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Annette Learns Crypto Trading, Part 2 – A Basic Strategy

By September 25, 2020 No Comments

Where to Start

In Part 1 of my series, Annette Learns Crypto Trading, I shared what I learned in getting a lay of the land, the why behind my interest, some handy vocabulary, and tools and resources.

Since then, I’ve signed onto the Kraken exchange, ready to make my first trade. And, I stalled. I still didn’t know what the fuck to do.

My goal is to trade altcoins, i.e. any cryptocurrency that’s not Bitcoin, but as I sat there staring at the exchange website, I realized I still didn’t know what to do.

I wasn’t looking to hodl, i.e. cryptonerdspeak for holding rather than selling, what I was looking for was a strategy. I need a plan, and so, I’ve delved further. I’ve been reading a lot of good information this past week and I’m going to lay it out for you here. Strategies, tips, and more concepts to know for the burgeoning crypto trader.

Developing a Strategy

Almost immediately in my search, I came across a post written for beginners on CryptoBible.io. It was published in 2017 by Will Hatton under the clickbait title: “How I made $350,000 in one year riding the Crypto-wave: Cryptocurrency Trading like a Pro“.

Unfortunately, the internet is saying that the days when people were becoming overnight millionaires on Bitcoin are gone but, I believe you and I can still make good money trading crypto.

Although an older article, it provided what I was looking for: a plan. Hatton breaks his down in a really easy to follow way.

  1. Swing trade rather than day trade. The former looks at bigger swings in the market, like months-long trends, rather than shorter increments of time, like day to day. The latter, day trading, can be too stressful for the ROI and other sources have said it’s a worthy pursuit only if you have a larger amount of capital to play with.
  2. Diversify portfolio into tiered investments. Keep 50-60% of your portfolio in safe, strong coins, like Bitcoin, Ethereum, Litecoin, etc., but also trade in “shit coins”, which are valued at sometimes minuscule percentages of a penny but can skyrocket in value quickly. Also, trade coins in the middle tier.
  3. Select a group of coins and swing trade amongst those coins, rather than trading in different coins constantly.
  4. Have an exit strategy. Figure out the profit you want to make off each coin that you’re interested in trading and sell when it reaches that price.

Okay, it’s starting to make sense how to do this … So what are the other types of coins available?

Making Sense of Altcoins

After Bitcoin, which is the gold standard of cryptocurrencies, everything else is considered an altcoin.

When considering which altcoin to trade in, there are so many options so how do I know which ones to choose? How do I know what sets each apart? How do I even begin to parse through the millions of options to make my selections?

Because there are a SHIT TON of coins out there. Just go to coinmarketcap.com to get an idea of what’s available. This website is the go-to resource for crypto prices and charts by market capitalization and as of today, 9/25/20, it has listings for 3,485 coins.

Blue-Chip and Shit Coins

Take a look at the top 10 to 15 coins at Coin Market Cap. These cryptos are the “blue chip coins [which have] a large chunk of the crypto market, a dedicated following and a real application” and Hatton considers them safe long-term investments. In addition to Bitcoin, other blue chip coins would be ones like Ethereum, Monero, Litecoin, and Ripple.

Photo by Nick Chong on Unsplash

Then, there are what Hatton calls the “shit coins”.

Another crypto writer refers to them as microcaps because they have a market cap between 0 to 25 BTC and offers a method for picking out these “shit coins” (Patel). These have been the most profitable for him. A revised 2019 version of his method can be found here but be aware the process appears to be very time-intensive. I will give it a go, see how it does, and report back.

CoinGecko is another crypto chart like Coin Market Cap but I can filter results by variables like developer activity and social presence, which would be important things to look for when selecting altcoins.

So what exactly is market cap? It keeps coming up and seems to be a determining factor.

Market Capitalization

Market capitalization indicates a coin’s dominance and popularity in the market and is the most important indicator to evaluate a cryptocurrency and rank it against others (Bitpanda). It’s also a really easy formula.

market cap = (current market price) x (circulating supply)

*circulating supply = total # of coins available in the market. This is a variable, not a constant, meaning it can increase or decrease.

Example, total supply (=max supply) of Bitcoin = 21M coins. As of 9/24/20, the circulating supply of BTC = 18.499M. That means there are these many bitcoins that have been mined and are currently in circulation (Blockchain.com)

Market cap is a useful and necessary metric because let’s say you have two coins,

current market price of coin A = $1

current market price of coin B = $10

Based on market price alone, it appears coin B has a greater value. However, factor in circulating supply and let’s see how that changes:

circulating supply (A) = 1,000 coins

circulating supply (B) = 10 coins

Therefore,

market cap (A) = $1,000

market cap (B) = $100

We can infer that coin A ranks higher than coin B and is more dominant in the market.

Entry/Exit Strategy

Soon I found my way to bitcointalk.org, a forum about all things crypto and more. I wanted to learn what other people say about trading strategy.

What I’ve gathered is that developing my own entry/exit strategy is important to keep emotion out of the process, i.e. have a marker for when to buy a coin and a marker for when to sell. This could look like, “Okay, when I gain X% profit on coin A, I’ll sell” and then, and here’s the hard part, stick to it.

Traders get greedy or fearful and don’t always stick to their pre-determined processes. After seeing a nice return, they’ll hold on, hoping they’ll get an even more lucrative return since the coin is on an uptrend. It’s human nature.

And while I knew psychology plays an important role in individual trading, I was surprised to learn just how much it also affects the market.

Human Nature

In developing a strategy, it would be worthwhile to also learn trends and how the market moves, and this includes why investors behave the way they do in response to market movement and how that in turn affects the market.

You can do this by talking to people and keeping up to date on the latest news, including social media. Twitter is a popular resource utilized by many in the crypto world. This method is filed under what’s called sentiment analysis, which according to this article, is “considered a lesser science” by some in comparison to more technical methodologies.

However, as another source points out, price charts are basically graphical representations of human emotions and behavior that “illustrate how market participants react to future expectations”.

More Advanced Strategies

By studying trends and performing more technical analysis I can fine tune my strategy. I’ll get more into the basics of these concepts in my next post where I’ll cover resistance/support zones, order types, and more.

Order types are great because they give me more tools to make more specific trades with. By educating myself on what’s available in the toolbox I can be more nimble in the market.

At the end of the day, what I keep seeing is that time and experience are the greatest of teachers in this game. For all the research and conceptual learning, being on the court and in action is when things start to gel.

References

  1. Chia, Alson. “The “Blue Chips” of Crypto.” Tokenize Exchange, Medium, August 26, 2020, https://medium.com/tokenize-xchange/the-blue-chips-of-crypto-d9a74487d4cf#:~:text=Blue%20chips%20are%20coins%20with,means%20lesser%20ROIs%20as%20well.
  2. Folger, Jean. “The Psychology of Support and Resistance Zones.” Investopedia, Updated Jun 25, 2019, https://www.investopedia.com/articles/technical/02/061802.asp.
  3. Hatton, Will. “How I made $350,000 in one year riding the Crypto-wave: Cryptocurrency Trading like a Pro.” Crypto Bible, 2017, updated 2019, https://www.cryptobible.io/investing-in-cryptocurrency-trading/.
  4. Liquid. “How to identify entry and exit points when trading crypto.” Liquid, June 4, 2019, https://blog.liquid.com/how-to-identify-entry-and-exit-points-when-trading-crypto.
  5. O’Connor, Michelle. “What Is “Market Cap” in Crypto, and Why Is It Important?” The Daily Hodl, March 6, 2019, https://dailyhodl.com/2019/03/06/what-is-market-cap-in-crypto-and-why-is-it-important/.
  6. Patel, Nik. “Picking Out Microcaps 101 (Revised 2018).” An Altcoin Trader’s Blog, June 12, 2018, https://www.altcointradershandbook.com/picking-out-microcaps-101-revised-2018/.
  7. “Total Circulating Bitcoin.” Blockchain, https://www.blockchain.com/charts/total-bitcoins.
  8. “What is market capitalisation (market cap) and why does it matter?” Bitpanda Academy, Bitpanda, https://www.bitpanda.com/academy/en/lessons/what-is-market-capitalisation-market-cap-and-why-does-it-matter.

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