How to trade cryptocurrency and not go broke

Risks

Cryptocurrencies use a complicated mechanism of its market price estimation, but all of them have three common risks:

• System juridical risk — there is practically no legal regulation of cryptocurrencies as a financial (exchange) instrument. In the most countries, the legal status of the crypt remains problematic, at best there are ineffective discussions held from loyal options (mining and possession are not officially restricted, but it is impossible to pay and speculate with it) up to the total ban. Actual information on this question should be followed constantly, the common information is here. So far monetary regulators have refrained from the direct control over virtual currencies and blockchain-based financial services.
• Uncontrollable, illogical dynamics: the value (not the price!) of the same Bitcoin or Ethereum is not ensured by the State, private capital, banks or other financial structures which could affect the liquidity of the market if needed. The result? Virtual assets can completely lose their value at any moment in case if the users participating in the blockchain link lose their confidence in these assets.
• Collapse can be caused by non-market reasons, such as developers’ actions, software changes, system technical problems, fraud, hack attacks, alternate cryptocurrencies appearing on the market. It is impossible to forecast such events by the ways accustomed for a trader, and the necessity of constant diverse monitoring of the market requires time, knowledge and a lot of nerve.

Right choice of a trading asset

As of 01.04.2019 the system information about 1951 cryptocurrencies was known (according to some estimates — more than 2500). Most of them are considered as low liquid shitcoins (having zero value) and trading interest to them is at zero level. But there is a special group of strategies for such assets, though it’s rather of an investment than of trading, under the term penny stock. We shall not dig deep into this topic.

Regardless of what you need cryptocurrency for, choosing the active we pay attention to the following factors:

• Scope of its application.
• Financial indicators: capitalization, liquidity, trading turnover.
• The price of coin, mining possibility, coins amount at the market.
• Developers’ qualification and activism, development programme of the project.

The market leaders who hold near 75% of the global circulation, have been remaining unchanged for 5 years:

• Ethereum (ETH);
• Bitcoin (BTC);
• Ripple (XRP);
• Litecoin (LTC);
• Bitcoin Cash (BCHABC or BCHSV).

Operations with these assets are considered the most trustworthy and being actively traded on stock markets.

But! From the stock trading point of view, the “old” coins has a serious disadvantage: they all try to reach Bitcoin (with different speed). If the BTC is collapsed — no reserves, protocols or technical improvements will help, LTC, ETH, XRP, BCH will follow. Thus we recommend paying attention to some “young” coins. As of 01.05.2019 the alternate 5 of steady but more independent budget altcoins look like this:

• DASH;
• Monero (XMR);
• EOS;
• Stellar (XLM);
• TRON.

Practice shows that diversification of the risks with buying different and especially new crypto coins is ineffective, and simply dangerous to inexperienced investors. We remind: 80% of all new ICO-projects over the past 2 years proved to be failures, so we invest only into steadily working currencies which take leading positions in the capitalization rankings.

Before trading cryptocurrency, we recommend testing your strategy with ForexTester software − on real quotations of any asset and in different trade conditions.

Technical analysis

The most important factor of crypto assets analysis is estimation of the capitalization volumes, you need permanent access to the actual data at least on free resources.

There is no full-fledged (from the Forex point of view) liquidity on cryptocurrencies, currency pairs from the popular token (BTC, LTC, XRP, ETH) and ordinary currencies (USD, EUR, CNH) are considered the most stable ones — they are well projected with traditional methods through high “technicality” of the fiat assets (see Using Indicators)

Technical analysis for cryptocurrencies causes reasonable mistrust since the volatility on these assets is hundreds times higher than at the stock market or currencies. Gaps on cryptocurrencies are noticed far more often, because of what the submissions fulfilment time can be too high. Right away crypto brokers discuss the right for forced deals closing, volume restrictions, super-high spread and other disadvantageous for trader terms. However, classic instruments can be used during relatively calm movement (see Using Graphic Tools).

There are no special super-strategies for cryptocurrencies, at least for Bitcoin. Standard technical analysis works from H! and lower, necessarily with Stop Loss and strict mini management, let’s not forget about the spread and overall expenses for conversion. Tick volume on the crypt loses its sense at all, and real stock volumes are hard to estimate because the decentralisation of crypto stock markets is much stronger than the one of Forex. The volume of hidden submissions on BTC and ETH are dozens times higher of the “invisible” volume, so it’s worth to operate with the short-term analysis only.

What is allowed:

• technical scalping not lower of M15, not linked to volumes;
• indicator, graphic and VSA strategies: trend, breakthrough;
• arbitrage (spatial and static);
• pump (provocation of the market participants in the way of creating large deals) and damp (abrupt fall of the course, caused by the specific volume “drop” by major participants);
• news trading.

Several practical remarks