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How Altcoin Trading has Evolved and How to Trade Profitably in 2019

While mainstream popularity surrounding cryptocurrencies like bitcoin might have subsided over the past few months, there remains massive potential for both short- and long-term profits in the crypto markets. Specifically, trading lesser known cryptocurrencies – or altcoins – is still one of the most profitable niches for traders who know what they’re doing. In many ways, the altcoin market remains the wild west for traders, and while its popularity surged alongside bitcoin’s rise in price back in 2018, the subsequent collapse has sent many dabblers in the market fleeing altogether. Throughout all this turmoil, however, a small group of experts have cashed in fortunes from the subsequent rise and fall of crypto.

While long term investors hate volatility, traders know that the more volatile an asset is, the more profit potential it can bring. With altcoins being among the most volatile assets in any market out there, it’s not surprising why altcoin trading is highly lucrative. When you couple the small market volumes of some of these tokens alongside the sensitivity to news developments, this creates the perfect recipe for a highly volatile asset class.

However, just as is the case when trading equities, Forex, futures, or any other market, there’s a fair bit of information one needs to know before you can be successful in this arena. For one, keeping your investments secure is a big issue. Cryptocurrencies are the wild west in more ways than one, and due to their relatively unregulated nature, the logistics of transferring your money into crypto is an issue. Having a secure wallet and a reliable exchange is crucial, especially since hacks are still happening in 2019.

There’s also a fair bit of foundational knowledge of blockchain technology you need before you can dive into the markets. Just as an aspiring Forex trader needs to have at least a basic understanding of how fiat currencies react to news developments and monetary policy, so to do crypto traders need to understand the basic rules of the altcoin market. There are different types of tokens in the marketplace, serving different functions and purposes. Not only can these tokens react differently in price swings because of their nature, but many are also closely related or even opposed to each other. At the same time, almost every altcoin is correlated strongly to the price of bitcoin, moving up or down depending on how bitcoin trades. This relationship doesn’t go both ways, however, as swings in even the largest of altcoins won’t necessarily carry over and affect bitcoin.

While all this takes some time to learn, the good news is that traders who already have success in one market won’t have to start from scratch. Most trading success comes down to human psychology, both in the markets as well as your own. Additionally, many technical patterns that are seen in small-cap stocks, futures markets, and other areas are still present in the crypto markets, so there’s still some carry over in that regard.

Regardless of your experience level, by the end of this article, you’ll have a sufficient understanding of how altcoin trading first began, how it’s evolved, and some of the strategies traders are using in 2019 to trade profitably. While it’s easy to think that you’ve missed the golden days of crypto, the truth is that the market is still young and there are plenty of opportunities still available. By the end of this article, we will go over why it’s likely that bitcoin will surge to as much as $30,000 in the next few weeks. Since most altcoins are correlated with bitcoin, crypto markets overall are expected to rise in tandem, providing opportunities for traders to see significant profits.

A primer on blockchain technology

It’s worth taking the time to go over how blockchain technology first came onto the scene, what it strived to accomplish as well as how this technology became tokenised in the first place. While mathematicians were creating digital proto-currencies long before the emergence of bitcoin, they struggled to figure out how to solve the problem of creating consensus across the millions of decentralised participants on these systems.

Bitcoin emerged onto the scene in 2008 as a solution to this problem, using a consensus algorithm known as Proof-of-Work (PoW) that is still used by many blockchain tokens today. This essentially requires those verifying the transactions to decipher complex mathematical puzzles formed from the collections of these transactions. In exchange, these verifying participants, called ‘miners’ would receive bitcoin payment in compensation, creating a small but ever dwindling fresh supply of these tokens, mimicking the supply and demand economics of precious metals such as gold.

It wasn’t until 2009 that bitcoin went public for the first time, with the first early transactions taking place between programmers that worked on the project. In 2010, someone first used bitcoin as a form of payment, swapping 10,000 of them for two pizzas, and by 2011, alternative cryptocurrencies such as litecoin had begun to enter the scene.

Trading the earliest cryptocurrencies

Before this point, no one had placed any value on bitcoin, making it impossible to trade. Eventually, the idea of a decentralised, unregulated form of cyber-currency grew in popularity with demand quickly outgrowing supply as prices reached the $1,000 price range for the first time in 2013.

At this point in time, interest in these currencies was mainly from a political, technological, and philosophical perspective – as opposed to a speculative, financially motivated point of view. Different cryptocurrencies emerging during these early days had different technological features, but would broadly still attract the same, libertarian-minded, technologically progressive minded crowd, more interested in the revolutionary potential of these currencies than their speculative value.

But sometime in early 2013, things began to shift as the first wave of traders began to enter these markets. In comparison to the traditional financial markets, such as equities, commodities, or Forex, crypto markets had little to no regulation where anything goes. This meant that there weren’t any circuit breakers to freeze trading when markets went south. Instead, crypto markets would just crash, letting things play out without any involvement from external authorities. This meant that traders had much more room to profit from upside or downside swings in prices. At the same time, however, the unregulated crypto market meant that players could manipulate the system through insider trading, pump and dumps, wash trading, and spoofing. As unscrupulous as it was, traders that wanted to dabble in the grey-areas of trading ethics could do so with impunity as well as profit in the process.

Additionally, the absence of high-frequency, algorithmic trading done by computers meant that retail traders had more opportunities than in other markets. Often times, computer algorithms will purposely disrupt technical price patterns and hinder typical trade analysis that retail traders use. However, crypto markets were the new frontier with relatively small volume sizes. No institutional investor or hedge fund would be willing to spend money designing an algorithm to trade in a such a niche market, especially since moving large amounts of capital at that time into crypto was extremely difficult to do.

This meant that retail traders could use strategies that previously were taken over by algorithmic trading systems. One relatively safe way traders made profits was from cryptocurrency arbitrage, as different exchanges had different prices for the same tokens. These were profitable strategies that are still used to this day, although with much more competition. Coupled with the fact that cryptocurrencies could see dramatic price swings, were heavily driven by news, and were just beginning to see an inflow of dumb money, traders knew what they were doing and had an easy time making substantial profits.

The ICO boom, rise of the altcoin, and the modern era

As the years passed, the major cryptocurrencies began to split up and new variations of these tokens were emerging. At the same time, the emergence of Ethereum, as well as the subsequent advent of the smart contract, meant that developers now had all the tools necessary to create their own, unique cryptocurrencies like never before.

Initial Coin Offerings (ICOs) started growing in popularity as blockchain start-ups began offering their newfound tokens on the market. It was at this point that the term ‘altcoin’ first came to prominence, referring to the less mainstream tokens entering the market. All of a sudden, specialised tokens were created with different functions and purposes.

Equity tokens, which essentially acted like securities akin to a company’s stock, were contrasted with utility tokens, which performed a function on these specific networks. Asset-back tokens represented digital ownership of a physical asset, as hard assets like real estate or commodities could be ‘tokenised’ and split up into digital tokens representing partial ownership. There were many types of tokens, each having their own purpose as well as value from a trader’s point of view.

The popularity of ICOs meant that they were becoming the go-to speculative investment choice for investors. Highly risky with extremely high potential rewards, ICO funding skyrocketed over the next few years. 2016 saw only 29 ICOs raising around $90m in cash, while 2017 skyrocketed to over 781 ICOs raising over $6bn collectively. With hundreds of new altcoins entering the markets every year, traders were finding themselves with far more options in what they could trade.

However, the rise in popularity came with its own challenges. While this attracted billions of dollars worth of dumb money entering the crypto markets, this also fuelled the emergence of trading bots and algorithmic trading systems. Now that major cryptocurrencies like bitcoin were surging again and capturing mainstream popularity, there was enough volume being traded consistently for larger investors such as hedge funds to start entering the markets.

Impact of regulations

Regulators around the world also began to get involved in regulating cryptocurrency markets as the hype and popularity behind ICOs began to subside radically. With the majority of ICOs failing to become successful and many others being outright scams, investors began to realise that making money speculating on ICOs wasn’t the best way to generate returns. Even though 2018 saw almost $8bn raised collectively through these offerings, most of that came from the first six months of the year. The first half of 2019, in comparison, only raised around $350m.

Federal regulators such as the Securities Exchange Commission (SEC) have begun cracking down on many of these cryptocurrencies. SEC chief Jay Clayton argued that most tokens were a type of security token, meaning they were being traded like stocks and fell under the agency’s scrutiny. Even crypto exchanges fell under scrutiny, with Coinbase, North America’s largest crypto exchange, having fallen in line after the SEC subpoenaed it for insider trading and demanding it be registered as an official brokerage.

What this means for traders is that, firstly, it could drastically reduce volatility in the crypto markets. Institutional investors have largely avoided crypto, waiting for regulatory clarity from agencies in regard to reporting requirements and legal issues. Regulatory clarifications could pave the way for institutional money to find its way into the crypto markets, drastically increasing the daily trading volume and reducing volatility.

Even a one percent allocation from a major fund manager like Fidelity (which manages trillions in assets) could completely transform the crypto markets. Institutional money will also prevent individual traders and groups of traders from manipulating crypto prices. Overall, crypto markets aren’t the wild west they used to be where anything was allowed. While this means that some trading strategies aren’t viable anymore, there are still some methods for traders to make money in 2019.

Opportunities surrounding cryptocurrency arbitrage

Arbitrage is defined as simultaneously buying and selling an asset class on different markets in order to profit from the difference in price between them. For a cryptocurrency trader, they might notice that a specific token is selling less on one exchange than on another. They would then buy said token on one exchange before selling it at another one, making essentially a risk-free profit.

Arbitrage isn’t a new concept, having been a prevalent strategy in the stock, bond, commodity, and foreign exchange markets. However, as financial technology advanced alongside the advent of modern computing, these price differences are quickly spotted by algorithms that automate the entire process. In turn, arbitrage opportunities have all but disappeared, with most companies competing for small, incremental, minute-by-minute discrepancies. Only institutional traders have the technology as well as the amount of capital to profit from these minute price differences, making arbitrage essentially impossible for the retail trader in most markets.

In the cryptocurrency world, however, these opportunities still exist. The constant addition and subtraction of new tokens, exchanges, and blockchain projects help create an ecosystem that’s filled with pricing inefficiencies. Nor is it particularly hard for retail traders to get started in arbitrage. As opposed to simply watching the markets manually and checking on every token throughout the day, retail traders can pay a fee to use price-tracking software specifically built to track crypto prices, or even pay a programmer to design such a program for themselves. Either way, retail traders are now able to automate this time-consuming process for about the same cost as they’d pay for any other stock screening service.

Typically, arbitrage is most profitable when buying from exchanges with higher trading volumes and less volatility, and selling to smaller exchanges with less trading volume and larger price swings. The opposite can be true as well, where a piece of bad news might cause a drop in crypto prices, but a smaller exchange could be more harshly affected than a larger one. In this case, a trader could buy from the smaller exchange and sell their tokens at a larger one.

Pricing differences can also arise across countries due to supply and demand. With each nation having different laws surrounding crypto, this is also a factor that can lead to arbitrage opportunities, although it also tends to make buying and selling tokens across different countries harder. One phenomenon, known as the ‘Kimchi Premium’ refers to the situation where prices of bitcoin in South Korea spiked to over 50% higher than global prices back in early 2018. Even after the price difference subsided, South Korea remains a place where bitcoin tends to sell for a bit higher than the rest of the market.

Another opportunity traders should look out for comes from new listings. When a token gets listed on a major exchange, there’s a time frame where prices will jump due to newfound buy demand from users on the platform. One well-known example came from the Binance listing of nano, a token that previously was only available on two exchanges. While the highest price for nano was at 0.0021 BTC, Binance’s listing saw nano’s price surge to 0.0029 BTC. Many traders were buying nano specifically because they knew demand would spike on the new exchange.

Technical indicators to consider

What has stayed relatively the same for traders is the use of technical indicators, which is a mainstay among day and swing traders. Widely accepted concepts such as support, resistance and common patterns such as head and shoulders are more than just coincidental patterns, but genuine phenomena that – when taken together with other factors – can forecast a major shift in a securities price.

Technical patterns also have the distinction of being more likely to occur when there are many other retail traders as opposed to just algorithms or trading bots. With most high-frequency trading in modern, mainstream financial markets originating from these automated systems, it makes it technical patterns less likely to occur. In crypto markets, where there isn’t the same degree of automated trading, this isn’t a problem, and with the steadily increasing number of retail traders coming onto the scene, these technical patterns will become more likely to occur as other traders recognise them as well.

The problem with technical indicators is that there isn’t a single metric, statistic, pattern or special detail that will give you all your answers. Successful traders, no matter the market, need to be able to consider a wide variety of indicators and other factors in making their decisions. Some tools, however, are more important than others and can quite accurately predict shifts in market momentum.

Indicators like Bollinger Bands, MACD, and RSI all are powerful predictive tools, especially when taken into consideration simultaneously.

Bollinger bands, as represented in the top part of the six-month Ethereum chart above, represent how far a price can move while remaining within a statistical likelihood that it’ll return back. A price that swings into the upper range of the band would indicate that the security is overbought, while the closer prices move in the lower band, the more they are oversold. Prices eventually leave the Bollinger band, but the point of this charting tool is that statistically, most of the time a price will return within the Bollinger bang rather than exit it. Like all technical indicators, this is truer the more traders are watching a stock, as in many cases this can become a self-fulfilling prophecy.

The Moving Average Convergence Divergence (MACD) is another trend-following momentum chart indicator that shows the relationship between two moving averages. Usually, the MACD is found by subtracting a 26-period exponential moving average from a smaller, 12-period EMA, which results in a baseline or signal line. When the MACD indicator goes above or below the signal line, traders buy or sell the stock respectively. Movements in the MACD indicate potential shifts in a market and are useful to look at in conjunction with other metrics.

As for the Relative Strength Index (RSI), this is an indicator that shows whether a stock is overbought or oversold. If a particular security is in a downtrend, traders would look at how high the RSI peaks at, usually around 50% in bear markets, as proof that a downtrend is continuing. Conversely, a security that was genuinely breaking out into a positive trend would rarely see the RSI dip below 50. Lastly, a security that was neither in a bull nor bear breakout would have an RSI range between 35-65 for the most part.

Putting it all together: analysing bitcoin’s future

With bitcoin prices seeing a major resurgence over the past couple of weeks, it’s worth taking the time to go over and analyse the current market and where it’s likely to go in the future. Since almost every altcoin on the market is tied to the price of bitcoin in one way or another, having a firm grasp of this area is foundational for a budding cryptocurrency trader’s success. More importantly, there are strong signs that the price of bitcoin could shoot up as high as $30,000 in the coming weeks.

Even before looking at any technical indicators, the current macroeconomic situation is much different than it was years ago when bitcoin first shot up in value. Global economic growth is slowing as China in particular, where manufacturing data has been falling despite stimulus programs from Beijing, is showing signs that their growth is unsustainable. In turn, various ‘canary-in-the-coal-mine’ industrial commodities that have historically predicted upcoming recessions, such as copper, are falling to multi-year lows. Additionally, the ongoing US-China trade tensions, potential Federal Reserve interest rate changes and the inverted yield curves between long-term and short-term bonds that shook up the markets a couple of months ago are all warning of a potential decline in 2019 and 2020.

As such, the general consensus is that an upcoming recession seems like an inevitability at this point. In bitcoin’s case, this is a very good thing. Bitcoin, while volatile, is regarded in somewhat of a similar vein as gold, which goes up when markets get bearish. This is creating an upward pressure for the cryptocurrency and suggests that the time could be right to break the previous $20,000 high seen in 2017.

With that in mind, looking at the six-month chart above, one can pick out a few interest patterns. For one, a search on Google trends reveals that the increase in bitcoin’s price hasn’t come from retail interest. That means institutional interest rather than retail investors are motivating this price increase. Secondly, we can see that over the past few months, every time the price of bitcoin broke past the previous resistance levels, prices surged – both on approximately 10th May and 19th June. As of writing, bitcoin continues to surge past the $14,000 point and a new resistance level hasn’t been set. However, in the future when a new resistance level gets established and prices cross that point, that would be a great opportunity for traders to buy in.

Putting that aside, one can also see that bitcoin trades almost entirely within its Bollinger band, hardly ever going outside of it. During times when the token was trading near the bottom of its band, around 30th May for instance, knowing this fact would have allowed you to profit when its price rose back up. However, one needs to consider what is the underlying trend taking place. When bitcoin was plummeting in 2018, buying at the bottom of the Bollinger band under the assumption prices would jump back would be a bad idea. In the same way, the current uptrend bitcoin is seeing means you shouldn’t bet against the price going down just because it might hit the top of the band. It’s better to trade in accordance with the trend then go against it.

Looking at the RSI, MACD, and Bollinger bands together suggests that bitcoin is in for a surge. The RSI is between 65-95, which suggests that a longer uptrend is on the way when coupled with the rising MACD. Bitcoin’s rise also is following a parabolic pattern, as seen in the red curve on the chart. These types of patterns often shoot up exponentially at the end of their cycle before giving back some of their gains, suggesting that bitcoin still has plenty of upside potential. A price point of $20,000 is a strong resistance point, matching its previous 2017 high, and is one price point where the surge could stop. However, considering that the global economic situation is much different than it was two years ago, there is enough reason to think bitcoin could go even higher, reaching $25,000 or even $30,000 before tumbling back down.

It’s worth noting, however, that before this happens, major holders of bitcoin might choose to liquidate their stakes. When these major whales sell, they flood the markets and end up pushing prices down significantly. While this could lead to short term, intra-day declines in the price, it likely won’t be enough to hold bitcoin from reaching at least $20,000 in the weeks to come.

Conclusion

The cryptocurrency markets have changed dramatically over the past few years and trading opportunities have come and gone in that time. While regulations have changed some aspects of the market overall, there are still plenty of opportunities for traders looking to get started in 2019. With bitcoin seeing a significant surge over the past few weeks, other altcoins are expected to rise in correlation with the major cryptocurrency, all offering tremendous trading opportunities for those who know what to look for. Don’t be surprised if bitcoin breaks its former all-time high and moves into uncharted territory as high as $30,000 soon.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.


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