Cryptocurrencies trading strategies: ones to follow

The most popular crypto trading strategies explained

Cryptocurrencies trading strategies                                 

Cryptocurrency may be one of the newest investable assets of the last decade, but it’s already proven to be one of the most profitable in 2021. But that doesn’t mean you should just plough in – it is just as possible to lose all your money trading in cryptocurrency as it is to get rich investing in it.

What is in no doubt is that the demand for digital currency, and the businesses it helps to drive forward, is growing.

Rise in price cryptocurrencies versus shares

While one of the newer assets, crypto is one of the most successful of 2021 so far: Bitcoin is up 83%, Ethereum is up 267%. 

Trading strategies for cryptocurrency – before you plunge in

Katharine Wooller, managing director of Dacxi, urges investors to educate themselves first.

“Read up and focus on jargon. Frankly a lot of jargon and misinformation can be found online. Find yourself a reputable source of education in the space and use it wisely.”

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Do you need an investment strategy?

If you are going to invest in any asset you need to have a ‘why’? Some investors may focus on buying cryptocurrencies that appear to be priced cheaply, therefore profiting if the price goes up.

Or they may buy a coin that is already rising, in the hope of making further gains.

What you need to decide on are your financial goals, how long you want to invest for and whether you can afford to lose the money you invest.

There’s no one investment strategy that can 100% guarantee the cryptocurrency you buy will make you rich.

Bitcoin

What is the most profitable crypto trading strategy?

What strategy you choose will depend why you are investing in cryptocurrency. We’ve narrowed it down to four main reasons. There may be others, but these are a good starting point.

  • Growth 

Growth investors concentrate on fashionable assets that are expanding rapidly and posting strong growth. 

  • Value

The opposite of growth. Value investors look for bargains others have missed – such as a coin trading at a discount to its true value. Value investors only gain if other investors start to plough in. 

  • Momentum

Probably the most popular reason for investing in cryptocurrency. Value investors look for hidden gems, but momentum investors buy the popular currency that has already increased. The only problem is that investors do risk buying on a high. 

  • Contrarian

These are the cryptocurrency investors who defy the crowd. Not always to be confused with value investing, contrarian cryptocurrency investing takes nerve, because it means not following the crypto crowd.

Now you’ve decided what type of investor you are, you need to decide what will be the most profitable crypto trading strategy for you. Again, there are no easy answers.

Crypto trading strategies: take a long-term (automated) view

A long-term strategy that makes use of automation (to take the emotion out of your investing) could be a profitable crypto trading strategy.

Anton Altement, CEO of Osom.Finance says: “Extreme volatility of the market makes it very difficult to ‘manually‘ call tops and bottoms. 

“What’s more, strong market swings will get even the most cold-blooded market sharks emotional, let alone casual traders.

“Emotion is the enemy of wise trading decisions, which is even more of a reason to trust a machine with your crypto trading decisions.”

Most profitable crypto trading strategies: invest indirectly

Investing in a company that has a limited exposure to cryptocurrency will dilute your own exposure to trading cryptocurrency while keeping you open to any gains in digital currency.

For example, on the New York Stock Exchange  there are companies like Square, PayPal, MicroStrategy and CME Group. 

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Companies such as these  won’t subject you to  the same exposure to a direct cryptocurrency or blockchain project but may help you  minimise any losses.

Then of course there are companies such as Tesla which bought $1.5bn worth of bitcoin in early 2021 and committed to allowing the currency for payment of its cars. 
 

Crypto investing strategies: be event-driven (airdrop) 

Yves Renno, head of trading at Wirex, believes cryptocurrency markets are getting more efficient, but there is still a long way to go before they reach the level of efficiency observed in traditional markets. He says:

“A nice strategy that I had the opportunity to test within the past year is to seek profit around airdrop events.”

Renno admits the trading strategy could be categorised as an event-driven strategy. 

“It consists of capturing the fair value of the airdrop, but also capturing the positive price momentum that typically precedes the event.”

He says the key is first to try to measure the fair value of the airdrop. “This can be done intuitively, simply by looking at the evolution of basis spread, the difference between the future value and the spot price. This is theoretically the fair value of the airdrop.”

He gives the example of XRP/BTC future and spot level taken right before and after the SPARK airdrop. Starting hours before the airdrop, the premium increased gradually from 3% or 4% to levels above 7%.

Ripple price last 12 month

The second challenge is to try to measure and capture the event’s expected impact days before its occurrence. 

“In the XRP case, the overall positive market trend – spot and future – observed days before the event was partly driven by the airdrop as the XRP price. And there was a significant market correction immediately after the airdrop.”

Crypto trading strategies: hold

Dacxi’s Wooller points out that crypto is “exquisitely” volatile. She says:

“Most retail investors are adopting a holding strategy which is sometimes referred to, infuriatingly for spelling pedants, as hodling. The trend has been hugely positive over 2020 and 2021. Holding may be preferable for those who don’t have the appetite for volatility.”

Crypto trading strategies: diversity – but not too much

The majority of the banks and financial institutions that have fuelled the recent gains are interested in a very short list of cryptocurrencies, such as Bitcoin, Ethereum, Litecoin.  

Wooller says:

“It is important to research the case for using each coin; they are as different as investing across three different stocks in three different industries.”

She points out that withover 9,000 crypto currencies, the vast majority are unlikely to succeed in the long term. 

“A great example is Dogecoin,beloved of Elon Musk, and originally based on a joke meme. It currently has a market cap in excess of Barclays and Lloyds, but it is unlikely to end well.  Of particular concern are the privacy coins, mostly promoted by exchanges with a poor KYC/AML policy, which understandably are under regulatory scrutiny.”

Cryptocurrency health warning: trading strategies for crypto are addictive.

You have been warned, crypto is probably best seen as a mindset, warns Wooller. 
 

“The industry moves at lightning speed, and a week in crypto, like dog years, compares to six months in any other industry. Crypto converts are evangelical – you will almost certainly find yourself talking about it animatedly to everyone you know. In my opinion, it is fast becoming the dominant technology, and will make the dotcom boom look like chicken feed.”

FURTHER READING: Bitcoin margin trading explained 
FURTHER READING: Tokenised assets explained

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