Since 2009, Bitcoin and other cryptocurrencies have fundamentally transformed the way in which individuals invest. Even though maintaining a well-diversified portfolio remains one of the most important principles of trading, the development of the cryptocurrency industry has given investors a wider range of options and a greater degree of flexibility.
As is the case with all financial assets, in order to successfully increase your wealth as an investor, you must learn to time the market correctly. Consequently, this will require you to successfully identify when a price increase is about to occur (opening position) and when the price has reached its relative zenith (closing position).
Bitcoin trading strategies are similar to trading stocks and other financial assets, but there are a few characteristics of the cryptocurrency market that make it unique. The market as a whole is much more decentralized, less regulated, more volatile, and more difficult to time correctly. Because of this, it is very important that you educate yourself about every dynamic of the crypto industry to the greatest extent you possibly can.
Fortunately, despite certain complications, investing in Bitcoin is something that can still yield a significant return on your investment. In this article, we will briefly discuss some of the most important principles for you to keep in mind in order to become a successful Bitcoin trader.
Buy Low, Sell High Still Applies in the Crypto Industry
As the first major cryptocurrency to be legitimately traded by the public, Bitcoin is likely the most stable cryptocurrency is circulation. Still, it is important to recognize that due to the unique dynamics of the industry, Bitcoin may still experience a significant degree of volatility on even a daily basis.
In order to profit from the ownership of Bitcoin, you must exit your position at a higher value than you entered into it. One of the most common problems in this industry, however, is the fear of missing out (FOMO). Because crypto coins can dramatically change values in a matter of minutes, you may be tempted to invest after positive price candles have begun to form. However, these candles are likely an indicator that the change in value has already occurred. Entering into a position when prices are high will make it much less likely that you’ll earn a positive return on your investment.
Use Stop Losses and Stop Limits in Order to Manage Risks
Timing entries and exits into the Bitcoin market can be very difficult, even if you are closely monitoring price changes over time. In order to avoid missing out on certain gains or avoid exiting the market before things get too bad, issuing stop orders can be incredibly beneficial.
A stop loss order is an order to automatically sell once a price drops below a certain point—this way, you can minimize the amount of capital that you possibly stand to lose. A stop limit order is an order to automatically sell once a price has increased by a certain amount. Even if the price of Bitcoin has momentum moving forward, stop limits make it possible to lock in your earnings once they’ve reached an acceptable level. These are among the most popular tools used by active traders.
Recognize that Bitcoins and Altcoins Often Move in Lockstep
Just as the American Dollar (USD) has a significant impact on the relative value of all other currencies in the world, Bitcoin has a strong level of influence on all other cryptocurrencies. Though there are many reasons and occasions that the price movements of these currencies may deviate from one another, the relationships between them should not be ignored.
Even if Bitcoin is the only cryptocurrency that you are currently trading, it is still fundamentally important to pay attention to general changes in the cryptocurrency market as a whole. If the “altcoin” market—a phrase used to describe all coins other than Bitcoin—experiences any sudden changes, these changes will likely soon be reflected in the value of Bitcoin. Similarly, changes in the value of Bitcoin may also directly impact the value of various altcoins.
…but Remember the Importance of Diversification
While it is indeed important to note the relationships existing between various financial assets, you should also remember that diversification is one of the most important principles for investors to be aware of. In fact, in an industry that is as inherently volatile as cryptocurrency, putting all of your eggs into one basket does little more than increasing your exposure to risk.
There are many different ways that you can effectively diversify your financial portfolio. Generally speaking, it will be beneficial to stake your capital in as many different markets as you feasibly can. This means that you should not only invest in Bitcoin, but also invest in stocks, bonds, and other financial assets. Within in the cryptocurrency, it will make sense to invest in Bitcoin alongside other altcoins as well. Other forms of diversification include market timing diversification, liquidity diversification, and various others.
Pay Close Attention to the News
Following technical indicators will obviously be incredibly beneficial for all Bitcoin investors, but the importance of financial news cannot be overstated. Though the legitimacy of the market has become increasingly more accepted, investments in cryptocurrency are still considered to be a sort of “luxury” or “periphery” investment by many of the world’s top firms. This means that if the investment market as a whole is about to turn bearish, you may want to wait before investing in Bitcoin.
In order to become an expert Bitcoin investor, you should begin by studying the historic relationship between the Bitcoin industry and other financial markets. This will make it significantly easier for you to navigate the market with ease. Furthermore, paying attention to Bitcoin and crypto-specific news sources—of which, there are many to choose from—can help you further gain the level of insight that you need.
Consider Creating a “Trial Investment” Before Actually Committing Capital
Lastly, even if you have a firm understanding of financial markets and principles as a whole, the unique risks inherent to the crypto market cannot be easily ignored. The best way to become an expert Bitcoin trader is through education and direct experience.
In order to develop an effective trading strategy that corresponds with your risk preferences and time constraints, you may want to engage in a practice investment run before committing any of your actual resources. There are many different programs that allow you to pretend to invest in a given asset and see if your hypothetical wealth increases or decreases over time. These programs are great for testing price action strategies, momentum trading strategies, and various other approaches to the market. Once you have begun to actually begin earning pretend money, then it may be time to begin investing in real capital.
There are many different moving pieces in the cryptocurrency and Bitcoin markets and in order to successfully trade in these volatile environments, there are several things you should pay attention to. Monitoring the news, technical indicators, and the values of related financial assets should make the Bitcoin market much more manageable. By keeping these fundamental principles in mind, you will be positioned to earn a return on your investment.