Image: Mohamed Hassan/CC0 1.0.
In an industry that’s notoriously unpredictable, Bitcoin and cryptocurrencies seem to take the proverbial biscuit as being even more erratic than the other markets that are commonly traded. Despite crashing completely in 2017 down from its near-$20,000 highs, Bitcoin is now back up to the $5,000-mark. Where will it go next? It’s anyone’s guess. But here are a few tips on how to trade the crypto given its uncertain future.
- Use risk management tools
- Don’t assume an uptrend is coming
- Long-term Bitcoin trading is not always better than short term
- Look for trends
- Stay informed
1. Use risk management tools
As much as trading can be enjoyable and rewarding, the negatives are often overlooked when people first begin. The fact of the matter is that it’s very easy to lose a lot of money, very quickly. One way to prevent the chance of burning through your funds is by utilising the tools available to you. On our TraderPro platform, we offer free* Guaranteed Stops on the Bitcoin (USD) market, meaning you’ll be able to cut your losses at a price predetermined by you, so you won’t fall victim to market slippage and gapping.
Trailing stops become very important when trading Bitcoin. With the potential for its price to plummet unpredictably in a short space of time, trailing stops can ensure profit is earned when Bitcoin's price rises while still protecting from price falls. Regular stops are fixed at one price, meaning a market can rise 2000 points and fall back down to the level the stop is set at, and no profit is earned. With trailing stops, the price level that the limit is set at 'follow' the price of the market, and the stop is only executed once the market falls a certain number of points. So if the trailing stop is set at 10 points below the market price and it rises by 2000 points before falling back down, the trailing stop will close the position while the trade is still up 1990 points.
Price alerts are another tool in your risk-management arsenal. You can set them to trigger at any chosen price selected by you, so for instance if the price of your invested equity falls drastically in one session, you’ll be notified if the market hits your predetermined price. You can choose to receive the alerts either via email or an app notification. Once triggered you can act accordingly, whether that means closing your position, setting a new alert or opening a new position.
See the video below to learn about some of the risk management tools that are available on our TraderPro platform.
2. Don’t assume an uptrend is coming
Equally, if Bitcoin’s price does rise favourably, don’t assume it will continue to rise towards the five figures level we’ve seen it at before. If you are thinking that it may rise, there’s a fair chance others are too. So, if a sharp price rise is followed by a quick decrease in price, this may spark worry and cause people to panic. Once this happens, another price crash could very well occur. Just keep in mind that a price can fall just as sharply as it rises.
As the graph below shows, even if or when Bitcoin's price does rise, it can completely crash back down at any given point - such is the nature of decentralised currencies.
3. Long-term Bitcoin trading is not always better than short term
Many people invest in Bitcoin in the long run, anticipating price rises. While it’s true that its price may gradually rise and overtime reach its highest ever level, whether it actually will and how long it may take is another story. Trading short term can be as efficient. Of course, this means you won’t benefit as much if Bitcoin’s price was to rise substantially, but you also won’t lose as much should it crash.
What's more, there's still plenty of opportunity surrounding short-term Bitcoin trading. Below is a table showing the weekly ranges (difference between highest price and lowest price over a specific time period) of the crypto in the last three months based on its price (USD). We can see that Bitcoin has an average weekly range of 684 points, with its highest change coming in mid-May where the difference between its lowest price and its highest price was 2156 over the week.
To put this in comparison, Wall Street's largest weekly range as a percentage of its total price was just 4% within the same time period. NASDAQ, a market that is more similarly priced to Bitcoin (currently 7250 compared to Btc at 8700), equally saw a weekly change of just 4.6% of its overall price during its most volatile week over the same period.
All this just shows that Bitcoin really is one of the most volatile markets to trade. Even over the course of a week, its price can change over 2000 points, so short-term trading around Bitcoin can still be significant in terms of wins (or losses).
|| Weekly low
|| Range as percentage of total price (high)
| 3 MAR
| 10 MAR
| 17 MAR
| 24 MAR
| 31 MAR
| 7 APR
| 14 APR
| 21 APR
| 28 APR
| 5 MAY
| 12 MAY
Prices taken from TraderPro.
4. Look for trends
Bitcoin and cryptos are some of the most unpredictable markets to trade down to their reliance solely on sentiment to drive price – no company statement or centralised bank will affect its price directly in the way, for instance, equities will. Therefore, it’s far more difficult to anticipate a specific time that Bitcoin’s price may change.
However, there still are trends that can be seen. A main one involves the mining reward halving, which is one of the only times traders can predict when its price will change. In theory, as the reward for successfully mining decreases, the supply will effectively lower as it’s more difficult to earn a Bitcoin. Therefore, the price is likely to rise if demand remains constant, as supply (not the existing supply but the supply of Bitcoins left to mine) decreases. In reality, Bitcoin had experienced two very significant bull runs around a year after the halving, in 2013 and 2017 respectively. With the next halving expected in May 2020, the period 12 months after that date could prove to be interesting. It is subtle trends like these that should be looked out for.
The image below shows the slight change in the price of Bitcoin when the halving has taken place. Some suggest that this change will be more significant for the next halving, as the mining reward will fall to an eighth of what it started as (from 50 Btc to just 6.25 Btc). With the mining reward falling exponentially as each halving occurs, this trend could continue with the price change of Bitcoin becoming evermore drastic as the mining reward is halved to an increasingly smaller amount.
5. Stay informed
Following on from the last point, with no monthly statement, planned quarter or annual reports or any other official announcements, it can seem like Bitcoin price changes originate at random. This is far from the case, as its price is based on trader and consumer confidence in the crypto. So, be sure to follow the influential figures in the Bitcoin world.
Keep informed on what companies are looking to embrace Bitcoin and which ones condemn it. Look at how other cryptos are performing in comparison to Bitcoin. Look at the markets that may have a direct impact on Bitcoin. Other currencies may be worth following as if one or more begins to crash, more faith may be put in the decentralised cryptos.
Staying informed, especially if you’re a short-term trader, will equip yourself to make predictions based on good, genuine knowledge of how a currency may react based on news that comes out.
Be sure to follow our blog, where you can stay informed on any significant news regarding Bitcoin and altcoins with our dedicated cryptocurrency analysis section.
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