy and safe to claim, it is advised to grab them and sell them to add to your Bitcoin stack. However, you will want to analyze the projects and determine if they are worth holding. At the time of the Bitcoin Cash fork, the project looked like a joke, a get rich quick scheme for ASIC boost miners. So, many sold their coins quickly for $100-$200. Over time, the project gained more support and traded as high as $4500/coin.

The takeaway is to put the effort in to make sure you claim all of the dividends you’re owed. Some new projects, like Bitcoin Rhodium, require BTC holders to sign a message to prove ownership of BTC to be credited with Rhodium. This may take you a few minutes to figure out, but it is a safe way to collect a potentially valuable airdrop.

Altcoin Speculation

Many altcoins have gained over 30x in value in under a year. Some of these projects had small communities, and traded for years with a $1 million market cap. Some projects burst onto the scenes with semi-working projects and interesting whitepapers. Some projects even rocketed into the top 10 currencies without a working project! This potential for wild profits has led to many people skipping over Bitcoin and investing directly into nascent, unproven projects. This is a dangerous game.

If you want to speculate on alts with a small portion of your portfolio, however, that’s on you. Here are some trading ideas.

Ride Free

There are plenty of altcoins with big ideas and strong communities. If you find a coin that interests you and you decide to invest a bit, you may want to consider reducing your risk if it rises in price. One popular technique is to sell your initial investment if the price of the coin doubles. If you pull this off, this puts you in a good situation. You’re no longer risking your initial investment, and you still have exposure to a project that could “moon”. As stated earlier, however, many of these altcoin projects will likely go to zero, so you’re taking a high-risk investment. There may be another risk that you may not think of, however.

Value Your Portfolio in Bitcoin

Let’s say you bought an altcoin and after 3 months it has doubled in USD value. Awesome, right!? Well, what did Bitcoin do during this time frame? Many investors were ecstatic with USD/alt performance in 2017, but may have actually lost value in terms of BTC. How does this happen, well, Bitcoin rose over 10x vs USD in 2017. If your goal is to trade alts to acquire more Bitcoin, then measure your portfolio in Bitcoin. Luckily, alts like Blockfolio allow you to do this.

Play the Volatility

If you thought Bitcoin was volatile, buckle in. Many alts are traded on extremely thin books. That beans large USD or BTC orders can drive the price a lot. It’s not uncommon for an altcoin to have a +100% or -50% day. Volatility always allows opportunities for trading profit. While we don’t advise day trading, there are some savvy moves that could make you some extra money.

Limit Orders

Many crypto investors and new to investing in general, as explained in a previous post. Sloppy market orders are often placed, where an investor single handedly buys up a large chunk of the order book and send the price sky rocketing. More often than not, the price mostly stabilized much lower within a few minutes. If you hold an altcoin, you can set limit sell orders well above the market price in an attempt to sell your coins at a tidy profit during these sloppy market orders.

Along the same lines, maybe cryptocurrencies experience “flash crashes” when someone dumps a lot of coins at market price and eats up the buy book. This can cause prices to drop near zero for a moment. To take advantage of this, you can place low-price buy order on coins you are looking to accumulate. This will require you to hold BTC or USD to back up those orders, however.

Irrational Exuberance

Many coins have rise 100x this year. Projects don’t legitimately go from $10 million to $1 Billion valuations within a couple of weeks. If you’re holding a coin that skyrockets in value without much fundamental change, consider taking profit on the way up. Some recent examples include the price runs of Ripple, Cardano, and Tron. For a few days, the market cap of Ripple rose about Bitcoin. Cardano snuck into the top 5 without having a functioning network. Don’t get us started on Tron. It’s OK to play these pumps if you’re willing to take the risk, but be sure to book profits along the way when things run a little too fast.

Conclusion

There are many more tips for cryptocurrency trading, but these are the big takeaways. Buy with conviction, so you don’t sell out of fear. Never risk more than you can afford to lose, especially in the wild altcoin markets. When your chosen altcoin makes it to the moon, take a step back and consider taking profits. Easy come, easy go. Ultimately, just buy and hold Bitcoin 😉

Need help building a portfolio? Got questions about an altcoin? Want to learn more about Bitcoin? Contact Us!

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