The cryptocurrency trading space is notoriously volatile, but it is this volatility — and the fact that the crypto trading space is still relatively young — that gives it so much potential. Here we outline trading strategies that can help you stay ahead of the curve and maximize your ROI.
The last few months have been groundbreaking for Bitcoin in particular and cryptocurrencies in general. Bitcoin and many other leading crypto tokens recently hit new all-time highs, and the rise of cryptocurrencies from being shunned to earning the approval of institutional enterprises to launching mainstream adoption (which is likely soon with Coinbase’s successful IPO) has been a marvel to watch unfold.
However, seasoned traders know that this point has not been reached easily, and fortunes have been made and lost along the way. In fact, it is the inherent volatility, risk, and potential for loss that keeps many mainstream investors away from crypto trade and investment and these are the same drivers that prevent many governments and established financial services companies from joining the decentralized financial revolution.
How can you avoid common trade and investment pitfalls? What are some of the strategies you can adopt to improve your return on investment while simultaneously minimizing and managing risk? We offer a few recommendations below.
This strategy involves investing a fixed amount of money (or purchasing a fixed amount of a token or asset) at regular intervals irrespective of price. For example, purchasing $10 worth of crypto every week would be an example of dollar-cost investing. This approach allows investors to take any emotions out of the investment equation and helps them balance high-cost purchases with purchases made during price pullbacks.
To day trade, you enter and exit positions on the same day in an attempt to earn returns on price fluctuations during the day. So, for example, you may purchase 0.5 ETH at a certain price and try to sell the same amount for a higher price.
Because most cryptocurrency trading platforms are open 24 hours a day throughout the year, many day traders use limit-sell orders and limit-buy orders to try to obtain tokens or assets at a certain price and sell them at a higher price based on the trader’s desired profit margin.
You can think of swing trading as day trading that occurs over a few weeks or a month. It involves opening positions and holding on to them in anticipation of favorable price changes occurring. You do not exit your position unless you have a favorable trade to make, but instead of trying to close the position within the same day as occurs with day trading, you take a few weeks or a month to close your open position.
If we consider day trading to be a short-term strategy and swing trading to be a medium-term strategy then we can think of trend trading as a long-term strategy. It involves opening and holding on to positions for longer periods of time, usually a few months at the minimum. Trend traders try to maximize their ROI by investing in tokens or assets that they feel are ready to embark on (or have just begun) an upward trend. Trend traders can enter long positions if they feel an asset is expected to appreciate in price or a short position if they feel the opposite will occur.
One way to draw a trendline that can be used to determine if an asset is trending upward or downward is to connect a series of highs, which would indicate a downtrend, or lows, which would indicate an uptrend. Higher and higher lows, which are indicative of an uptrend, create a support level for future price movements; they indicate that the price of the asset is creeping upward and that downward movement is not immediately likely.
On the other hand, a series of lower highs, which are indicative of a downtrend, create a resistance level for future price movements; they indicate that the price of the asset is creeping downward and that upward movement is not immediately likely.
Different markets follow different trend paths and last for different durations. For example, primary market trends, commonly referred to as bull and bear markets, usually last one to three years for stocks, but they can last longer or shorter for cryptocurrencies. Your investment horizon and the types of assets you invest in will determine the duration over which you should look for trends.
Buying and holding is a passive investment strategy in which you buy an asset with the intention of holding on to it for a long time, regardless of what happens in the market. This strategy attempts to make capital gains without having to time the market with the belief that, in most cases, the market generates returns over a long timeline. In cryptocurrency circles, this strategy is sometimes called the “hodl” practice, which stands for “Hold On for Dear Life.” Crypto investors who buy and never sell their assets are referred to as “hodlers.”
Index investing means purchasing shares in an ETF (exchange-traded fund), similar to investment baskets offered by institutional financial services organizations. Crypto ETFs are usually indexed to the performance of various baskets of cryptocurrencies and/or digital assets with different risk/reward profiles, although they can also be indexed to specific coins. By investing in a basket, you earn the average return of the assets in the basket you chose. On Wisebitcoin, ETF tokens are linked to one specific coin such as Bitcoin or Ethereum. This gives the advantage of providing exposure to the indexed asset without having to own it, and you can even leverage your investment. On Wisebitcoin, ETF tokens are leveraged X3.
For example, you can invest in a low-risk basket that may contain only the most stable and popular cryptocurrencies, or you may have a hunch that the privacy or off-chain solutions spaces are about to take off and you can invest in ETFs that contain more privacy and/or chain solution tokens.
With index investing, you are relieved of the burden of tracking individual projects and can instead invest in a basket of goods that can deliver the returns you expect from your area of interest.
This strategy looks for buy and sell signals based on the average price movements of a token or asset.
If the average price of an asset over the last 50 days exceeds the average price over the last 200 days, this is a sign of convergence and is called a Golden Cross, which is a buy signal.
If the average price of an asset over the last 50 days falls below the average price over the last 200 days, this is a sign of divergence and is called a Death Cross, which is a sell signal.
Depending on the exchange you use and the tools available at your disposal, it may be difficult to calculate the 50-day and 200-day price averages of the tokens that interest you, so this is a somewhat advanced strategy for those who have access to customizable trading tools and charts.
Wisebitcoin’s trading charts provide investors with a wide range of information, such as current trading pair, current price, price changes over the last 24 hours, price highs and lows over the last 24 hours, and trading volume. You can also customize your trading view to price action over the last month, week, day, or hour, with 15-minute snapshots also available. You can also view trades using candles, which indicate the opening and closing prices at a given point in time, or you can use depth charts, which provide a visual representation of supply and demand (sell and buy orders) at different prices. These charts can be used to predict how prices may change in the near future and where most of the market activity is occurring.
RSI, or Relative Strength Index, measures momentum by calculating the average number of gains and losses of a token over a two-week period. The RSI fluctuates between 0 and 100 and is used to determine if an asset is overbought or oversold. Anything above 70 is considered overbought and will likely be followed by a price drop. Anything below 30 is considered oversold and will likely be followed by a price rise.
To successfully implement the RSI divergence strategy, you must accurately predict the price trend that you expect before it occurs. Doing so can be tricky, but with the right tools and enough practice, you can reliably predict price changes before they occur and can make substantial earnings doing so.
Even the best investment strategy can only work if you get the basics right. Here are a few important pieces of investment advice that you must keep in mind before investing, regardless of the amount, time frame, or strategy you use.
You never know how your investment will turn out, so never invest money you cannot afford to lose. Your rent, utility payments, college tuition, and funds for other important expenses should not be placed into your crypto trading pool. Come up with an investment budget — whether monthly, weekly, or daily — and religiously stick to it after saving enough to cover your critical expenses.
The percentage you allocate to different tokens or assets is up to you based on your research of different opportunities (we talk about research next) but you should put some amount of money in established crypto projects such as Bitcoin and Ethereum and allocate fixed percentages to other projects (such as up-and-coming projects or high-risk/high-return projects) based on the kinds of returns you are looking for and your risk appetite.
You must do your own research before investing in a token, asset, or project. Never give in to the fear of missing out (FOMO) because an informed decision is better than an anxious or hasty one. Learn the basics of technical analysis, read news articles on the project you are interested in (as well as the project team and the project white paper, if possible), and understand what the project aims to do, how big its addressable market is, how it is different from existing solutions, and what its unique selling proposition (USP) is. Only if the project satisfies you on all these criteria should you consider investing in it.
Investors must be comfortable with some level of risk. Completely avoiding risk at all times is not a viable investment strategy because, without risks, there cannot be any rewards. What is important is to make calculated decisions based on acceptable risks and learning to walk away from bad investments as long as you did your due diligence beforehand and were confident that an investment that did not work out was actually a good one. Do not be discouraged and stick to the process of identifying promising projects and putting money from expendable savings into the projects that excite you most.
Arbitrage is the practice of buying and selling tokens or assets on different marketplaces to benefit from price differences. For example, you may be able to purchase 1 ETH on one exchange for $2,000 but sell it on another one for $2,020. As long as the commissions, fees, gas costs, and any other trading costs that you have to pay are less than $20, you can benefit from making this trade. Look out for arbitrage opportunities on different exchanges as well as news and liquidity changes that can lead to significant price disparities in different markets.
The ability to trade cryptocurrencies with other cryptocurrencies, digital assets, and fiat currencies is something that has never before been seen in traditional finance. Using these unique properties of cryptocurrencies, you can enhance your buying power by directly purchasing an asset or token that interests you without having to resort to a fiat purchase with the potential for simultaneously benefitting from price changes that work in your favor.
The cryptocurrency space is very volatile, and while there are many opportunities to earn substantial profits, you can also suffer considerable losses. By choosing one of the strategies discussed here and limiting your investments to what you can afford to lose, diversifying your portfolio, researching projects before investing in them, knowing when and where to take risks, and knowing how to lower your operational costs while looking for opportunities wherever they arise, you can potentially earn profits in the crypto space while maximizing your ROI from the projects that are the most interesting and exciting to you.