There are a variety of ways to approach trading cryptocurrency, and these strategies can range from being simple to very complex. The aim of this article is to provide you with an overview to trading strategies that you can use as tools to beat the cryptocurrency market.
Fundamental analysis is one of the most popular trading strategies that investors use in traditional markets such as stocks. The idea behind fundamental analysis it to find assets that are undervalued before the wider market recognises its underlying value.
The theory is that an undervalued asset will then appreciate in price as the wider market becomes aware of its value. By this point, you would already have taken a long position and captured solid returns from its price appreciation.
Traders will often use financial metrics to help them determine the underlying value of the company, for example:
These metrics are very much used for fundamental analysis that is applied to companies. In general, the fundamental analysis trading strategy requires a longer investment time horizon, usually the medium to long term. Thus, you will have to be prepared to hold on to your asset for quite a while.
You may be wondering how we can apply fundamental analysis to the context of the crypto market. It might first seem unworkable because cryptocurrencies such as Bitcoin are not companies, nor do they have cash flows attached to them.
However, the same principle of using metrics to help identify undervalued assets can still be used when trading cryptocurrency, even though the metrics used might be slightly different. For example, you can use the following metrics to help you identify the investabiltiy of a cryptocurrency:
- NVT Ratio – Network Value to Transactions Ratio
- Crypto-asset value proposition
- Quality of the team
You will need to be prepared to hold for quite a while with this strategy. However, the underlying assumed advantage with this strategy is that, for example in the case of the stock market, prices tend to trend upwards, so in the long term you will be generating a positive return on your capital.
2. Swing Trading
This trading strategy is a more commonly used tactic when it comes to trading cryptocurrency. The reason for this is due to the volatility of crypto. For example, the price of Bitcoin can swing 20% in one direction and then an hour later drop by 30%.
This kind of volatility is actually great for traders, because volatility creates pockets of trading opportunity that we can capitalise on. The difficulty with executing on the swing trading strategy is that it will require you to be able to time the market. You will need to be able to call when price movements are likely to swing upwards or downwards.
Given the volatile nature of the crypto market, this can be extremely difficult, especially if you are executing trades manually. However, Automated trading via bots or signal groups e.g. Bitcoin signals have proven to be helpful in being able to properly implement the swing trading strategy.
This is also another reliable trading strategy that is especially effective in the crypto market. Arbitrage trading is a simple trading strategy to both understand and carry out. It involves exploiting the price differentials that can exist between two different cryptocurrency exchanges. For example, there will often be times when cryptocurrencies such as Bitcoin are priced differently between exchanges.
For example, the price of Bitcoin could be $10,000 on Binance and $10,500 on Coinbase. With arbitrage trading you are able to exploit this price differential by buying Bitcoin on Binance, and then selling it at the higher price of $10,500 on Coinbase. A big part about arbitrage trading is speed, so you will need to have an automated set-up to effectively capitalise on price discrepancies between exchanges.
There are countless more trading strategies that you can use when navigating the market. However, the strategies mentioned in this article are good starting points, especially if you are new to trading cryptocurrency. Learn more trading styles out there, and find the one that works for you.