Cryptocurrency Price Action
Crypto prices are as predictable as the waves in the ocean. Fluctuations large and small in a random direction, over various time bins, is difficult to ascertain. However, the average behaviour or statistics can be used to extract profits even in this turbulent situation. The volatility of the cryptocurrency markets makes it attractive both to risk-takers as well as strategists.
There are some noteworthy features of crypto that make it very different from traditional assets:
- Crypto markets run 24x7. There is no pause and no stop.
- High volatility: The market seems to have a life of its own. While there are long term gains, in short term it behaves contrary to popular expectation.
- Massive momentum: It is not uncommon to see a 10% to 50% increase on a certain day. It is also common to have the entire portfolio down by 30% in certain times. Once the rate of change of price reaches a critical value, it usually remains that way for a certain period.
- High correlation to Bitcoin: Most of the cryptocurrency has price action that is closely correlated to bitcoin price. So in any trading strategy price of BTC should be taken into consideration. BTC price thus acts as a good parameter for decision making. The following correlation chart is generated from one year data from 2020 to 2021.
- Network Outrages: Many distributed and centralised blockchains face stagnation/spam attack from time to time. This causes either network stall (example : SOL-Outrage, Nano-Spam-Attack) or very expensive transaction fee (example: Matic-Sunflower-NFT, Bitcoin-Pool-Stagnation, Ethereum-Gas-Increase). These events are usually followed by massive price dump, that take a while to recover.
- Regulators and Influencers: Often an adverse comment from an influencer or adverse regulations from the financial regulators (1, 2) can bring down the prices of cryptocurrency heavily. These are transient but worrisome scenarios that can cause liquidation of funds for many investors.
- No Utility Argument: There is a substantial percentage of investors and financial regulators that are strongly opposed to the decentralised network and its value. They do not think that a monetary network without issuing authority and central control can be a sound financial investment (3). While their narrative might appear true to a casual study, bitcoin/cryptocurrency is truly all about financial freedom. It is important to note that the ROI for bitcoin over a three year period has always remained positive (4).
- Noob Investors: Buy high and sell low is a strong effect that is always present due to emotional/price-momentum affinity of the new investors. They often bring rapid changes and suffer from massive losses and liquidations.
- Factor X: There are a number of intricate factors that influences the cryptocurrency price action. It is not possible to take into account all of them. However the periodicity of these factors can be separated and robust strategies can be constructed using statistical parameters.
Trading Stategies for Cryptocurrencies:
A successful trading should have a mix of short, long, and price immune strategies. The investment should be divided into long term hold, quick trading, and stable cryptocurrencies, such as USDT, USDC, BUSD, PAXG.
Trading techniques:
- Oscillitory Asset Trading Strategies (OATS): In this method two assets of similar perceived valuation is shorted against the other. The 100 day EMA can be the guideline over which the assets are swapped for a few percentage gain each time. An asset is swapped when the asset ratio ascend to a predetermined value, swapped back when the value descend to a low ratio value. Each time the small profit will accumulate and amplify when there is a successful trade. Assets ETH vs BTC is demonstrated in the following plot from 3Commas & TradingView. Here the buy and sell grid ratio is set within 0.08457840 btc to 0.07404782 btc, with 10 step division. Each steps gives around 1.4% profit. In the case of large price movement in one direction, the asset with the higher volatility will exit to the other. This is an important factor in this type trading. So, the choice of the two asset must be of similar perceived value by the investor. Multi pair OATS is also possible but will require machine learning algorithms deployed over automated trading. LRC/ETH, MATIC/ETH, SOL/BNB are some potential pairs that will give substantial profit with OATS. This is a price action
- Short sell with opposite Sentiment (SoS): A asset is shorted during a bullish run, with the idea to sell as the price is going up. The selling percentages are kept up to 2% to 3% profit on each step. This works very well when the sentiment is bullish for an asset, as there is always substantial pullback near to the ATH. Incase the price of the asset goes down, the asset increases as in any short sell. Two example from December 2021 is given below (source 3commas DCA bots):
- Long buy with opposite Sentiment (LoS): In this strategy the accumulation of the asset is achieved. The profit taking is set very high about 100% to 200% . 5 to 10 DCA orders are place below the entry point, each covering lower buy with higher weightage. Favourable trades both in short term and long term is possible depending on the volatility of the asset. A LRC/BUSD LoS example:
- Cost Averaging with Set Exit (CASE): The buy is set at regular intervals without any consideration to the price indicators. The asset is sold at the point when the set profit percentages are met. Note this is a very common and straightforward strategy, but traders fail to take profit at the set point resulting in missed profit realisation.
Summary:
Cryptocurrecy trading is very risky and both gains and the losses can be very high. Without proper strategy, the trades will most likely end in losses. Buy low and sell high is not that difficult. DCA in DCA out (DiDo) will work for most of the time as it minimises the risk and optimises the gains.
