7th March 2018

Want to Succeed in the Cryptocurrency Market? – Don’t Day-Trade!

by Lawrence Robinson

I must preface this article by mentioning that I am not a professional trader and this is not financial advice.

The recent explosion of prices across the cryptocurrency market in December drew a large number of new traders into the extremely volatile market that is crypto. Accompanied with these huge increases in the price of cryptocurrency were questions such as; ‘how can I make a decent profit from cryptocurrencies?’ or ‘should I trade between coins to make money off the volatile nature of the market?’ My response to these questions is almost always; never day-trade! When buying a cryptocurrency, you should always view it as an investment, knowing what the particular coin is planning to do with regards to the wider blockchain technology. If you follow any other strategy, it is essentially gambling; and the house always wins.   

An example of the risks posed by day trading are outlined in the graph above. Having seen the sharp increase in the price of ether after 1/28 (red arrow) one  might be tempted to convert your bitcoin into ether to maximize your profits. This is because the price of ether increased to its highest value relative to bitcoin. While this price increase undoubtedly offered an excellent opportunity to maximise earnings the window to capitalise on this opportunity was very short indeed.  In fact this window was just one day, with anyone who missed this window making a loss. To make matters worse day trading is only profitable if trades are made quickly, as profits are only guaranteed between trades. Day-trading requires traders to be constantly informed of all market movements and all the news surrounding every coin you are switching between, with this of course being unfeasible for the large majority of people who trade cryptocurrency. To further this point, can anyone reliably know where the market is headed?  Of course it is possible to make educated guesses on the market, but these are still just guesses. While some “guru’s” claim to be able to predict the crypto market, it is clear to me their followers are just blinded by confirmation bias. A correct prediction amongst an equal number of incorrect predictions stands out because it’s correct; if one makes enough predictions, it’s  almost guaranteed one will be accurate. In a study performed on NYSE stock market traders in the year 2000, it was reported that over 90% of day-traders lost money, another 7% made money but not enough to justify the amount of time they spent following the trends, and only a poultry 3% made substantial profits Robert Deel, CRB:9;1 (2000).

Investing the Right Way

Investing is a lengthy process, and one that must be done correctly in order to achieve maximum potential. The line between investing and gambling is blurred especially in an emerging market such as cryptocurrency. Many people who are invested in cryptocurrencies are gambling. While they will often say the contrary, it is only those that understand the tech behind a project  that will come out on top. An easy way to spot if you are gambling is to ask yourself why you are buying the coins you wish to buy. If a friend has recommended them as an easy way to turn a profit and the charts look promising, why would you not invest? I mean if ripple can jump from from 0.2$ to 3.6$ in 2 months, why can’t X do that too? It is my opinion that the days of unbridled speculative gains are nearly behind us, only coins with an established use-case and user base will survive.

In order to achieve success when investing in the crypto market, you should follow a simple yet effective strategy. First, identify the companies with the best technology for the area they aim to emerge in, with the easiest way to do this being to read and compare the whitepaper of specific companies that are competing for market share. Secondly, always look at the development team behind a project; what have they done before? Do they have the experience required to carry out what they say they want to achieve? Thirdly, inspect the market cap to supply ratio. If the supply is high and the market cap is high, unless the coin is revolutionary you are not going to see rewarding gains. Is the supply all circulating? Or are there stores of coins locked up by the developers (Ripple…). If so this can dramatically affect the price at any time since the supply is dictated by one person who likely does not hold your interests at heart. Once you have identified what you believe to be the most likely candidate for success then it’s time to invest and invest modestly, spreading out buy values over time so as to maintain a steady average buying price. Another way of buying at modest prices is to wait for a significant dip in the market such as the one that just passed last week (early Feb 2018) and buy when the price starts to recover (bear in mind that bull traps are common and buying the dip can also be done incrementally so as to maintain a modest average buy in price.) Finally, my last piece of advice is to store your coins offline or in a secure wallet you know is next to impossible to hack. Only consider selling if the development team start not delivering on their promises.

Deception, Lies and Pump & Dump Groups

A pump and dump is when an individual or a group of people with enough buying power to affect the market put in buy or sell orders in order to manipulate the market.  A keen eye can tell you when a pump and dump is taking place, with the most common telltale sign being uncontested increases in price over a very short amount of time without significant news or technological updates. They seldom happen without the help of willing and unwilling participants.

The anatomy of a pump group can be seen in the image below. Once the group has agreed to pump, the organisers will often cash out a few points before the wider agreed target so as to guarantee profit for themselves while leaving the rest of the group to continue mindlessly buying. Once the price plummets the unsuspecting buyers are left with nothing but an overpriced stack. As an example of this let’s look at the charts of BTC-DOGE with a timescale of 6 months. The dramatic increase in the price of DOGE at around January of 2018 followed a fairly natural bull run. The pump team chose DOGE and spread the word that they would pump to other select individuals (pump starts at the red arrow) and by the time the price was making headlines the core pump team had already sold, making easy money in the process. If we further analyse the graph we can also see that the current resting price is around that of the price before the pump. Anyone who bought in over $0.01 would have lost a significant portion of their investment. The reason I raise the issue of pump and dump schemes is because traders will be lured into rising prices simply because of the potential to make a profit, and have been burned in the process.

The market is not only rife with pump and dump groups, coin shills exist in swathes and plague the forums which claim to promote unbiased discussion,  with these shills promoting coins and tech that are clearly inferior to other contenders on the market and do so for their own personal gain. YouTube crypto discussion personalities have also been accused of amassing large audiences and promoting coins they invested in long ago to cash out on the rising price due to fans buying on the recommendation of their favourite content creator. The best method to decide which coin to buy is to read the whitepapers of all the coins in the area that you are investing in, stay informed on the development team using Twitter and Reddit, and make sure to keep up with the current blockchain news on Coindesk. 

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