10 Cryptocurrency Trading Mistakes and How To Avoid Them ...
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10 tips for Investing (A guide from a newb)
Hello all. I will make this quite frank. I've been noticing dangerous advise being spread around the forums that is based too much on hype and I do not want the layman investor to suffer. We are all here to profit intelligently, not to gamble. So I would just like to offer a few tips to new investors of stellar. I am not a stock professional but have ties to the finance industry and have dabbled in forex and investments. I got burned so that you don't have to, so heed my advise. Especially since I have institutional friends who have helped me along the way (think Goldman, BNP, JP, etc). Tips: 1.) Do not over-diversify your portfolio but pay attention to exposure. Investing is all about the risk-reward ratio. Greater risk does not always mean greater reward. For example, I have 80% of my portfolio in traditional investment vehicles like real estate investment trusts, stocks, bonds, and exchange traded funds. 20% is for cryptos however this is what I consider my 'play' money since cryptos are a very young market, that is based more on potential rather than value (you can't gauge the financial health of crypto using traditional tools like cashflow analysis or price/earnings ratios). I think cryptos are incredibly valuable but going all in especially with the inflated nature of bitcoin, would be dangerous for any of you, so I would suggest you diversify between traditional and cryptos. 2.) Reduce crypto risk by analyzing competitors to your alt coin. As I said before, do not overcompensate this diversification but bet for and against a crypto. In forex institutions use this tool to limit exposure to currency volatility. Imagine you go long GBP/USD, then you should naturally short GBP/CAD to a degree in order to limit exposure, but maximize growth potential. In the crypto world crypto pairs aren't really traded so they are illiquid markets, but I would suggest hedging a bit of stellar with XRP and even bitcoin. With this strategy I have been able to mitigate my losses from the recent stellar drop. Picture cryptos as a ranked list with the most valuable on top and the worst in the bottom. If BTC is on the top of your ranked list and XLM is in 3rd place but XRP is in 2nd place, then short XRP/BTC and go long XRP/XLM. I know these pairings don't all exist but it's to give you an idea how to think about the market. 3.) Support and resistance is important for technical analysis. The way you determine this is simply by seeing the area where past price action has not been able to surpass (resistance) or where past price action has not been able to drop below (support). Usually when a support or resistance level is tested multiple times it becomes stronger. However, there are ways to guess how breakouts are formed. See the chart below. https://imgur.com/u9r2e0c In the chart you have what is called accumulation. The price keeps testing the 400 resistance mark, making it a stronger barrier, however every dip in price is higher than the proceeding dip. This signals that there is a solid accumulation that will result in a break out. Just because a price level is tested multiple times does not mean there is a break out. You need to usually have such an accumulation phase (think of the imagery of stairs). In the same chart you can also see the price has not been able to really go below 400 because it is the new support level and the more it tests it, the stronger the barrier will become. 4.) Statistics has a fine way of helping us in our journey. My best friend is a mathematician and was able to offer advise on statistical trend setting. He stated that the longer the trend is set, the higher probability that it will keep going in that direction. Sounds obvious right? Well there is some truth to this but this goes right to my next point. 5.) For every second and moment you have a position open you increase your risk exponentially. This is why high frequency trading exists. So I am trying to offer a nuanced point that while trend continuation is statistically likely, so is the exponential increase of risk. These two last tips are particularly for leveraged traders. 6.) Be creative. Try to implement value investing criteria on cryptos in order to assess the true value of your chosen currency, whatever that may be. It can truly be difficult for ones like Bitcoin but for centralized cryptos like XRP and non profits like XLM it isn't too difficult. I saw an investor here requesting stellars financial statements and had a slight grin. That is the type of investor you should be. Vigilant, because more than making money, we should all be focusing on protecting money. Do not be greedy, because you will be susceptible to hot tips and emotion. Make 'preserving' your capital a priority. As long as you are gaining above inflation, all of you are winning. And now... 7.) Luck number 7! Anyway, buying on the dips is a great strategy, especially when it is testing a support or resistance zone that has been tested a bit before. Buying into a dip in a zone that has only been tested once is a bit risky. You want to see a form of sustainable accumulation. 8.) Do not simply invest in a crypto purely based on the dip. I will admit I have done this sometimes to an extent and it is okay. But the point of this post is to encourage you to do your homework and measure valuations, based on market volume, liquidity, technological announcements, and financial statements. The reason I sometimes partially ignore this is because I usually enter investments to hold at least 8 months -1 year minimum. 9.) Centralization and decentralization do not matter in crypto. I know XRP gets hate and I'd prefer stellar lumens, but that is not purely a reason to not invest in a currency. With centralization you get more compliance and regulatory oversight which marks higher security in investment. Cryptos are amazing, but with institutional involvement, this is an important case to make. 10.) Governments do not have conventional ways to regulate cryptos, but they do have tools to manipulate the market, so be attentive. All it takes is one major country to become heavily involved, in order to ensure a large price drop. 11.) DO NOT SHORT! I REPEAT DO NOT SHORT! Leave this to the professionals. Whereas with buying a currency you have a limited downward risk (you only have the risk to lose all your money), with shorting you effectively have no price floor to limit risk and exposure since the price theoretically has unlimited growth potential. If you decide to short stellar at 0.10 cents then you can lose all your investment and even be in debt (depends on leveraging), because the price can go anywhere from 0 cents to infinity. When you buy, you limit your risk to 0 cents which is where you lose all your money, but maximize growth potential which is technically infinite. This plays into the concept that the longer you have a position open, the greater the exponential risk. I hope you all enjoyed my guide. I am by no means an expert and am new to cryptos, however I've had associates involved for longer and friends that are also in finance (I worked in the back office of a private equity firm even though that wasn't glorious).
I know most people on this sub are focused on the day to day news and price movements, but I try to think in the larger picture and I wanted to share my thoughts and hopefully generate some discussion along these lines. I feel like the last few months in particular for crypto have been completely dominated by Bitcoin/Fiat trading. This was very different from spring/summer 2016 where the largest market was often BTC/ETH. Now BTC/CNY, BTC/USD, BTC/JPY, BTC/EUR are all larger markets. In pracical terms, this means that the fiat traders are the ones moving the market, and they are doing so based on factors that largely have little to do with crypto. Bitcoin fiat markets are the primary ones, and Ethereum is largely just along for the ride. I think many old-school crypto traders are frustrated by this since it is hard to make sense of price movements, and the developments and news in the crypto-sphere do not immediately impact the price. Part of this is simply the inevitable maturation of the crypto space. Bitcoin is being taken seriously as a store of value now. That matters and is important. Crypto was built from the ground up to offer shelter and alternative to fiat markets and institutions. We are seeing situations now where crypto is needed and valuable. Brexit, devaluing currencies, governments trying to reduce cash transactions, governments instituting capital controls, manipulating interest rates and monetary supply, etc. The list goes on and on. Crypto is only going to get more important. The value of crypto is being set more based on how people value their fiat currency than how they value the crypto currency. Now, obviously the fiat/crypto markets are still miniscule in comparison to the normal fiat forex markets. This means that any small change in fiat land can correlate to large swings in crypto land. However, as long as crypto is providing valuable alternative markets in this way, the size of these markets basically has to increase to accomodate more money. New issuance in crypto cannot accomodate this growth, which will inevitably translate into higher prices. How exactly this happens, I have no idea - I expect increasingly large amounts of volatility, possible expansion into other blockchains, etc. The US Dollar right now is very strong. It is at around 5-20 year highs against almost all major fiat currencies. So I think the fact that Bitcoin is near its all time highs in terms of the dollar is pretty significant. If you think that crypto looks strong right now, wait until the US economy and the US dollar start faltering. This probably some time off yet (years), but crypto has never seen a US (or Chinese) recession. We will not see the true value of crypto as a store of value until such a time. Things could get crazy really, really fast. It is obviously unlikely, but if something like the 2008 financial crisis happened right now, we could easily see crypto valuations go 10x in a short space of time. Onto more crypto focused things - the current situation. Bitcoin, the coin we love to hate. It is a store of value and most of the other use cases have fallen by the wayside to preserve this. It plays the role of digital gold very well. Its better than Ethereum at being a store of value because that is what the protocol and development is focused on. It has unrivaled network effects. It has unrivaled hashpower. It has a longer track record. It is the "reserve" crypto currency and enjoys a position not unlike the USD does on the global stage that gives it a stronger position. Most important though, is that like any type of currency, it has value because other people think it does. There is a lot of money invested in the Bitcoin ecosystem, and therefore a lot of people saying it has value. This gives "dumb" money even more confidence in the network. None of these things are likely to change, and as crypto grows in importance, all those things are likely to continue to create value regardless of Segwit or transaction backlogs. Much to the surprise of many (including me), it has proven that it doesn't even need to scale in order to fulfill its primary use case, therefore it is unlikely to take any risks in order to try to transition in that direction. Ethereum meanwhile has taken on most of the other use cases in the space. Primarily today it is coming to dominate the "asset token" industry, with many other use cases being prototyped. The amount of continuing development across the network is very, very significant but difficult to appreciate from and outside vantage point. From light clients and browsers, to storage and networking. It turns out that a decentralized processor without all those things is not all that useful, but all those things are in working alpha stages and progressing along. Then you also have services like identity and privacy being built that are critical to a huge number of use cases. So the Ethereum economy seems poised to expand significantly and it is advancing at a rate faster than any of its competitors, but what does that really mean? I kind of think about it in terms of gold and USD economies. The gold economy cannot really expand without a price increase, but the deflationary nature of the asset works against it - people don't like to spend gold and there is enough transactional friction to make it impractical for small purchases, but if the price goes up significantly, they are likely to sell it and take profits. Contrast with the USD, which went off the gold standard specifically to allow for an expansion in the economy and has followed monetary policy to increase GDP rather than value. Bitcoin is more like gold, it will retain its value, but seems unlikely to form the basis for a massive economy due to its deflationary nature and transaction costs. What is Ethereum??? The monetary policy is still a work in progress, but despite the naysayers, it is likely to be very conservative similar to gold/bitcoin. However, with the advent of asset tokens, the Ethereum network can expand its economic activity nearly infinitely without requiring the price of ETH to rise in stride with increased activity. This is somewhat similar to a stock market which represents a large amount of value, but can funtion more or less independently of the underlying fiat values - there is a slightly positive feedback cycle there, but it is unclear how large of an impact that would have on say the price of ETH. The future of crypto Now that we seem to have largely proven out decentralization and security, scalability is oviously the next big hurdle. Bitcoin is likely to take the approach of secondary level systems that handle transactional/application volume and then settle on the Bitcoin chain. The Lightning and Liquid networks, Rootstock, and various other sidechain/drivechain type solutions. These solutions will compete with Ethereum on-chain solutions. They face significant hurdles since they require new networks to run and therefore lose some significant Bitcoin network effects in order to ramp up. They also need Bitcoin protocol improvements in order to interface with and those may conflict with Bitcoin's primary use case as a store of value that will resist any compromises. So they are taking a long time to develop and are still years away from production ready systems, but they have a huge advantage of not needing on-chain scaling to work. I will also say that Bitcoin companies, which have raised billions of dollars over the years face signficant challenges here because their options for monetization are very, very limited, How do you monetize a "store of value" and build a business around that? Most Bitcoin startups were not envisioned to be run like gold trading companies, but that is about all they have to work with until these secondary level systems are in place. Ethereum is taking the approach to try to scale on-chain. There are significant challenges here, but if successful, it seems likely that this kind of system would be far superior to Bitcoin's secondary level systems, But it also seems like failure to solve these challenges could relegate Ethereum to the crypto scrap heap. There are risks here with moving to a staking model. There are more risks here with moving to a sharded system. Compromises may have to be made in the protocol that will negatively impact the price of ETH. These are things that Ethereum is willing to tackle that Bitcoin never will. Like I said above, Ethereum can increase its economy very, very significantly no matter what the price of ETH is whereas Bitcoin is unable to accomplish the same thing. For investors in the currency, this could be seen as a negative thing and there are a lot of unknowns. However, the long term implications of a successful, dominant crypto-based economy may end up far outweighing the downsides. In a successful Ethereum world, the reserve crypto currency switches from BTC to ETH, and the positive network effects shift as well. If the monetary policy of ETH does not have to be compromised, it may also come to be a superior store of value simply by virtue of those network effects. I'm surprised you made it to the end ;)
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