Interest in cryptocurrencies has been on the rise since 2018 and Bitcoin’s 300% rally in 2019, surely has caught the attention of many traders and investors. New traders and young investors get lured by these returns and fail to educate themselves on cryptocurrencies and trading. They end up chasing the market, and this ultimately results in an unbearable loss for many. There are a few crucial factors investors should consider before actually buying or selling cryptocurrency. Here are 5 essential things investors must consider as they make their first cryptocurrency trade.
Tip 1: Choose Cryptos with Highest Market Cap
Currently, there are more than 5,000 cryptocurrencies that are listed across various exchanges. What we see in news bulletins and on broker’s website are the largest cryptocurrencies by market capitalization and ones that are most familiar to traders. Market capitalization (market cap) reflects the size of the instrument and is calculated by taking the asset’s price and multiplying it by the total number of shares.
It is always advisable to trade cryptocurrencies with high market cap and large supplies. Theoretically speaking, they are less vulnerable to manipulation and crazy volatility, whereas currencies with a smaller market cap usually see wild price swings on both sides. Smaller market cap coins are also often vulnerable to manipulation by large players.
Source – Coin Market Cap
The above picture shows the top 5 cryptocurrencies by Market Capitalization.
Similarly, high trading volume is equally important before choosing the cryptocurrency. When it is traded in high volumes, it will be easier to buy and sell the digital asset, and there won’t be any liquidity issues. Sometimes a trader can also struggle to fill his orders.
Tip 2: Safe Storage of Cryptocurrencies
Now that we understood how to select a cryptocurrency for trading and investment purpose, the next crucial step is determining how and where to securely store it. We have seen so many instances recently where there have been unethical hacks on various exchanges, and the culprits have stolen cryptocurrencies worth millions. Therefore, in such circumstances, it becomes very important to have a secure system in place.
Today, well-informed investors rely on hardware wallets that store digital assets using private keys. This makes the coins accessible only to the owner. Moreover, there is also an abundance of software wallets, which allow traders to choose their own private keys for Bitcoin and other cryptocurrencies using an app. This app can be accessed from the user’s laptop, smartphone, and iPad. Trading and keeping the cryptocurrencies on exchange should be avoided as much as possible, particularly for large amounts.
Tip 3: If the price of one cryptocurrency is high, don’t buy others.
A common mistake among traders is that they ‘buy’ other cryptocurrencies when they see one has rallied a lot. All those have missed the rally, look to cash in on the other altcoins. Traders need to understand that not all cryptocurrencies are due for a rally. Every coin has its own reason to rally, and it need not be correlated to others. Instead of comparing two currencies, it is sensible to analyze each of them fundamentally and technically as standalone. We should take a position in the market only if our technical or fundamental analysis supports that position. An event that is generally related to all cryptocurrencies can result in volatility of all the coins together.
The above chart shows the price of Ethereum in Bitcoin’s value and the US dollar price of the same. The lines show the amount of correlation between Bitcoin and Ethereum, where we can see how uncorrelated they are at times.
Tip 4: Never Forget To Use Stop-Loss and Take-Profit Orders
Using risk management tools is incredibly important for technical traders when planning for a trade. This step makes sure that we don’t fall victim to emotion led trading. A Stop Loss protects investors against significant loss of funds, which otherwise can wipe out their entire account balance. Cryptocurrencies are known for their whipsaw volatility, which can drive the price up to and down by 100% in an hour. For this reason, it is vital to use a stop-loss to protect against losses. The stop loss for any trade should not exceed 5% of the capital.
We should also know to take our profits at the right time. Else it could result in giving up all gains or even a loss. Therefore, the ‘take-profit’ of any trade should be near the opposing area, which can obstruct the current movement.
‘Chart 1’ shows how placing a stop-loss protected us from an unlimited loss and in ‘Chart 2’ we see how profit was taken perfectly at the resistance area.
Tip 5: Always add positions to a winning trade
Smart traders usually do not enter the market with full position size on the first entry. As we just said in the previous ‘tip’ that we are allowed to risk 5% of the capital on each trade, smart traders split their orders across multiple entries and keep adding to a winning trade. The first position would be 2%, and after the trade has moved into profits, they would add another 2% and do this until they reach the maximum limit of 2%. At the same, time they move their stop-loss to protect their position.
The below image shows how positions are added to a winning trade.
Investing & trading cryptocurrencies is not difficult or risky, but we need to have a plan before taking any action. Every trader must do their research before making an investment in any crypto asset. By following the above-mentioned tips, one can definitely improve their odds of winning trading cryptos.