Bitcoin and other cryptocurrencies are very volatile. Their prices in euros or dollars fluctuate a lot, sometimes with multiple digits per day. Trading bitcoin can, therefore, be very risky. In this article
The Basics of Trading any Asset
The basics of trading any asset (such as stocks) is that you buy them low, and sell them high. If you can do that reliably you will make a lot of profit. The problem is of course, how do you predict when an asset is going to rise and dip.
Professional traders use a technique called “technical analysis” to predict the movement of prices. They are using patterns they see on the charts to predict where the price is going to. Personally, I don’t really believe in this technique. I mean, there is some truth to it, but it all depends on being a self-
That’s why I own most of my assets in a buy and hold portfolio. That simply means I buy every month, and never sell (unless I need the money). That prevents me from trying to time the market and losing a lot of gains that way.
Even though most of my money is in “boring” investments that I don’t trade, I do like to
trade gamble a little bit on the side with cryptocurrencies. I mean, there is money to be made and who doesn’t like that? Let’s look at how I do this.
Swing Trading Bitcoin and Litecoin
Swing trading is a very simple technique I like to use when trading bitcoin and other cryptocurrencies. You simply rely on volatility to execute a pair of orders. Let me give you an easy example.
Say coin XYZ is trading at 10 euros, but experiencing 20% volatility on a regular (daily) basis. I could then put in two orders: a buy order at 9 euros and a sell order at 11 euros. Since I can reasonably expect the price to fluctuate that much, I’m fairly certain the order will execute, leaving me with more money than I had before.
Swing trading relies on the price of the asset going through a curve, both up and down. A problem occurs when the price dips below your buying point but then continues to drop, potentially never executing the sell order. This is especially dangerous when trading between crypto and real money – i.e. euros and dollars.
Trading Bitcoin to Other Crypto
In the past, I have made (and lost!) some money trading several cryptocurrencies to euros making swing trades.
The problem was, however, that I lost quite some money when the swing trade executed the first order but then never executed the second order due to the price exploding in the wrong direction.
Therefore, I only execute swing trades these days between cryptocurrencies. I especially like to trade bitcoin and litecoin to each other. I look at the price ratio between the two and see that the pair usually trades between 0.010 and 0.016 bitcoin per litecoin. Within that bandwidth, I’m now trying to swing trade the two coins.
The risk I mentioned in the previous section is still there. It is never guaranteed that the price ratio of bitcoin and litecoin will stay within this bandwidth. However, I’m still “exposed” to crypto even though the trade fails. I mean, when I buy bitcoin with litecoin or the other way around, I’m not out of the market if it takes the trade a month to complete (generally I’m aiming for a week maximum).
Last month I made a fairly large trade, yielding in almost 2,000 euros profit (at current prices). I bought litecoin using bitcoin, at 0.0134 and sold it a few weeks later at 0.0165.
Going forward, I will try to make the trades much faster, looking at a 2-3% spread instead of 20-30%, lowering the risk of trades not executing. Plus, I get to play around with the API to automate this trading (otherwise it will be too much work).
Could I Automate Trading Bitcoin?
The algorithm I use seems to be pretty simple. I will be using the volatility of bitcoin and litecoin to perform a lot of small trades every day. This will incur some costs, yes, but it minimises the risk of having too many coins “stuck” in a trade when the price moves in the wrong direction.
What I plan to do is create an Excel spreadsheet with macros executing my trading algorithms. During the day, I can simply have the spreadsheet open on my computer to automatically execute these orders.
I’m still working on the exact algorithm, but it seems to be fairly simple. Every few minutes, the macro should check my BTC and LTC balance via the API. When the balance is sufficient, it should place a pair of orders with the buy side of the order at the spot price minus 1%, and the sell side of the order at the spot price plus 1%.
Every time the macro runs, let’s say every five minutes, it checks the balance, opens the orders, and that’s it. I can even make it fetch the orders that are executed to create all kinds of cool reporting. Even though he despises cryptocurrencies, Geldnerd could be proud of me using Excel macros to build this trading tool. I mean, it’s all fun and games. Most of my money will stay in the boring old index funds.
Did you ever trade cryptocurrencies? How did you do?