3 types of strategies for trading cryptocurrencies
Cryptocurrency has long ceased to be something exotic. Traders are discussing the advantages of this or that coin, making bitcoin rate forecasts and honing their skills at various cryptocurrency exchanges.
As for any other financial assets, there are three types of strategies used in cryptocurrency trading, which we will consider today.
Arbitrage strategies
Arbitrage strategies on the cryptocurrency market are based on the idea of simultaneously buying and selling the asset on different trading floors. The trader's profit consists in the difference in the value of the coin on these exchanges.
For example, on cryptocurrency exchange Binance you can buy 1 bitcoin for $3300, but on BitForex exchange you can sell the same bitcoin for $3400 per 1 BTC. Having bought a coin on one exchange, the trader immediately sells it on the other exchange, making a profit of $100 (for simplicity, we will not take into account the commissions) for one bitcoin.
Arbitrage strategies look so simple only at first glance. In fact, they have many peculiarities. For example, it is very difficult for a person to constantly monitor the current rates of many cryptocurrencies in real time to find the most profitable deal. Most often, arbitrage strategies are based on trading robots.
Strategies based on fundamental analysis
Fundamental analysis was originally proposed by Benjamin Graham, a famous American investor, in order to forecast the price of an asset. The greatest development of this method was made by the legendary Warren Buffett, who popularized it greatly.
The value of any asset on the financial markets, in theory, can be estimated by fundamental factors. For example, on the stock market, the following factors are used to find out whether a company's stock is overvalued or undervalued:
- the ratio of share value to earnings (P/E);
- return on equity (ROE).
Fundamental analysis is also applicable to the cryptocurrency market. However, more specific parameters are used to estimate the value of a cryptocurrency. For example:
- the ratio of the cost of the network to the number of transactions performed;
- cryptocurrency value proposition;
- the reputation of the development team, etc.
Strategies based on fundamental analysis also have their own peculiarities. They do not work in the short or even medium term, so current fluctuations in the rate of cryptocurrency do not matter - strategies based on fundamental analysis are designed for a minimum period of several years and are most suitable for investors.
Cryptocurrency trading using price fluctuations
This type of strategies is the closest and most "native" to traders, because it uses the same principle as the trading on the foreign exchange market - making a profit by fluctuating the rate of an asset.
Cryptocurrencies are quite volatile - a rise or fall in the value of a coin, for example, 20% for a few hours is not something out of the ordinary for the cryptocurrency market.
As in the foreign exchange market, the trader determines the current trend on the selected coin and buys when the trend is up, and sells when the trend is down. The holding time of the transaction depends on the time interval at which the trader has determined the current trend.
This is one of the main features of this type of strategy - the difficulty with identifying the trend. Where one trader sees a growth, another trader may see a decline - it all depends on the knowledge, experience and practical skills. And given the increased volatility, identifying a trend in the crypto market is not an easy task, even for experienced traders.
Cryptocurrency strategiesThe most affordable, but also the riskiest, are those based on price fluctuations.
Conclusions
Each of the above types of strategies on the cryptocurrency market has its right to exist, and if using them allows a trader to make a profit - that's just great. But while the currency market is called risky, the cryptocurrency market is mega-risky. So, no matter how dizzying your successes may be, invest only the money you can afford to lose in cryptocurrency trading.