March 8, 2022
Cryptocurrencies: Weekly Update
Every day the cryptocurrency news cycle completely changes its tune. Some days are filled with euphoric bullish sentiment, only to be met the very next day with antagonistic crypto doomsdayer’s dominating the media in response to a short-term selloff.
We already know to expect volatility in the price action of cryptocurrencies, but it is important to recognize the volatility of global sentiment as well.
Thanks to the Covid-19 pandemic we have seen a worldwide shift in which retail investors are taking their trading activities back into their own hands, and relying less on advisors and portfolio managers. This rapid increase in the level of retail participation in the markets has led investors to improve their personal economic knowledge, as well as utilize technical analysis to inform their trading activities.
Retail crypto traders have chosen to trade digital currencies typically because of 2 core reasons…
They either think they can make money quicker than in the stock market due to the volatility of the crypto market, or they believe that they’re making a long-term investment in the future of global fintech.
If you’d like to trade crypto successfully, you should develop a personal strategy/framework depending on what you’re hoping to accomplish by investing in cryptocurrencies, and especially your tolerance for risk.
Let’s discuss the different types of opportunities that are appropriate for different types of cryptocurrency traders.
The most well-known and publicized approach to trading cryptocurrencies is the short-term ‘catch lightning in a bottle’ strategy. This approach is less about research and disciplined analysis and typically more about jumping into what's hottest at any given moment.
This isn’t to say that technical analysis doesn’t work, but rather that you need to be prepared for the worst case scenario when entering any given trade. You need to be able to take multiple losses in a row without tanking your portfolio, which is hard to do when trading the highly volatile 24-hour crypto market.
Of course you’re able to day trade Bitcoin and other large-cap cryptocurrencies if you want to, but if you’re looking for the +100% short-term trades that are famous in the crypto space then you’ll have to focus on the small cap cryptocurrencies.
The best example of this kind of trade was in the first half of 2021 when we watched Dogecoin (DOGE) go from $0.005 to a peak of $0.74 (+1,100%) in only 28 days.
If you were trading crypto at the beginning of 2021, there is a good chance you made big profits on DOGE because it was one of the most discussed cryptocurrencies as a result of Robinhood offering it to their customers. Thanks to a combination of a bullish crypto market, mainstream hype, and ease of purchase, DOGE grew from an $8 billion market cap to $88 billion in a month.
However, with this kind of emotional and abrupt trade, some good things never last. In the case of DOGE, you better have picked the absolute top, because the coin has continuously sold off ever since the $0.74 ATH.
This trade had few technicals to rely on, no technological developments to boast…nothing. DOGE was an example of retail investors piling into a highly trendy short-term play. To call this a trade would be irresponsible because it is far more of a bet than anything else.
Of course it is awesome if you’re able to squeeze a 100% profit out of a trade like this, but you better be sure that you’re not the last one to jump on the pile because if you are… there’s a good chance that your investment will be somebody else’s exit liquidity.
As the industry grows we’ll expect to see less and less opportunities for short-term get rich quick trades, but for now these opportunities are still available to those that are waiting for another unicorn trade. These days the best opportunities to double your investment overnight are in NFTs, micro-cap crypto startups, and Initial Coin Offerings (ICO).
The second and most long-term approach to trading cryptocurrencies is the Buy and Hold method.
Many of us have a friend that bought Bitcoin for under $10,000 (or even cheaper) back in 2017 that loves to tout their huge profits to date. That is great, and from a tax standpoint going to be one of the better options for investing in cryptocurrencies.
However, similarly to the short-term approach, Buy and Hold is less of a strategy and a lot more like a bet. To many this may be your desired approach as you may not have the time or energy to attempt to perfectly trade the volatile swings in the cryptocurrency market. Or, if you simply want to set aside a nest egg of Bitcoin for a rainy day in the hopes that you eventually come back and it’s worth $1 million per coin… Well that's fine too.
But why not make the best of a good situation?
What most traders/investors love about the cryptocurrency market is that its potential volatility simply means that it is a highly tradable asset class. Whether you day trade, swing trade or even buy and hold, you can always maximize your potential returns by simply utilizing a risk-managed approach.
Our own CryptoPulse Quant model has been proven to beat the buy and hold strategy over the long run, simply by deploying a set of rules and a disciplined approach to the crypto market.
The final approach to trading cryptocurrencies could be called the Goldilocks method because it isn’t too hot or too cold, but just right.
When the market is hot, you want to buy what is the absolute hottest because if BTC goes up +10%, there's a good chance another coin is up +20%. At the same rate, when things start running cold you want to make sure you aren’t riding the wave down.
Swing trading can be either a short-term or a long-term strategy depending on what you’re going for. One example of this would have been buying ETH during its 2021 breakout that led to a +500% move from January 1st to May 12th of last year.
Investors piled into BTC starting in October 2020, but those that had been studying the space for a while knew that ETH was bound to be the big winner to start 2021. What many thought would turn into a good 1-month trade just kept delivering, which is exactly what we aim for.
We’ve observed that cryptocurrencies clearly have the tendency to trade more like risk assets than like safety plays such as Gold, so it is important that you use strong-risk management in your trading to ensure you are able to maximize the upside potential of a booming market while also protecting your downside risk in situations of high volatility.
If you are swing-trading cryptocurrencies, you absolutely NEED a well-founded strategy in order to make sure that you don’t just give up all of your profits when we enter an extended bear market. As fun as it is to ride a well-timed crypto trade up 25%, it isn’t nearly as fun to see that same position reverse and lose -25% of your initial investment simply because you didn’t have an exit strategy in place.
At MarketGauge, we let price, momentum and our other market indicators determine how and when we trade cryptocurrencies. Thanks to this strategy, even though we’ve suffered some losses in recent months with the rest of the market, we’ll still live to fight another day thanks to our rules-based trading model.
Whether you’re trading along with our CryptoPulse Quant strategy or not, we implore you to simply make sure you have some kind of strategy in place. Set stops and targets when entering a trade, position size responsibly based on your portfolio, and make sure you have a risk-management approach that works for both short and long-term trading.
If you haven’t developed your own approach for trading cryptocurrencies yet then stick around, because we’ll continue to teach you all of the ways in which MarketGauge approaches trading this space.
The best part is that our strategy for cryptocurrencies is not a completely novel approach, but rather one that has been successfully implemented across both traditional and emerging equity markets for years.
So don’t go out and buy a meme coin that you read about on twitter hoping it will be the next DOGE. Don’t simply buy and hold BTC because you think it will be worth more in a year than it’s worth today.
Trade with a purpose, an established strategy, and always make sure that you’ve planned out a way to fight another day in the event of another market crash.
**If we discussed a cryptocurrency that you would like to trade but isn’t offered on your current crypto exchange, please see coinmarketcap.com in order to view a profile on any tradable cryptocurrency, as well as a list of exchanges that do offer the coin for trading.**
To track our CryptoPulse Quant trading strategy or use our crypto tools and resources, please check everything out here:
CryptoPulse Quant ($)
Daily & Weekly Commentary (free)
Stock Sectors Radar ($)
*Coin Rankings ($)
“*” Simply click a ‘symbols’ to see an interactive chart