Bitcoin Trading - Are you sure you don’t want to stay up with us? The Japanese markets wake up in a few hours, there will be some action then. —A day trader whose name is lost to my memory, said shortly after 1 a.m. at a Bitcoin convention afterparty.
Day trading Bitcoin is not for the weak-willed or the halfhearted. I do not particularly recommend it. I don’t do very much of it myself. For every person who can beat the system, there are more who can’t. During a gold rush, the best thing you can do is sell shovels. During a war, the smart money goes into “defense” contracting. When there is an extremely volatile commodity, some day traders do get rich, some lose their shirts, and the exchange rakes in the fees either way.
There is also something that makes the day trader almost diametrically opposed to the philosophy and motivations of the rest of the Bitcoin community. Day traders love volatility. No other member of the community desires volatility. Miners, merchants, payment processors, long-term investors, people who work for Bitcoin—every one of these groups desires stability, not volatility.
At the same time, the community needs day trading. It makes up a significant part of the currency’s legitimate use and volume. It is also one reason why the price climbed so high, so quickly. Those jumps brought a lot of real value into the Bitcoin ecosystem, both in fiat money and by making Bitcoin more valuable. Many of the early adopters who saw a return of 9,000 percent or more on their investment reinvested at least some of that money into Bitcoin-related businesses.
The thing about high-volume trading of any commodity is that it gets kind of “meta” after a while. Ostensibly, everyone is betting on what they think Bitcoin is going to be worth, only they aren’t really betting on that. What they are really betting on is what they think the public, primarily other day traders, think the price will be in an hour, or half an hour, or 10 minutes.
Certain strategies can be followed that attempt to predict what the public will think next, not based on the theoretical value of Bitcoin but on the theoretical ineptitude of the average day trader.
This blog post will explain some basic tips and theories, as well as offer resources for more information. This is not meant as a comprehensive guide. I do not mean this disclaimer in a “cover my ass legally, but really, you are ready, wink wink, nudge nudge” kind of way. I am, at best, a toddler in the day trading world. So take the knowledge I have to offer, but then go learn from a master before you invest even what you think you are willing to lose.
You will be competing against real animals. Many of them, the most successful ones, are veterans of the stock market. Even they are concerned about the effects that a 24/7 global market can have on the junkies that previously lived on stock quotes. The quote at the beginning this blog post was said to me directly. Although I have forgotten the trader’s name, I will never forget the enthusiasm with which he said it. He was dead serious. He wasn’t giving me a tough time, either; he really thought that staying up until 3 a.m. to work the Bitcoin market as the Japanese started waking up was something I would be interested in doing, even though I had just covered the convention for the last 17 hours.
You should know, going into Bitcoin day trading, that guy is your competition. You don’t necessarily have to beat the likes of this man, but if you are serious about making a profit, you will have to match his level of dedication. On the other hand, Bitcoin is very volatile compared to nearly every other commodity—stocks, precious metals, currencies—so there is a lot of money to be made if you can ride the waves.
Of course, if you are interested in day trading at all, you have by now heard the “buy low, sell high” principle that is and always will be the golden rule of investing, regardless of whether you are playing the long or the short game. Everyone knows this strategy, but day trading only works because most people don’t adhere to it.
They want to adhere to it, they probably even think they adhere to it, but they don’t. The problem is FOMO—the fear of missing out. The average day trader will see a quick rise in price and think, “Oh, this is the jump we have been waiting for, I’m going to miss it!” But, of course, in most cases, the day trader had already missed it and is buying in at the peak or close to it. Then when the price tanks, rather than hold out for it to rise again, the average day trader overreacts, thinks that this could be the next big drop, and sells. Of course, all professional traders and whales—the term for big Bitcoin holders—bought in when the price was low and sold when it was high.
The key is to stay calm, using certain indicators to gain some insight into the reality of the market as opposed to the current price of the coin. First, you need to know where to get information. The most popular resource and absolutely required reading if you plan to trade Bitcoin in any serious fashion is BitcoinWisdom.com. The website gives information on Bitcoin and all the major altcoins on all the major exchanges. In addition to order books, it also includes some basic tools useful for identifying trading opportunities.
There are other sites, such as Coinigy, that allow you to trade on multiple sites at once and give you a suite of tools that resemble those used by professional stock traders. It currently offers a free trial, after which it charges a fairly hefty fee. Depending on the kind of volume you want to put behind your day-trading activities, you might or might not find it worth the price.
The other principles of stock or currency day trading apply here as well: use market indicators to identify possible trading points and then capitalize on them. Day trading is a bit like surfing—you will fall and you will make mistakes, and you will be wrong a lot of the time. Just as in surfing, you will fall off your board a lot; it is a part of the sport. The key is to stick with it until you are right more often than you are wrong and to use small amounts until you get a feel for the market. Bitcoin is helpful in this because you can “practice” with insignificant amounts—five dollars or even less—and then move to larger bets when you are ready.
The main thing you are looking for is variance between where your indicators say the price should be and where the market price actually is. Generally, the market should rebound closer toward where it was previously. There are general trends down or up, but they generally happen in “stairs” rather than “elevator” jumps as the price tests new bottoms or highs.
The first concept that you should know is that of the double bottom. When a bear (down) market is about to transition to a bull (up) market, it will first test things with a double bottom. What this means is that when the price hits a new low, soon after there will be a quick but small rise in price, followed by another drop, typically equal to or smaller than the previous drop.
This is an indicator that some people are buying at the new lower price and a rebound is imminent. Keep in mind this pattern is not the only factor that should be considered when making a trade, because double drops can sometimes instead be temporary pit stops on the way down even further.
There are other fundamental indicators that every trader needs to know about. They are the moving average (MA), the moving average convergence difference (MACD), the relative strength index (RSI), and the on-balance volume (OBV). I will also cover Fibonacci retracements, which are less of an indicator and more of a helpful visualizer.
Coinigy and Brian Beamish—a.k.a. The Rational Investor—put together a great series of videos on day trading Bitcoin using their tools. I highly recommended watching these videos. They can be found on Coinigy’s YouTube channel.
Beamish’s system works like this: when the indicators draw an “M” it is a sign of a bearish market. Conversely, when they show a “W” you are likely to see a bullish market. Beamish recommends that you identify at least three independent indicators before considering it a trading opportunity.
Moving Average (MA)
The MA is the average price over a set amount of time. It helps reduce noise by smoothing out price swings. The two common types of MA are simple moving average (SMA) and exponential moving average (EMA). SMA is just the average of all the segments of time accounted for; the EMA gives weight to more recent indicators.
Moving Average Convergence Difference (MACD)
The MACD measures the relative strength of price swings by comparing more recent EMA prices to past EMA prices. The typical MACD setup takes the 12-day EMA average and subtracts the 26-day EMA from it.
Relative Strength Index (RSI)
The RSI compares recent losses and gains to judge the overbought and oversold conditions relative to the average price.
On-Balance Volume
The OBV tracks the current volume in a market compared to previous volumes. In theory, increased volume without a corresponding price increase means there should—again, in theory—be a price increase coming shortly.
Fibonacci Retracements
The Fibonacci retracements are not an indicator but they are still a useful tool. These are graphs that illustrate likely bounceback levels and ceilings using ratios and can be a useful guide for making the decision to get in and out of a coin investment. The ratios usually used are 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, and 100 percent. Trace the Fibonacci retracement from the coin’s highest price to its lowest price (for the timeframe you want to judge) and do not buy in at any box other than the 23.6 percent, or 38.2 percent boxes. Always sell in the 61.8 percent and 100 percent boxes. Rather than something that actually predicts moves, it is more useful as a tool that helps you stick to the basic “sell high, buy low” principle and seeing it laid out in front of you can be helpful.
Again, and I can’t stress this enough, I am far from an expert on this subject. Do your own research and consider taking a class. At the very least, read and watch everything that is available for free.
Eventually, with some practice and dedication, you might find that you can turn a profit on Bitcoin volatility. Your success might tempt you into other markets. Day trading is just as exciting as gambling on anything else, and addiction can become a real problem, especially considering the hundreds of altcoin markets that are also available for 24-hour trading.
Bitcoin doesn’t just allow users to invest in Bitcoin itself, altcoins and related services; it opens up an entire world of investment to anyone with an Internet connection.
Financial services go beyond simple bank accounts. Financial services are about increasing your wealth or at least making sure some of it will be around after you stop working. That means more than just saving; it means investing. Investment services are generally available to people in America but you usually either have to go through a middleman or be wealthy enough to afford the minimum account levels of services like E*TRADE. If you don’t want to get into investing but you have a hunch gold is going up (or down), Bitcoin enables you to profit either way.
Bitcoin lowers these barriers not only for first world citizens but also for everyone else. The Bitcoin blockchain is designed to transfer value and there is no reason that value has to be in Bitcoin. In theory, it can transfer anything of value. In the future, it is reasonable to expect that stocks and bonds will be traded on the blockchain as well. It seems almost inevitable. But we are not quite there yet.
In the meantime, there is Bitcoin day trading. It arguably has a negative effect on Bitcoin, because the instability it causes might harm the currency by making it less useful as a store of value. However, speculative trading remains one of the largest uses for Bitcoin and that volume would be missed if it disappeared overnight. The promise of quick riches, fool’s gold though it might be, has also been successful in bringing more people to the currency. Speculative trading and Bitcoin will likely be bedfellows for a few more years. This association is hardly unique to Bitcoin Trading.
