Cryptocurrencies exploded in 2021 as mainstream companies including Tesla and Square entered the bitcoin arena. With online tools available for free or a minimal charge that make trading cryptocurrencies accessible to everyday people, many new traders also entered the market over the past year.
Investing in cryptocurrency tends to trend younger. A recent Motley Fool study found that 47% of Gen Z stockholders hold cryptocurrency, compared to 39% of Millennials. It’s no surprise since Gen Z are also more likely to trust social media-based sources of information. In fact there are 28,866 social media posts about bitcoin (probably the most popular cryptocurrency) per day, which breaks down to about 20 posts per minute. There’s so much information out there, but how much of it is good information? And what do you need to be skeptical about?
Here’s What I’ve Learned About Taking an Automatic Trading Approach to Cryptocurrency, and What You Need to Know BEFORE You Get Started:
- The crypto markets are still very young and are very volatile. Since the movements of these markets are generally quite strong, and they usually last for a while, you can expect to trade them effectively using very basic models. The best plan is to create various strategies based on the most basic models and test them.
- Crypto markets trend. Making decisions in trading is never easy, even more so when you are dealing with fast-moving, extremely volatile markets such as cryptos. What would you do if bitcoin dropped suddenly? Or if there was a sudden retracement that could make you lose all the profits you made during the day? These are questions that cannot be answered by relying on your gut feelings. You need numbers, rules, and a detailed plan.
- You need to look at the numbers, not rely on gut feelings. What would you do if you had bitcoin purchased at 55,000? There are so many questions that you can’t answer just based on your feelings. Making decisions is very hard.
- Do your research and understand exactly what you are trading BEFORE you enter the market. Be careful in understanding what you are going to trade. If you just trade things that you think will make money, you don’t know how much you can make or (even more important) lose. These are things you need to know to fully understand what you are doing. This is true whatever you trade of course but in cryptos it might be even more important to understand where your money is put.
Consider an Automated Approach to Trading
Automated trading systems are based on rules that are tested and fine tuned using historical data from the markets. Since cryptos and bitcoin are relatively new, until recently there hasn’t been historical data available to study these markets, but that has changed. Automated traders now have a decent amount of historical data and platforms that let them send orders to cryptocurrency exchanges.
As for performances, don’t expect to make crazy profits such as the ones some people made with bitcoin. You may be disappointed when you compare your performance to a simple buy and hold strategy on the same market. However, what you are looking for is getting an average return without the pressure of having to make proper decisions under stress. Many people aren’t good at making choices based on a gut feeling, and trading systems take the stress out and help to trade effectively.
When there are strong moves in the markets, things can go wrong quickly, but fortunately automated trading doesn’t pose the same problems as fast market trading. With automation, you can plan all your actions before going live, which means that you can study and analyze everything with common sense and honesty. The machine will then act according to your rules you’ve set no matter what is going on.
Cryptocurrency Should Be a Small Part of a Diversified Portfolio
Cryptocurrencies represent a newer opportunity for diversification, and that is why I added them to my portfolio, which already included futures and stocks. Cryptos also offer some risk-free opportunities, such as cash and carry. Of course, let’s never forget that the idea of “risk-free” in trading is relative, because even where there is no risk of losing money in the trades, there can still be the risk that the exchange will go bankrupt and you’ll lose your money. Nevertheless, this kind of risk is there for any broker, actually, regardless of whether it’s in crypto or on the stock market.
Since crypto is a new market, there is still a lot to be studied and discovered. You need to put numbers together, to interpret them with common sense, and to understand what they mean, if you want to find edges. However, developing new strategies for this market can really keep up our curiosity levels and prevent us from getting bored, which can sometimes be a problem when you always do the same things.
The main benefit in trading cryptocurrencies is that it’s unique. Nevertheless, it also poses some new challenges. For example, cryptocurrencies are extremely volatile, which means that to manage risk properly, you should include them in a balanced portfolio in which there are also many other strategies on different underlyings.
Some people believe that cryptocurrencies are the revolution of the world. As of now, it is hard to say. There are many key players in the financial world who consider them as nothing, and there are other key players who see them as the future of the money machine in the world. That’s a determination you’ll need to make for yourself.
Remember, no matter what you are trading – cryptocurrency or any other market – trade with consciousness and common sense. Carefully study what it is you are investing in before putting money anywhere.
Andrea Unger is a full-time professional trader, President of The Unger Academy and author of The Unger Method. Andrea is the only Four-Time World Trading Champion (2008, 2009, 2010, and 2012), he’s an honorary member of SIAT (Italian Society of Technical Analysis, a branch of IFTA) and speaks throughout Europe, America, Australia and Asia. Connect with him on Facebook @AndreaUngerOfficial or Instagram @unger_academy.