One truly unique, and confounding, characteristic of the cryptocurrency markets is that there is no way to determine bitcoin value or altcoin value via traditional valuation metrics making them particularly susceptible to market psychology and thus market cycles. They are also so new and mysterious that fundamental valuation is difficult as well so the technicals (the charts) become increasingly important in helping bitcoin traders and investors navigate these markets. Finally, many of said bitcoin traders and investors are neophytes given barriers to entry into the cryptocurrency markets are practically nonexistent, so help with navigation is needed which is why we are laying out some simple guidelines to get started in the right direction.
Using Fundamentals for Cryptocurrency Trading
Portfolio selection is critical for any investor and can be difficult in bitcoin trading and cryptocurrency trading which is why we think its best to keep it rather simple in terms of determining what to hold in a long-term portfolio. Things like liquidity, trading volumes, current float, total supply, degree of decentralization (nodes, hash rate, mining dispersion, etc.), and market sector (privacy, smart contracts, payments, etc.) are all crucial to consider when allocating capital to the cryptocurrency markets. Additionally, diversifying amongst the different sectors in quality coins can help to distribute risk a bit, although note that correlations between all cryptocurrencies are still very high overall so we think bitcoin value should make up the majority of ones crypto portfolio (which should be a small part of one's larger investment portfolio).
Using Technicals to Generate More Bitcoin Value
Generating alpha means creating additional returns on top of a market benchmark or index, and is achieved not only by proper portfolio selection based on fundamentals but also by properly timing market cycles by using the charts as a tool. In bitcoin trading, and cryptocurrency trading in general, market participants use a myriad of timeframes, indicators, and price action signals to determine where we are in the cycle and when the best times to buy and sell are, which is what BBA specializes in. We'll discuss the topic of bitcoin trading using technical analysis in much more detail in future posts, but for now, just know that it is the key to taking advantage of the infamous volatility in the cryptocurrency markets.
A Few Other Considerations Regarding Bitcoin Trading Platforms
There are some other idiosyncrasies specific to bitcoin trading and cryptocurrency trading that bear mentioning before signing off, mainly relating to bitcoin trading platforms (exchanges). One is that the exchange landscape is globally distributed and fully independent from legacy markets and other cryptocurrency exchanges making them especially risky places to keep a large amount of bitcoin value which is why we recommend moving coins immediately after transactions. Additionally, some exchanges allow for the use of large amounts of leverage with no verification whatsoever which can be tempting to new traders, so it's important to stay disciplined when engaging in bitcoin trading via those venues. Finally, because the exchange environment is so anarchic, volatility spikes in both directions sans news or developments are quite common which makes it very difficult to place stops, entries, and exits which is why it is key to keep an eye on the charts in order to have an idea of where significant levels of support and resistance reside.
DISCLAIMER: Please always do your own due diligence, and consult your financial advisor before acting on any investment. The author owns and trades bitcoin and other financial markets mentioned in this communication. We never provide actual trading recommendations. Trading remains at your own risk. Never invest unless you can afford to lose your 100% of your capital. Please read our full terms of service and disclaimer at the BullBear Analytics Legal.