As someone who has traded nearly every market out there for over 25 years, I can say with certainty that crypto is a different animal altogether. While all markets bear certain similarities to each other, crypto markets have certain characteristics that are unique and critical to understand if you want to be successful in the space. Here’s a primer on a few of them.
- Understand (Crypto) Market Cycles:
Market cycles, the perennial ebb and flow between bear and bull, take several years, sometimes even decades, in legacy markets. Here in the world of crypto, entire bull runs with returns of greater than 10x can happen over the span of a single month or less on some coins. This exuberance then usually takes 10x as long to sell off and thus complete the bear market before the whole event happens all over again. A simple idea of where in the market cycle that a coin you are buying is makes an enormous difference.
Last year, the term “HODL” spread throughout the crypto space, encouraging investors never to sell, implying no end to the bull market. Today, only a year later, most of those investments are down over 90%. Change is inevitable, especially in the fast-paced and ever-shifting world of crypto currency. The difference between turning $1,000 to $10,000 in a month and turning that $1,000 into pocket change over the span of a year is a simple act of zooming out and having a general idea of what quarter in the proverbial game of market cycles your coin is in.
2. Bitcoin runs the show:
In the current world of cryptocurrencies, you’re either Bitcoin or you’re an “altcoin.” Never lose sight of the Bitcoin chart when buying or selling any trading pair in the crypto market.There is a strong correlation between the price action in Bitcoin and nearly every single altcoin. A healthy Bitcoin is a healthy total crypto market cap. The number one way new money enters the crypto markets is by way of buying Bitcoin. This new money typically learns about the rest of the cryptocurrencies and is enticed to buy altcoins at a chance of higher returns. When Bitcoin is bearish, it is very uncommon to find an altcoin that is not also bleeding out.
This important dynamic can be tracked by way of watching the Percentage of Total Market Capitalization (Bitcoin Dominance). When Bitcoin is falling in percentage, this shows money is flowing from Bitcoin into altcoins, and higher returns can be found trading altcoins. When Bitcoin decides to buck the trend and take back the total market cap percentage, it is time to find a hedge away from the altcoin markets, whether that be Bitcoin itself or cashing out.
3. Antifragile diversification is hard to find:
The use cases for the thousands of altcoins and utility tokens in the crypto space range far and wide. Unlike traditional markets, where fringe tech stocks may be a good way to diversify a portfolio full of blue chips and bonds, the thousands of coins in the crypto world move in a general unison. Of course, not all coins are alike, and thus many coins and portfolios far outperform others. That said, a diversified crypto portfolio will not save you from a devastating drawdown when a bear market rolls around.
There is a lot to unpack when first trading crypto, from the fundamentals of the underlying technology to getting adjusted to the voracious volatility. It is easy to become overwhelmed. Focus on a few coins at once, especially when trading, even if you come across a coin promising to change the world. Keeping the number of coins you own low is not only recommended for more focused day traders, but investors, too. The crypto space does not lack surprises and keeping up with things like coin swaps, delistings, wallet upgrades, etc. can be difficult to keep track of if you are new. Focus your fire.
4. Emotions never change:
A bull market is fueled by fear, a bear market by hope. Many make the mistake of assuming that the paradigm shifting technology of blockchain changes this common law of markets. Yes, Bitcoin is deflationary by nature. No, this does not mean price will rise indefinitely without corrections. When someone sees their peer getting rich in the span of weeks, the fear of missing out is the same fear they would feel in any other market. More importantly, the negative emotions one feels when their investment in a cryptocurrency (no matter how world shattering the technology) is down 50%, is the same emotions our predecessors felt during the great depression in 1929. Everyone has their breaking point.
Heightened volatility in crypto brings out intensified emotions. Trading cryptocurrencies is a true roller coaster. On top of the haphazard price action, the crypto market never sleeps, literally. It is tempting to take advantage of the 24/7 nature of the crypto markets when starting out, trading late into the night, multiple days in a row. Understand that crypto is here to stay, despite what the mass of critics have to say. There will be boundless opportunities to come and trading this disruptive market successfully requires extreme emotional stability. Take care of yourself and size your trades properly!
5. Security and Safety
The parallels between the gold rush of the 1800s in the Wild West and the current crypto space are endless. From miners to blackhats (hackers and cowboys), the crypto space is largely untamed, and with that comes risk of all sorts. The technology itself was derived from a group of cypherpunks looking to find a cryptic alternative to the current monetary system. Cybersecurity, on all fronts, when taking part of any activity in this space is of utmost importance. The opportunity for crypto investors and traders to reap massive profits are endless but also useless if you don’t have the proper security measures in place to keep them.
Here is a short list of a few security tips for navigating the crypto markets:
- Use multiple emails — certain services may require you to register with an email. Don’t put all your eggs in one basket by using the same email every time you register for something new.
- Two Factor Authentication is a must — Anytime the opportunity arises to enable “2FA” through an app on your phone, take it. Keep your 2FA backup codes.
- Beware of bots — There are tons of imposters of prominent figures in the crypto space, especially on social media. Double check and make sure the person you are interacting with is the real person.
- Invest in a hardware wallet — Keeping your crypto profits offline in “cold storage” and off of seedy exchanges is highly recommended. Consider buying a Trezor or Ledger.
- Don’t believe everything you read — There is amount of misinformation in the crypto space is baffling. Audit everything and everyone. When something sounds too good to be true, especially in crypto, it’s because it is. Use common sense!