By far the most well-known activity that has resulted from the increase in popularity of blockchain technology is the cryptocurrency market. Now anyone can invest and trade this novel, digital asset class. From a trading perspective, this is exciting because there are a number of trading opportunities that can be capitalised on. A variety of trading strategies can be deployed to be a successful crypto trader and ‘beat the market’. Let’s take a look at some strategies that you could employ in your trading.
The arbitrage trading strategy is conceptually very straightforward. Put simply, it is the simultaneous buying and selling of an asset to make a financial gain on its price difference between two markets. Arbitrage trading in cryptocurrency market would be, for example, buying and selling bitcoin for $10,000 on one cryptocurrency exchange (e.g. Coinbase), and then selling it on another cryptocurrency exchange (e.g. Binance) for $11,000. In this instance, a trader is able to make a $1,000 return. Now, a price differential of $1,000 is unlikely to exist between cryptocurrency exchanges, but you get the point!
2. Fundamental Analysis
Using fundamental analysis as a trading strategy has been around for a long time, and is regularly applied in the context of traditional asset classes such as stocks and bonds. Traders that make use of fundamental analysis will use numerous indicators to identify whether or not an asset is undervalued or overvalued. If an asset is undervalued then a trader can take a long position to profit from any upward price action.
As an example, conducting fundamental analysis for shares typically involves looking at the fundamentals of the company. This analysis could involve using metrics such as:
Now, it can be difficult to apply fundamental analysis in the context of the cryptocurrency market because cryptocurrencies such as bitcoin are underpinned by decentralized networks, not companies. However, this is not entirely impossible. We can use the below metrics in our analysis of determining the underlying value of cryptocurrencies such as bitcoin:
- NVT Ratio – Network Value to Transactions Ratio
- Crypto-asset value proposition
- Quality of the team
The fundamental analysis trading strategy is typically used by traders who are looking to hold an asset for the long term i.e. multiple years. The idea behind this is that if the asset is truly undervalued, then it should appreciate at price over the long term, so intraday market volatility does not concern a trader who is looking to hold an asset for the long term.
3. Swing Trading
This trading strategy is the polar opposite of fundamental investing. The idea of swing trading is to capitalize on the intraday volatility of the financial markets, which will typically involve holding assets for the short term i.e. a few days or weeks. Swing trading is especially effective when trading in the cryptocurrency market given its volatility. To be successful with swing trading, the trader will need to be able to time the market, which is difficult given the unpredictability of the crypto market. Good trade execution will be important in using this strategy effectively. Manual trade execution can be limiting, as you may make mistakes in placing trades. Automated trading via bots or signal groups e.g. Bitcoin signals have proven useful in executing the swing trading strategy.
The trading strategies covered in this article are just a few that you can use when trading cryptocurrency. There are tons of strategies that you could use, but it’s important to find the right strategy that suits your style and works for you.