One interesting development that we have seen with the advent of blockchain technology is the cryptocurrency market. Blockchain has spawned an entirely novel marketplace of investible digital assets. Like with any other existing traditional markets such as stocks or bonds, the cryptocurrency market is ripe with opportunities for those that are able to capitalise on them. There are a variety of different trading strategies that one can take to ‘beat the market’, here are a few that are most commonly employed.
Arbitrage trading can be described as the simultaneous purchase and sale of an asset in order to profit from discrepancies in its price. In other words, arbitrage traders will purchase an asset in one market, and then sell that same asset at a higher price in another market. In the context of the cryptocurrency market, arbitrage trading might resemble something like this:
Consider the following example, the price of Bitcoin is trading at $5,000 on Coinbase, while at the same time, it is trading at $5,100 on Binance. An arbitrage trader can buy bitcoins on Coinbase and then immediately sell their bitcoins on Binance, thus turning a profit.
Arbitrage as a trading strategy is one that can be fairly profitable if done correctly. Trading tools such as crypto trading bots can be used to automate and increase the execution time of trades, however, as the cryptocurrency market develops, it will become increasingly difficult to exploit price differentials that exist within the market.
Individuals who execute trades based on the fundamentals of an asset will look to certain indicators in order to determine if an asset is undervalued or overvalued. For example, fundamental analysis in relation to a company’s share price can involve evaluating metrics
- P/E Ratio – Price to Earnings Ratio
- EPS Ratio – Earnings Per Share Ratio
- ROE – Return on Equity
Fundamental analysis is a methodology that was first conceived by the late American Investor, Benjamin Graham. It was then later popularized by Warren Buffet, currently one of the world’s more famous value investors. Fundamental analysis is a concept that is most often applied to companies, but it can just as easily apply to digital assets such as Bitcoin. Instead of metrics such as the P/E ratio, factors such as the following can be used as part of any cryptocurrency related fundamentals analysis:
- NVT Ratio – Network Value to Transactions Ratio
- Crypto-asset value proposition
- Quality of the team
Trading based on the fundamental value of a digital asset means that one should be looking to hold the asset for a period of around 10+ years. Thus, the day-to-day volatility that the cryptocurrency market might experience should not concern an individual that is deploying this trading strategy.
The cryptocurrency market is very well known for one thing, and that is volatility. The price of Bitcoin, or any given cryptocurrency can rise by 20% in the span of a few hours and just as easily fall by another 20% in the next few hours. Ultimately, some traders use this volatility to try and turn a profit. One such strategy that allows for this is swing trading.
Swing trading concerns individuals that hold a cryptocurrency over a set period of time, usually a few days or weeks. Swing traders will then attempt to determine the overall trend of their cryptocurrency holding and execute trades based on its overall upward or downward trend. The success of swing trading is largely dependent on an individual’s ability to time the market, which is an extremely difficult feat to achieve given just how quickly the cryptocurrency market can turn. Thus, swing trading is no doubt one of the more riskier trading strategies to pursue.
The cryptocurrency market is a difficult environment to navigate. Its volatility can be a boon for some and a curse for others. However, what is clear is that there are a variety of trading strategies that one can employ to try and ‘beat the market’. Regardless of the strategy that one chooses to utilize, one must acknowledge the risk that comes with trading in this market. As such, it is important to not invest more than one is willing to lose, and also to make sure that thorough research is always performed before executing any trade.