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Five Things I Wish I Knew Before I Started Trading Crypto
I started trading cryptocurrency in 2017, and looking back now, I learned how to trade by learning how not to trade, so to speak. For starters, like all financial markets, trading cryptocurrency is more of an art than a science. There is no magic formula for predicting what the price of bitcoin will be next week. Nor is there a trading guru who’s predictions can be accurately trusted all of the time. These sound obvious, but when you’re starting off, they seem 100% possible.
In this article, I’m going to reflect on the five things I wish I knew before I started trading crypto. Let’s dig in!
1. There is Bitcoin, then there is Everything Else
Probably the most important piece of knowledge that I picked up since starting to trade is that there is a meaningful distinction to be made between Bitcoin and everything else. Especially in the early days, Bitcoin was the vehicle through which many people entered the world of cryptocurrency. So in that regard, it was easier to take it for granted. If I wanted LINK or ETH, then I first had to buy BTC, then trade it. Although, I was not aware that BTC might be the real object of my desire.
In trading, an important concept is taking profits. But in order to take profits, you have to pre-decide on the currency you wish to denominate your profits. For example, traders on Wall Street are likely to denominate their profits in the USD. This is also where I began, but I later on decided that BTC is the thing I actually want more of. I wish I had known this when I started, as I would have kept less USD, and taken more profits in BTC along the way.
2. Most Cryptocurrencies Run on Hype
There is a strong desire to try to value cryptocurrencies based on the size of the community, or the novel new technology a particular cryptocurrency has implemented. I wish I had known this, because the actual tradable value of a cryptocurrency has very little to do with the amount of supposed utility the cryptocurrency has.
What became very evident to me later on, especially after Doge and the Wall Street Bets debacle, is that cryptocurrencies get a large portion of their valuation from the hype in the marketplace.
Knowing this piece of information would have helped me not get attached to certain coins, and sell them when they’re at the top of their respective hype cycles. If a cryptocurrency shot up in price because it’s being talked about in the news, then there is a good chance that it’s about to come back down when the hype inevitably dies down.
3. How to Ride the Momo Wave
On the note of capitalizing on hype, skilled traders can see which cryptocurrencies are primed to become hyped, then plan to sell when the cryptocurrency reaches “peak hype”. Beginning at the floor price, the cryptocurrency accrues some amount of momentum, aka “momo”.
As momentum builds, the price undergoes more volatility, but generally in the upwards direction. When there is some arbitrary critical mass of momentum, the cryptocurrency usually goes through a “blow off the top” event. That is, the price goes parabolic, and spikes to extremely high values in a short period of time.
Like surfing, riding this “momentum” is a skill and an art. The ideal is obviously to buy at the bottom and sell at the top. If done correctly, profits can be immense. However, if you’re not paying attention for just a few hours, you can completely miss the blow off the top event. You may still walk away from the trade in profit, but the difference can be substantial.
Knowing exactly which levels to try and call ahead of time can help you ride the momo wave.
4. Redundancy, Redundancy, Redundancy
With all things crypto, it is generally in your best interest to have redundancies in place. Redundant wallets, redundant passwords, and redundant exchanges. It’s a bad idea to only sign up on one exchange.
It is an all too familiar story to hear that your favorite exchange went down, just when you wanted to buy. You never want to be in a position where you can’t take the action that you wish, because the 3rd party you chose is restricting you.
This is why I recommend setting up accounts on at least 2 reputable exchanges. Seed each platform with a bit of your portfolio, that way, no matter what, you can buy or sell when you need to.
Outages happen, so it is best to be prepared when they do.
5. Crypto Market Cycles
It would have been very useful for me to know that the cryptocurrency market goes through quadrennial (4 year) cycles. Although the market will never follow a past cycle exactly, the previous cycle iterations can provide decent guidelines for what to expect and when.
These cycles seem to be loosely based on Bitcoin’s halvening events which also take place every four years. After each halvening, bitcoin skyrockets within 12-18 months, also sending altcoins to new high price levels. We usually see a display of fireworks with a “blow off the top” event, then an 70%-80% correction in the years following.
If I had known about these cycles, my pattern would be to buy in the bear markets, and sell in the bull markets. Which market we’re in can be somewhat accurately determined by looking at where we are in the cycle.
Conclusion: Trading is a Difficult Art
I would like to conclude by saying – don’t continue trading, if you discover that you’re not a trader. I discovered that I am not a trader during the 2021 bull market. Until that point in time, I had really only lost money trading. It’s an expensive lesson to learn, but if you’re in the process of learning that you’re bad at trading, I recommend cutting your losses and capitulating under that realization.
A farmer is not a trader, nor is a software engineer. Trading takes focus, skill, practice, and a good amount of guts. I learned that I am a hodler, so I wish I had known that I’m not at all cut out for trading before I even started.
