Back in late January I started active trading on the digital currency markets.
So two months later what’s the score? What progress have I made? What have I learned, what have I done right? And what mistakes have I made?
I thought I’d share a few of my views and opinions on my experiences with digital currency trading 2 months after diving in as a beginner.
I’ve had an interest in investment for many years. Mainly in the traditional stock markets, investing in selected shares, unit trust funds and ETFs (exchange traded funds).
And I’ve been an investor in Bitcoin on and off as well. As for the other new digital or blockchain-based currencies, the only other one I ever considered was Litecoin.
I used to leave my investment management to large corporate fund managers based in places like Frankfurt, Luxembourg and London. These are the outfits like DWS, Fidelity, iShares and all that. Occasionally I would also make my own small stock picks using an online brokerage.
But at the start of this year I decided to change my strategy. From now on no more corporate investment schemes.
I believe we should take responsibility ourselves for our investments and not rely on fund managers and bank employees to do it for us.
These guys aren’t interested in your investments. They’re only interested in their salary and their careers and selling their corporate stuff to you for that purpose. Especially with the retail market-making activities that these outfits are involved with now.
As for the organizations that employ them all they care about is raking in management fees from the punters and ripping them off. I have zero confidence in banks.
It seems I’m still on the mailing lists of a few of them because I still get sent their glossy brochure investment crap every now and then.
Entrusting your money to the suits is not the best way – as we saw with the banking credit crash in 2008.
Digital Currency Investment Is the Way Forward
Assets like digital currencies by contrast are accessible directly to the ordinary person and enable us to take control ourselves and cut out these scumbag banks and avoid their rip offs and their bullshit.
Another great thing is that you can invest and manage your own digital portfolio from anywhere in the world. You’re not tied to any physical location or physical asset.
So in January I began properly learning Forex trading, mainly using the excellent Babypips site. I can recommend this site if you’re interested in any form of financial trading – not just Forex but stock trading as well. Right now I’m about halfway through the Babypips Forex training course.
I’m not actually that interested in traditional Forex trading with USD/EUR/GBP. The trading opportunities in Forex are limited in practice for the average person. Traditional Forex typically only moves a few percentage points at a time at most – excepting “black swan” situations like Brexit or a Eurozone crisis/Grexit/Frexit or whatever.
Traditional Forex to my mind is a bit of a mugs game. National currencies just don’t have the potential that Bitcoin and co have. Plus fiat currencies all depreciate over time – especially as a result of government borrowing policies and quantitative easing. Digital currency value appreciation due to scarcity is the order of the day
Also you can’t make much money trading Forex unless you have large amounts of trading capital. And for this you either need a very big stash of money already, or else you have to rely on margin trading in order to get leverage – which is a high risk form of funding and trading.
Bitcoin and other digital currencies by contrast offer a much more vibrant trading environment where a lot can happen and you can get a piece of the action for much smaller capital outlay.
So I decided to focus once again on Bitcoin. But this time with one essential difference. This time investing and trading actively in the wider digital or cryptocurrency sector beyond just Bitcoin.
This is a sector which is in the middle of a massive boom right now. It’s like the World Wide Web boom of the 90s, or the dot-com boom of the early 2000s.
Like all booms, the blockchain digital currency boom can also lead to a bust, at least in the short-term. But the long-term prospects for this technology sector are clear. This is an area of innovation which is going to change the world. And we are only just at the start.
I’ll write more about blockchain technology and digital currencies and also the practicalities of trading in digital currencies in later posts. For now I just want to talk briefly about my own experiences over the last 2 months of actual trading on the digital currency markets.
The great thing about investing in digital currencies with Bitcoin as the base currency is the compounding effect. You get the rises of the currency you invest in, then when you convert back to Bitcoin it’s worth more, then when you convert your Bitcoin back to Dollars, Euros or whatever, it’s worth even more than when you started.
The down side of course is that if both markets fall at the same time, then your portfolio value quickly goes negative. So you need to work out a way to hedge.
My First Weeks Trading In Cryptocurrencies
I’d been buying Bitcoin late last year, and I was looking for an alternative currency to Bitcoin to diversify my investment.
So I looked around on the markets and found a newcomer called Dash. This currency has a strong and growing market cap and the infrastructure supporting it looked sound, and so I bought some.
The price of Dash went up very fast and at one time I was almost 50% invested in Dash. This isn’t a good situation from the risk perspective. I knew from my experience with Bitcoin that when a value goes up extremely fast there’s a good chance it will suddenly fall sharply. So I began reducing my exposure, milking the currency every day, selling small lots of my holding every day as it reached new highs in order to get my holding ratio down to safer levels.
I was lucky. The Dash price suddenly toppled and began to fall sharply. Fortunately I had stop losses in place which were automatically processed, so I was able to exit at a profit.
What we had with Dash was a ridiculous upwards excursion in a short space of time and that never lasts. The Dash price fell from a peak of around $114 down to the current $83 where it is today.
I think with Dash we had a strong push generated by corporate marketing and market trader hype which helped the price go up. But I think Dash has a great future, as all the fundamentals look good. So once the price bottoms out at more reasonable levels I will go back into Dash.
I’ve also been researching other currencies, looking at the fundamentals and also the technical price charts. I’ve since been trading in a number of currencies, among them Ethereum, Zcash, Monero, Ripple, Pivx and others.
These are all solid long-term currencies in the top 10 or so of digital currencies by market cap and trading volumes.
I’ve also been gradually dipping down into the mid range cryptocurrencies and learning more about them. These are currencies such as NXT, MAID, STEEM, Stratis and others.
I don’t tend to touch low volume low caps because these can be too volatile. However – you can benefit from holding these positions when there is a sudden spike often caused by whale activity – more about this below.
I’ve already gained quite a bit of practical experience these last 2 and a half months and I’m continually learning. I’m not taking reckless risks, well apart from being invested 50% in Dash at one stage, and a similar amount in Pivx, which was indeed reckless and not recommended, but the sentiment was so positive that I succumbed (and it’s been extremely profitable) – and I got out of the exposed position quickly.
But it’s not the way you should do things. I was lucky because both of these are now taking a much-needed and well-earned break right now and have gone into a short-term downturn.
I understand portfolio position sizing ratios and that is one of the most important things. And never to short a currency unless you are very well hedged. Even then it is high risk and not for beginners.
In fact so far my trading has brought excellent profits. I did an experiment calculation of compounding portfolio value for the 2 full months that I’ve so far been trading, and to my surprise I found that I have increased my trading cap by almost 2.5 times. This means I’ve done way better than what the portfolio compounder considers to be good performance for an investor.
But if it wasn’t for the parallel Bitcoin crash I could have done a lot better still.
I guess it’s partly down to the market, the sentiment among the other traders is that these last weeks have been amazing by any standard. So to that extent I’ve been in the right place at the right time by lucky co-incidence.
Of course things can suddenly downturn, and then the figures look different. The stock market can crash, Bitcoin has crashed over the last few weeks and is still not out of the woods with this possible blockchain split looming and other problems.
But so far I’ve been able to weather the Bitcoin slump. Right now the currency is picking up once again. Bitcoin is a hardy animal.
Some Observations About Trading In Digital Currencies
So, here are some quick points about investing and trading in digital cryptocurrencies.
1. There are literally hundreds – or maybe even thousands, of digital currencies out there. Many of them are junk, me-too’s and are not going to be going anywhere long-term. There will be an inevitable shakeout. But there are also some quality projects and currencies. If you research then you’ll find them.
Applying the 80:20 rule, 80 percent of them will probably fall by the wayside one way or another – either going out of circulation or out of business, or being taken over by other ventures or merged into other projects. So be selective about what you buy.
2. Coins with the smaller cap and smaller trading volumes get easily pumped up by large volume traders. These high volume traders are nicknamed “whales”. They suddenly swim in and buy up a small low volume low-priced currency that doesn’t seem to be going anywhere. This causes the price to rise very fast. The little fish – smaller volume traders then get attracted and buy into the currency – the “dumb money”, which causes the price to rise further. The whale then sells again and swims back out, leaving the price to fall. The small fish then suffer.
So beware of swimming with the whales. And never chase after a rising coin which is being pumped up by whale activity. But if you already hold the coin, then lucky you. You can sell at a big profit.
3. Many coins are not even meant for transaction purposes, but are rather a kind of alternative digital form of funding or part of the business model – such as with Ethereum or Steem.
They can be used to fund commercial company ventures or non-profit making community or scientific research ventures. They are the by-product of blockchain projects, rather than designed specifically to be used for payment transactions.
However, they can be just as tradeable as Bitcoin, if not even more lucrative. But you have to be selective and check these projects out – at least if you are intending to hold the coin more long-term.
4. Be wary of the currency exchanges as many of them have been hacked or have had security problems. The most notorious instance of this was the Mount Gox scandal.
Keep the bulk of your coins off the exchanges, preferably in your own wallet. Don’t forget to keep secure multiple backups of your wallet.dat files and your public and private keys.
5. Day trading isn’t necessarily worth the overhead. Be wary about day trading. I tried it one weekend and found it knackering. It was very intense, but also very stressful. At the end of the day, though I made a decent return, in relation to the amount of time and toil it cost to achieve it, I don’t think it was really worth it. And I said goodbye to my weekend. I have other things to do and other businesses to work on besides currency trading.
Much better to set up your trades and do a trading and review session for example a few times each day. Right now I am doing a one hour portfolio check and trading session every 6 hours around the clock.
6. Trading is basically a figures-multiple game. As your trading capital increases, you increase the multiples you trade with. This allows you to grow to the next stage. If you still stick around setting trades of $100 or $200 then you don’t grow. So you increase them to $400, $800, $1600 and so on. It’s all about adding naughts as soon as you can!
7. Set your portfolio position percentage sizes and stick to them. Likewise your trading lots. The amounts you trade will grow as your trading capital grows, but the percentage sizes should remain the same.
Right now my portfolio position rule is: no position greater in value size than 10%, and a standard trading lot is no greater than 5% at a time. I do have some positions which are only 5% but they are exceptions. I try to keep the portfolio size down to around 10-12 coins, otherwise there are diminishing returns from the admin overhead involved.
8. You still have to apply the same principles with “big” money as with small money, whether you are investing $100, $200, $5000, or $50,000 or more. The principles you learn and apply when you have little money like me right now are the ones that you will always keep and apply throughout your investment trading career.
9. Set targets for every position you enter. Know how you will exit. Hopefully at a profit – but by how much? And by when? Try to keep to the target you set when you entered the trade.
But understand that sometimes you have to be ready to modify this target if needs must. Sometimes a value can shoot up further than you anticipated and you may be able to ride it as it goes further. But don’t get too greedy. Sooner or later a value which escalates sharply will most likely very suddenly turn and fall fast in the downward direction.
10. Make sure you have a trading plan – and stick to it. What are you aiming to achieve? And by when? And what size loss are you willing to expect if it goes in the opposite direction? Will stick it out ie buy and hold, or will you set a stop-loss to exit?
Basically I am pursuing a fast track capital growth path. That’s a fancy way of saying I’m reinvesting all profits in the business and not taking out a penny for living expenses.
11. Keep records of your PnL or Profit and Loss. The good exchanges provide trading history data which you can download so I don’t need to manually list every trade.
But I also maintain a spreadsheet which I designed which gives me a record of my daily trading situation, with opening and closing day portfolio values automatically calculated for me in Bitcoin and Euro. so I know at a glance exactly how I’m doing.
12. Remember you can’t switch the market on and off at will. It basically does what it wants and you have to work with it as it is. The fact that I can double my cap in one month does not mean it will be the case for every month. With losses, or weak market growth you can be at the same level at the end of a month as you were at the start – or you can even be down.
Currency trading – and for that matter financial trading of any kind, is rather like being on a sailing boat at sea. You have a tiller, sails, and maybe a small engine, your charts and your sailing ability, but ultimately you are at the mercy of the sea currents, the wind, and the weather.
Digital currencies are an extremely volatile asset class. They’re far more volatile than stocks, let along traditional Forex, or even commodities. Which is both good and bad. Cryptocurrencies also have great growth potential, and they do grow fast – but they also move around like crazy, like the worst force 10 gales.
So you have to be extra vigilant. You have to have a head for risk and the willingness to bear risk. And you have to stick to sound trading principles and good risk management best you can.
Well that’s some of my thoughts on cryptocurrency trading now that I’m a couple of months down the line.
I’m still very much a beginner, but I’m learning fast, both the practice as well as the theory. It’s been a great experience so far. Digital currency trading goes on world-wide 24×7 around the clock, so I can dive in whenever I want. Every day is different and one thing’s for sure, it’s never boring.
And there’s loads of money to be made.
Image Attribution: Courtesy of Pixabay.com CC0 Public Domain Free for commercial use No attribution required
Disclosure: The author holds investments in Bitcoin and other financial assets at the time of writing this article.