Disclaimer: Before we get started please read the disclaimer in the footer of this website.
This is a quick overview of the two most effective ways to experience and survive the very volatile cryptocurrency markets over time. These two methods are based off of a couple of years experience with this dynamic asset class, and represent what to date has worked well. These two approaches are not silver bullets as they rely on the subjectivity of the investor/trader in timing entries and exits. But if you can learn to control your emotions, and not buy high when the euphoria and FOMO hits, and sell low when the panic hits the markets you stand a good chance of not losing everything. Boy, what a pep talk.
Now with that out of the way, let’s get started.
We will approach trading and investing in cryptocurrencies in two ways here.
The first is the Buy and Hold investment strategy which is a fairly passive approach to the markets. The second strategy is what could be termed a Bitcoin Maximalism approach combined with Seasonality and Opportunism and is a much more active trading approach to crypto.
BUY and HODL
This is fairly straightforward.
You buy BTC or ETH or LTC and hold it for a long time on the belief that its value will go higher. While it may sound boring, traditionally in the cryptocurrency market it has worked. At least it has worked consistently with the major coins – Bitcoin, Ethereum, Litecoin and Ripple. With each of those being up a minimum of 3,000% in 2017.
This approach requires you to have a long term outlook, and be invested in a coin for a minimum of three months and normally much longer.
But do not assume that by just buying and holding you are opting out of the dynamic aspects of this market. You are not. In fact, you should be prepared to experience the dread of having your buy-and-hold investment portfolio drop at least 50% in paper value at least once every 6 months. As an example – buyers of Litecoin at its first all-time-high (ATH) peak had to wait three years before it regained its former heights (in USD) in mid 2017. But, if they held on for another few months after finally breaking even on their investment, they had the potential to make returns of at least 10x.
Historically, buying and holding your portfolio through the downturns and not selling at the bottom when the fear was greatest has been rewarded for holders of BTC, ETH and LTC. This is not true of the same strategy with other altcoins, many of which dropped to zero in value, so do your own research (DYOR). AND please understand that all of this is subject to change quickly as cryptocurrency is an extraordinarily fast marketplace and ecosystem. Past performance is not indicative of future behavior.
The last point is that in many cases a buy-and-hold investment portfolio of BTC has outperformed someone who was actively trying to trade altcoins over the same time period. Particularly when the person actively trading was unfamiliar with the cryptocurrency markets and did not understand how they differ from traditional markets.
Active Trading Towards Bitcoin Maximalism
This is the second strategy which has performed well in the cryptocurrency markets over the past two years.
This is a much more active approach and is not for everyone. Seriously, these markets move 24 hours a day, 7 days a week, 365 days a year. There is no break, and some of the most massive moves have occurred over holidays, weekends and at night. So you ABSOLUTELY need to be aware that if you are going to try to actively trade in crypto you have to be prepared to watch them like a hawk, or develop your own system for mitigating your risk.
For those of you familiar with stop-losses, a note of warning. When you are trading some of the more illiquid markets of the smaller cap altcoins, stop-losses sometimes simply don’t work. This can happen for a variety of reasons. Most often it is a lack of appropriate liquidity to cover your position without extreme slippage. But it can also be due to an exchange simply being off line at the time you need it most. Or their wallet is being worked on. Or the blockchain network is congested and your transaction can’t execute quickly enough.
So, with all of those caveats out of the way, here is the approach which many use to maximize their portfolios and hedge against total loss.
Have Two Portfolios
First, they have two portfolios. One is for hodling long term. The other is for actively trading.
The goal is to try to keep at least 50-60% of your cryptocurrency assets in the long term portfolio. This may be made up of BTC, ETH and any other altcoin you think may turn out to be a big winner down the road. These coins are all kept in cold storage and are meant to be held for at least a year, with 5-10 years not being out of the question.
In the actively traded portfolio you may hold as many as 45 coins at any one time. The goal with this portion is twofold – expose yourself to the potential exponential upsides of the altcoin market and maximize your returns in terms of both BTC and fiat.
This seems deceptively simple. It is not. Emotions can wreck your positions, mis-timing your entries and exits can drain your profitability and most importantly for the crypto markets – BTC can wake up and go on a giant bull run and decimate your alt positions.
Trading with the Seasons
Altcoins have a strange and ever-changing relationship to BTC. Whenever BTC makes big moves altcoins seem to fall or stall. But altcoins tend to go into what is colloquially called “Altcoin Season” when BTC is moving sideways or trading in a range. For the past two years, BTC seems to have a cyclicality to it which tracks fairly neatly to a calendar year’s quarters. There is a great explainer on this trend here. The periods of decline or stagnation in the BTC trend are when altcoins sing. This is generally from mid-winter to late spring. With BTC reasserting dominance starting in late spring and carrying forward to close out the year.
Altcoin season is most likely driven by the influx of new people into cryptocurrency. These new entrants tend to come into crypto through BTC. Then they branch out to ETH and LTC on the same exchange. Then they hear about exponential returns of 100x in altcoins and go searching for “the next bitcoin” when their BTC investment stops going up >20% each month. And in fact, over the past two years many people who held altcoins during altcoin season have experienced holdings which did go up 10x-50x at least once.
Don’t Be a Bag-Holder, Unless You Want To Be
Many an investor has stopped being an investor and become a trader who goes on to do very stupid things because they experienced these kind of runs either directly or peripherally.
The biggest sin is going “all-in” on a coin which they think will be the next BTC with a significant portion of their portfolio. This is a bad idea. Sure, if you get really lucky, you could turn $10,000 USD into $3,000,000 USD over the course of a few weeks if you have unbelievable timing and are THE MOST AMAZING TRADER OF ALL TIME. But the chances of doing that are ridiculously low.
More to the point, if you are new to this, you will probably not sell near the top. Why? Because, you will be thinking – “this mega bull-run is going to go on forever”, “I AM THE MOST AMAZING TRADER OF ALL TIME” and “this coin is going to be the one which eclipses BTC forever”!
Of course it is, and of course you are. Of course. So you hold that coin through what you think is a minor correction (even though it just dropped 20%). Then you fail to sell the dead cat bounce and you ride your precious coin all the way down like Gollum and his ring.
Which is how you become a “bag-holder”, and you join a lot of other “bag-holders” as the “community” around that coin. This is the community which spends its days hoping and praying that their coin will someday rise from the ashes. Which it might. But not anytime soon. In the meantime, BTC and many other altcoins just went 10x and you missed it.
The safer bet would have been to put $1,000 USD into 10 altcoins instead. You would still have made $300,000 USD on only one of your investments and you didn’t have to be THE MOST AMAZING TRADER OF ALL TIME. Because you probably won’t be. Seriously, you probably won’t be the most amazing trader of all time. If you are, please remember the little folks.
So, instead of being naive with your money, maybe you should think about figuring out how to do your own research, find a few projects you think have a good chance of going to the moon and then split your trades amongst them.
Look at the BTC Chart First, Last and In-Between
Now, once you have your basket of altcoins you need to look at the charts for each on a regular basis. BOTH CHARTS. What does that mean? Well, you need to look at both the fiat chart, and the BTC chart.
Most people new to crypto only look at the fiat value of their holdings. Which is fine. But it means that you will miss out on the opportunities provided by leveraging the trading pairs to maximize your returns. How does that work? It is actually fairly simple. You try to enter into your altcoin positions when they are priced low against BTC. From a technical analysis perspective this means using the BTC chart to find your 50% fib, your support and resistance and cloud entries. (Not sure what any of that last sentence meant? Check out one of the best free resources for learning TA for the crypto space here.) By using BTC as your primary trading pair for your altcoins you can also get a feel for where a specific move might stop. This is particularly true when a coin goes past its ATH in fiat. In times like that it may seem like your altcoin is in price discovery mode. And it is, in fiat. If you look at the BTC chart, it is probably following a similar pattern to one which it has followed before. Which will tell you where you might want to set your sell orders.
Knowing when to sell an altcoin is a bit of art. It is very easy to fall in love with a project and think that it will indeed upset BTC. They call this the Flippening. But it has yet to happen with any authority. Why? Because BTC has the greatest network value and first mover advantage. It is also the reserve currency of the crypto world. Sure it could happen. But most people are betting that it won’t. Really, they are seriously betting big money on it not happening. And these are very smart, very wealthy people who are very familiar with the space. So for this exercise let’s assume they are right.
What that does for us is to inform our next most important decision – when to sell.
Many successful crypto traders use their altcoin positions to maximize their bitcoin positions since they are betting that it will be the long term winner. Their process is pretty straightforward. During altcoin season, when their altcoin positions are roaring upwards against BTC, they are selling bits of their positions into BTC on the way up.
So they might enter an altcoin position at 1000 satoshis. When that altcoin reaches 1200 satoshis they might sell 10% of the position into BTC. When it reaches 1500 satoshis they might sell another 10% into BTC. When it reaches 2000 satoshis they might sell another 40% of their position. When it goes to 3000 satoshis they might sell another 30% of the remaining position and then let the rest ride. By approaching their trading this way they have more than doubled the BTC they put into that trade. And they still have an altcoin bag which might do something stupid – like go 100x. Then they can sell it and have 10x+ the amount of BTC they started the position with. Then when BTC makes another parabolic move they have a lot more of it with which to ride the swell.
They can also take part of their profits and apply them back to their long term holdings, and cash out some as well. Which is, after all, the goal here.
If you are going to be a trader, remember to keep a separate long term holding portfolio, and to learn to do technical analysis. It will make all the difference in the world.