My Cryptocurrency Trading Strategy for Bitcoin/Ethereum

It’s obvious that currencies such as Bitcoin can’t be ignored. The extreme price volatility means that on any given day, the Bitcoin price may be a news story, be it a rise or a fall. And it’s fairly true that at least for some people, extremely big gains have been made. It seems very likely that in the future that some of these tokens may become an alternative store of wealth and as such, they represent a chance for diversification for the passive investor.

I must state that overall, I am bearish on this sector overall. So it’s perhaps best that I first distil my reasons why:

  • Most ‘currencies’ have no basis at all. Like the dot-com boom, most will amount to nothing.
  • Valuation is tricky, almost impossible. Movement is driven almost all by speculation.
  • Overall, these are a bad thing for governments who would prefer something they could regulate.
  • Mainstream take-up of seems unlikely at present. Volatility means that anyone accepting this as payment takes on the risk.
  • Even the top currencies could be obsolete one day if a better currency arrives. A changeover may not be friendly to holders.
  • Security is a big issue. Once coins are stolen, it is difficult to retrieve them. Law enforcement knowledge lags a long way behind.

But that isn’t to say I believe there are good reasons:

  • Blockchain is a natural development of technology and offers advantages over a fiat currency system. International transfers are relatively expensive and slow.
  • It is eminently possible for anything to have a store of value as long as people believe in it.
  • Market maturity may give these currencies more legitimacy.

In short I do believe that in 10 years time we will still have virtual currencies around, but by this time the market shakeout would have produced a limited set of ‘winners’. If they are to be used as a store of value, the implied value per token would be much higher than today’s values. But the price trades at such a huge discount (in my opinion) to reflect the risk that the currency may not amount to anything at all. 

So, my own trading strategy for these currencies rather reflect my beliefs. The principles are as follows:

  1. Only risk money that you can afford to lose. This is obvious, because if one day the market crashes and does not recover, you will not be materially affected. For me, my initial stake will be capped at 500 EUR.
  2. Only risk money in the top currencies. With the future of any marginal currency questionable despite bullish predictions from their creators, I only invest in Bitcoin (BTC) and Ethereum (EUR). Currently these are the top two currencies by market capitalisation. 
  3. Buy the dips, sell the peaks. Speculation means that prices swing much more wildly than other asset classes. Even though the Bitcoin market is well established, variance of 20% a day is not uncommon. Obviously, judging what a peak is, is a different matter.
  4. Buy first, sell later. This means buying physical coins, not taking them on the spread market. This limits your liability to the cost of the coin.
  5. No selling at a loss. The worst case scenario is that I end up sitting on a load of coins; the best case is the market continues its volatility and I can earn several times my investment, giving me some ‘free’ coins.

One of the good things that make trading possible is that trading and holding costs are nil. If you trade on GDax (the exchange for Coinbase) and are offering limit orders (a market maker), it costs nothing. This means it is possible to make profits on extremely thin market movements. Theoretically even if the market moves by a dollar, you could make money. I am sure there are people making a decent living this way – buying £10,000 or more of currency and selling it back for a tick above, but if the market goes against you, you may be waiting a while.

My strategy is to use the graphs to and buy when the price seems to have bottomed and sell out if it seems to have hit a ceiling. This is obviously not foolproof, but I will tend to use just 5% of the bank at one go. If the price keeps on going down, I will keep adding tranches as I see appropriate, selling these tranches as the price recovers. I am trading both BTC and ETH; despite the prices of all currencies being heavily correlated to the Bitcoin price. I also use the EUR market on GDax; it simply is the easiest one for me to do.

Results are updated as below:

Date InCurrencyPrice In (EUR)Date OutPrice Out (EUR)Profit (EUR)
7/3/18ETH0.2 ETH @ 600
3/5/180.2 ETH @ 6204
7/3/18BTC 0.01 BTC @ 80005/5/180.01 BTCH @ 82002
9/3/18BTC0.01 BTC @ 699010/3/180.01 BTC @ 75005.1
14/3/18BTC0.01 BTC @ 650019/3/180.01 BTC @ 70005
14/3/18ETH0.2 ETH @ 496.423/4/180.2 ETH @ 5225.12
17/3/18BTC0.01 BTC @ 600019/3/180.01 BTC @ 67857.85
17/3/18ETC 0.3 ETH @ 38019/3/180.3 ETH @ 44519.5
27/3/18ETH0.2 ETH @37013/4/180.2 ETH @ 4006
31/3/18ETH0.2 ETH @ 3009/4/180.2 ETH @ 35010
31/3/18BTC0.01 BTC @ 600012/4/180.01 BTC @ 62502.50
11/5/18BTC0.02 BTC @ 7000
23/5/18ETH0.2 ETH @ 490
13/6/18ETH0.4 ETH @ 400
24/6/18BTC0.02 BTC @ 500017/7/180.02 BTC @ 600020

Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.

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