"How to Trade Cryptocurrencies" - secrets of making money from new instruments
The future is already here. Even grannies on benches are discussing Bitcoin exchange rates. Even deputies grudgingly admit that cryptocurrencies have finally entered the economy. But how to earn on them? It's too late to mine, investments are extremely volatile. The answer is simple - trading, the only way to earn on cryptocurrency both when it rises and when it falls.
Traders are the ones who can make millions from cryptocurrency surges at any rate, high or low.
What are cryptocurrencies
In general, cryptocurrencies can be seen as an analogue of electronic money, such as Yandex.Money, Webmoney or PayPal. The essential difference is the Blockchain technology that underlies all cryptocurrencies.
The easiest way to see the difference is to use an example. Say, what happens when you send your grandmother 100 usd by bank transfer? First, the money goes to the bank account, then the record goes to the server. If at this point something happens to the bank's server (force majeure), the money will disappear. From one bank's server, the money is redirected to the other bank's server. Again, if something goes wrong during this transaction, the money can be lost during the execution of the transaction.
Blockchain is analogous to the digital notary, where there is no single central server (single point of failure) as with traditional electronic wallets. Essentially, blockchain is deciphered as a chain of blocks, where each block is involved in confirming a transaction. In the bitcoin network, all transactions are irreversible (immutable ex post facto), with each participant in the network keeping a complete history of all transactions.
Bitcoin is the very first and brightest representative of a cryptocurrency based on blockchain technology. An analogy can be drawn here with the U.S. dollar as the main conversion instrument. In many services, bitcoin is the default cryptocurrency, that is, other cryptocurrencies are automatically converted to bitcoin.
As for security, we can say that the technology provides transparency of transactions, as information about transfers between wallets is open to all, but does not give full anonymity. If desired, more anonymity can be achieved by using special mixers (transaction obfuscation servers) and other methods that hide the physical address of the wallet user.
When will the bubble burst?
Actually, no one questions why the rate is growing. At the very least, investors are interested in the technology itself and, in general, people like to be independent of states.
But, to start with, the amount of Bitcoin in circulation is limited, and it is estimated that the bulk of the coins will be mined by 2034. If you believe in blockchain technology, it definitely makes sense to hold investments until then, but you need to be prepared for spikes of 30-50% of the rate.
One of the main perks of trading cryptocurrencies is the tremendous volatility. Since we're talking about trading rather than investing, a strategy for making money on bitcoin may well include short positions. In fact, bitcoin can also be sold, and you can make money on it too.
That the bubble will burst is inevitable. It is quite possible that the process has already begun. After the bubble bursts, the exchange rate will drop dramatically. But, since a huge amount of infrastructure is created (companies, exchanges, services, exchangers, etc.), that is, the rate will be low for some time, cryptocurrencies will stay, stabilize and eventually go to growth.
The same was during the dot-com crash of the 2000s, when people invested a lot of money into the Internet without really knowing what it really was. Nevertheless, despite the collapse of the bubble, a tremendous infrastructure was created and the Internet is everywhere and the wealthiest people work in IT.
Mining is the process of producing new blocks during the processing of transactions. That is, you give some of your own computer power to maintain a distributed network, and you get some cryptocurrency as a reward. Mining at home is no longer economically profitable, unless you are going to do it on an industrial scale.
In general, the time for investing in the same bitcoin has also passed. But, given the current rate, if the situation now will settle down and the currency will show any signals to move up, you have a good opportunity to invest in bitcoin at a bargain price. It is necessary to invest for a long period of time and be ready for the fluctuations of 30%-50% and huge drawdowns.
Soon, the launch of the official bitcoin option is expected, so you can prepare for a strong growth due to the arrival of hedge funds and other large structures. Thus, the company LedgerX LLC, is going to open the possibility of trading option BTCUSD, with a period of one month to six. In general, they trade without the official instrument, but if they appear, we should expect a revival of the market.
The strongest growth of the rate has already been after Japan recognized bitcoin as an official means of payment. Accordingly, when other countries follow the same practice, we should expect a similar market reaction.
Pros of cryptocurrency trading
Trading is the best way to make money from cryptocurrencies because we can make money even when the rate is falling. When investors are in a panic, traders are calm. One of the big pluses, as we've discussed, is strong volatility. Those thousands of percent, that everyone dreams about when they come to Forex, on usual instruments can be achieved only with a big leverage. Here, it is all available with moderate risks.
Also, classic tech analysis, book examples and commonly known patterns work great on cryptocurrencies. Since the instruments are new, they have a lot of inefficiencies, that, for example, do not exist in popular instruments like EURUSD for about 10 years. If we take some simple strategy, such as trading on crossover slips, it will work terribly on euros, while on cryptocurrencies it will work fine. For example you can satoshi to usd and on these two currencies see the hole picture of trading.
What currencies to trade and where?
The main currencies are Bitcoin, Litecoin and Ethereum. Also, the major ones include Monero, Dash, Ripple, Zcash, Ethereum Classic. Check exchange rates of top cryptocurrencies here. Ethereum Classic has high upside potential in case Ethereum is banned from mining. I would advise buying Ethereum Classic at the first sign of growth. The main thing is to stay away from unknown currencies.
But the situation with cryptocurrency exchanges is not very bright. Not so long ago there were some big stories with MtGox and BTC-e closures, also Chinese exchanges Bitcan and BTCC stopped working. Therefore, trading on crypto exchanges is a separate pleasure with high risk. It is much easier for ordinary traders to trade at forex brokers, because, like most traders, they do not need bitcoins themselves. The total cost of this approach is often lower. At the same time you get a full-fledged MT4, less risk of losing money and many ways to deposit/withdraw money.
Since Bitcoin now is mostly a people's instrument, that is, there is not yet a large amount of institutional money, as in conventional currencies, the most powerful thing that affects the rate is the news. For example, China banned ICO (initial public offering of coins), and this had a direct impact on bitcoin. There was also a strong rise in the exchange rate after bitcoin was recognized by Japan. So you need to keep an eye on the news.
Also, given the proximity to the people, cryptocurrencies have strategies that target crowd behavior. You have to keep in mind that one big sell/buy can easily move the market. That is, any sharp fluctuations can be not only for fundamental reasons, but simply when a major player decides to enter/exit the market.
Fibonacci levels work great. Fibonacci levels are built on the basis of the golden ratio, that is, they are based on the structure of nature around us, structural harmony. All this is from the point of view of human perception, that's why there are pullbacks, rebounds from levels - the same people trade in the market.
If we zoom out on the chart, we can see that the long-term trend of BTCUSD is still going upwards, despite periodic strong drops. This is very clear even on the relatively small period since May 2016.
The traditional horizontal levels are also working. But of course, don't look for levels where they don't exist, use only the most obvious ones and look behind the round numbers, e.g: 200, 300, 3000, 4000 and so on. False breakouts of levels are very common, so you have to be extremely careful here. If you do trade on levels, then use fixing (confirmation). However, a bounce is always more likely than a breakout.
Also, note that while in the past there were many so-called pyramid schemes operating under the guise of Forex trading, now the same thing is happening to the cryptocurrency market. One example is cloud mining services, most of which operate under a fraudulent scheme.
When there is no big news on the market, the most banal pullback trade to the average (necessarily with confirmation) works. The 21 averages are excellent. The trend lines can also be attributed here. Also pay attention to the gaps - they may not close, and this is quite normal. Taking into account the increased volatility, you should not indulge in averaging as well as buy at the maximums.
One of the most promising strategies for Price Action lovers is pin bars. On cryptocurrencies, pin bars work perfectly. But, of course, don't forget that a pin bar should always have some support - a key or Fibonacci level. There are just a lot of candlesticks with long tails. A characteristic picture of the market is several pin bars in a row. When you notice such a formation, you should expect some directional movement.
As the working TF, the best is the daily and H4. In general, do not forget about the technical analysis, do not give in to emotions and do not buy on tops. For those who trade long term, it is best to use a portfolio strategy, buying all three major currencies simultaneously - Bitcoin, Litecoin and Ethereum.
Recommended deposit, on average, $1000. Leverage greater than 1:10 is nowhere to be found, AMarkets and Alpari have such leverage. The minimum lot at AMarkets is 1, at Alpari - 0.1 and 0.01 at FXOpen, but with a leverage of 1:3.
To make calculating the risks easier, at the end of the article, you will find a link to a special indicator that displays the maximum number of lots to buy, the minimum lot, the point value, the spread and swap size on the chart. To run it, drag the indicator onto the chart, click download and select the attached set-file.
Risks per trade are 2-3% at most, just like other strategies. In any case, do not forget about money management. In general, 1:3 leverage is enough for normal trading without overestimating the risks. But, of course, it is best to test the strategy on a demo account first, and then go for a real account.
Cryptocurrencies are currently a very simple tool for trading. This situation will last for some time, perhaps about a year, until big money comes to the market. That is, when trading becomes more centralized, many of the inefficiencies will go away. Nevertheless, people manage to lose even when things are greatly simplified. So, your job is to use your advantage, but not to let your guard down in a fit of excitement.