10 Oct 2019
5 Tips to Keep in Mind While Trading Bitcoin
After a period of prolonged losses through 2018, Bitcoin’s price surge in 2019 was a major relief for investors. The coin gained steadily through the first half of the year, with its price almost tripling from its initial value of $3,746 on January 1, 2019, to reach $13,387 in June 2019. However, the digital asset has recently lost some of its value, trading at $8,368 as of October 3, 2019. Experts maintain that this volatility in the cryptocurrency market is what makes digital assets viable investment options. Bitcoin, as an individual crypto asset, is still up 115% in 2019, and these short-term highs and lows are important to enable long-term growth for the cryptocurrency with the largest market cap. With news surrounding the recent launch of physically settled Bitcoin futures, by Bakkt, along with several other market factors, analysts are predicting a high growth scenario for Bitcoin going forward. According to John McAfee, the pioneer of the McAfee antivirus solution, Bitcoin could well hit a price of $1 million in 2020. While reports like this can only be validated with time, the increased use of Bitcoin in payment solutions, together with the gradual global acceptance of blockchain technology, certainly seem positive for cryptocurrencies. If all this motivates you to trade Bitcoin, it might be useful to keep these tips in mind.
Tip #1: Technical Analysis is a Must-Have Skill for TradersThe nature of Bitcoin is significantly different from traditional asset classes. For starters, there are no central banks deciding its future course. It has sporadic correlations with other asset classes and shows high volatility with news releases in the cryptocurrency industry. This means that the pricing models could be largely speculative, when it concerns Bitcoin. This is why a strong foundation in technical analysis can be very useful for traders. Viable technical indicators can offer strong clues as to where the price might be headed. In the absence of market fundamentals, traders could find much information by analysing price charts, applying indicators and evaluating price action. Some common technical analysis tools used in Bitcoin trading are trend lines, Bollinger Bands, Simple Moving Averages (SMA), Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI). The aim is to identify overbought and oversold market conditions, so as to identify potential buy and sell signals.
Tip#2: Bitcoin Prices can be Affected by Political and Economic InstabilityBitcoin can be considered a safe-haven asset, given its zero correlation to any specific nation’s economic indicators. News regarding a rise in trading volumes during political and economic downturns is not uncommon. For instance, Bitcoin volumes in Hong Kong surged to their highest levels in the local P2P exchange (over 12.3 million HKD), on October 2, 2019, on account of a rise in violent protests on issues like income disparity and lack of democracy. The uncertain future of the UK’s Pound Sterling and equity markets, on account of Brexit, along with a rise in global economic contraction in August and early September 2019, coincided with a steady increase in Bitcoin prices, with the digital currency trading at the $10,000 level. Experts also predict that a no-deal Brexit could trigger a major breakout for Bitcoin. All this points to the need to stay informed of political developments and the release of important global economic indicators.
Tip #3: Consider Bitcoin and Altcoin Price Correlation AnalysisBitcoin, with a market cap of $149 billion as of October 3, 2019, commands 67.6% of the cryptocurrency market. And, a very large number of cryptocurrencies show strong correlations with Bitcoin price. Plus, so far, no altcoins have shown a negative correlation to Bitcoin. Coins like Ether, Bitcoin Cash, Litecoin and EOS, in fact, show high positive correlation with BTC. So, while trading Bitcoin, it could be a good idea to pay attention to alt coins with similar functionalities or source codes as BTC. In fact, news developments in similar altcoin communities can have a huge bearing on Bitcoin prices. At the end of September 2019, when Bitcoin prices went down drastically by 15%, major altcoins like Ether and Bitcoin Cash were also down by 6.76% and 14%, respectively, against Bitcoin. News surrounding the launch of Facebook’s much anticipated Libra coin, which has similar functions to Bitcoin, is also said to have boosted the coin’s value. These correlations can also be useful to consider when diversifying your portfolio. When Bitcoin bleeds against the USD, altcoins lose value and vice versa. This means diversifying your portfolio with other coins might not provide a cushion during times of extreme volatility.
Tip #4: Be Aware of Market ManipulationThere have been several reports of exchanges faking trading volumes through phony transactions. In July 2019, a new report by Alameda Research indicated that more than 90% of these volumes were bogus, in a bid to increase the exchange’s rankings on the trusted coin metric site, CoinMarketCap.com. Analysts have recently found a strong correlation between Bitcoin price swings and the settlement dates of CME Bitcoin futures contracts, which could be due to market manipulation. With contract expiry on August 30, 2019, BTC prices increased 11.4% within one week. So, it is important to have a clear goal and trading strategy in mind when entering a position in digital assets. There are plenty of whales in the market, who can manipulate prices, so it would be prudent not to jump into trades, each time the coin hits historic highs. Basically, steer clear of FOMO.
Tip #5: Always Have Risk Management Strategies Backing Your TradesThe market has inherent volatility and significantly lower liquidity than other financial markets. It, therefore, could be a wise decision to always have defined stop-loss and take-profit strategies in place. Regulated exchanges and brokers offer greater levels of security and consistency in trading, while also offering prudent leverage, since regulated firms are forbidden from offering high leverage ratios that could harm investors. Most of all, it is important to not allow emotions to guide trading decision, such as ignoring stop-loss signals. Bitcoin trading can offer multiple trading opportunities, due to volatility, but it is risky business. To manage the uncertainties in the cryptocurrency market, traders often consider crypto-CFDs as a safer alternative than actual coin trading on exchanges, where there is always a risk of wallet theft. CFD trading allows traders to protect their positions during extreme market volatility.