One Bitcoin Trading Strategy to Rule Them All?
People become interested in Bitcoin for a variety of reasons. Some people are fascinated by potential for the revolutionary technology of blockchain. Others are attracted by the adrenaline rush of volatile markets, and may or may not care much about what the underlying assets actually represent. Regardless of where you fall on the spectrum, it is safe to say that nobody invests in Bitcoin with the intention of losing money. Whether you’re investing pocket change as fun experiment or heading full throttle towards becoming the next mighty whale of crypto, there’s a pretty good chance you’re hoping to increase the value of your investment. There are many different approaches and opinions about how to make this happen, ranging from complex algorithmic analysis to the much simpler course of “buy and hold”. Which Bitcoin trading strategy is the most likely to pay off?
How Much, How Soon?
In the world of traditional investment, one phrase that comes up surrounding these questions is “fast nickel or slow dime”. The fast nickel refers to the approach of trying to make a little bit of money right away rather than a lot of money over the long term, or the slow dime. When it comes to Bitcoin, many people are likewise drawn to the market for its “fast nickel” potential. While even some novice traders undoubtedly get lucky – perhaps those who invested in October of 2017 and sold in December – many of them are also sorely disappointed (perhaps those who bought in when Bitcoin hit $20,000 only to see it come crashing down).
Cryptocurrencies are particularly seductive to those looking for quick gains due to their dramatic ups and downs. High volatility offers high upside potential, but it also comes with high risk. Volatility works both ways – up and down. Plus, cryptocurrency markets have a history of moving in highly unpredictable ways that do not necessarily correspond to traditional technical analysis fundamentals. Is it possible to make money with an active Bitcoin trading strategy, buying during the dips and selling at the highs? Absolutely. Is it easy to predict which direction the market will move on a day-to-day basis? No. As bitcoin.com pointed out, “Bitcoin prices don’t follow most people’s predictions, and you may miss the highs and lows and lose significant amounts of funds forecasting the wrong market events.”
HODL – Hold on For Dear Life
As Bitcoin gets more media attention, one focal point that outlets are fond of emphasising is the huge increase in value over time. As Fortune put it, “July 28, 2010 – Early investors paid just six cents for a Bitcoin. A $100 investment seven years ago would be worth (you might want to sit down for this) $28,341,266 today.” This assumes, of course, that these early investors used a “slow dime” Bitcoin trading strategy and simply held onto their original Bitcoins for a decade.
Within the cryptocurrency community, holding on for the long term throughout the highs and lows is a popular strategy, often expressed as “hodl.” Originally a typo of “holding”, the term stuck and later evolved into an acronym for “hold on for dear life”. Holding continues to be a popular crypto and Bitcoin trading strategy within the online cryptocurrency community, and with good reason. Many who see the revolutionary potential for blockchain technology believe the value of Bitcoin will increase over the course of many years.
Past performance does not guarantee future movement in financial markets – at any given moment, there is no way to know for sure which direction prices will move. Traditional trading systems attempt to increase the probability of success by looking at a wide array of factors, ranging from public opinion to complex mathematical charting patterns. All of them ultimately rely on historical data to make informed decisions about the future, with varying degrees of success. When we look at historical Bitcoin price data over a period of years, since the beginning, there are numerous peaks and dips, but overall the price trends upwards.
Savvy traders might have been able to capitalise on peaks and dips, but the odds of losing any gains one has made on risky trades are equally high. For those that believe in the technology, buy and hold is likely a more effective Bitcoin trading strategy than actively trading on a daily or weekly basis. When to buy in and how much to invest are another question.
Dollar Cost Averaging
One way to minimise risk when developing a Bitcoin trading strategy is to put in a small amount on a regular basis, such as monthly, regardless of the price at the time. This is known as dollar cost averaging in traditional finance, and it makes for a strong long term Bitcoin trading strategy. Rather than investing all of your funds in Bitcoin at one price point, you spread them out over time at a variety of price points. Potentially, of course, you could make more investing one lump sum at a low price and selling at a higher one. Then again, you could also lose a lot more should the cookie crumble a different way. Spreading out your investments is a way to manage risk in a volatile market, build up your portfolio over time, and lock better odds of stable upward growth assuming the long term Bitcoin trend continues.
Even some of the most famous investors in the world have advocated this strategy. In 2016, Warren Buffet said that investors make money, “by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.” While Bitcoin is not a traditional asset, looking at its performance over the past 10 years, we can certainly see that his advice rings as true in terms of a Bitcoin trading strategy as it does for the stock market.
