Bitcoin holders divide into two types: investors and crypto traders. As crypto traders, we stick to the Bitcoin’s value, as our underlying asset. Compared to FIAT, Bitcoin is considered a lot more volatile, creating fluctuations. When Bitcoin is stable or otherwise rising, we are less concerned about the situation. Even though the rise of Bitcoin’s value leads to mass sales of Altcoins, the increase in Bitcoin’s value usually keeps our portfolio’s profit stable. In this article we will discuss the most difficult situation in connection with the above – a sharp decline in Bitcoin value in a short period, or in one word – Dump. Such a dump just happened in the first 10 days of 2017, when the Bitcoin lost almost third of its value. It dropped from an all-time peak to its current value. So what to do and how to keep profitable during such terrible days?
Sell through the Pump
If we look at the graph of Bitcoin it is easy to say that last run looks like an accelerating spacecraft in a horizontal position. After crossing the $800 level, we’ve been through a significant correction, until the target was reached at an all-time high of $1160. The violent trading up, will probably repeat itself when going down. And so, we received the painful and quick crash of losing more than 30% of Bitcoin’s value in just a couple of days. The smart traders had sold some part of their Bitcoin portfolio on the way up: some at the key levels of $900 and $1,000 and one near the all-time high of around $1150. These traders are probably less worried than those who did not sell anything. Remember, with no fundamental major news, it’s always more profitable to buy the declines, and sell when rising.
The red light: The celebration of the press
Just when articles about the rise in bitcoin come up like mushrooms after the rain, we should think again about our position. The question is, who are the newbies that don’t know that Bitcoin crossed the remarkable level of 1000$? Yes, exactly the ones that joined the party last. These investors have a fear of missing out (FOMO). They buy very high, pushing Bitcoin a little more towards an all-time high and the rest is known. Smart traders sell at this point, and it’s just a matter of time before there is a reasonable story that pulls the trigger and start a heavy snow ball rolling down the mountain. The trigger of the mass dump in 2013 was the crisis of Mt.Gox, this time the rumors came from the Chinese government about investigating Chinese exchanges. Anyway, when an appropriate and sufficient reason comes up, the market decides to adopt it quickly.
Hedge into Altcoins
Usually a dump will be much more violent than the way up. It creates panic in investors who sell off their portfolio at any given price. One way to reduce the risk when there is the fear of heights is to buy some Altcoins. Lots of Alts crashed when Bitcoin skyrocketed, and are at a very good price for accumulation. Usually as mentioned, Alts will decline more relative to Bitcoin’s rise, and vice versa. Currently the coin which is considered to be with the highest inverse correlation value to Bitcoin is Etherum. When Bitcoin lost a third of its value, the value of Etherum increased respectively.
Today most of the crypto exchanges allow trading inversely, or in other words – Short. Some allow leveraged margin trading (We recommend on Bitmex platform, follow here to learn more about crypto margin trading). If you read our article on the Bitcoin wallet, you should not hold the majority of your Bitcoin portfolio on exchanges, it should be safely stored in your wallet (preferably a cold wallet). In a situation where the majority of Bitcoin is actually not available for immediate trading, when we want to defend the value of a large amount of Bitcoins, we can open a leveraged short position with a much smaller amount of Bitcoin, to decrease the volatility. If Bitcoin continues to rise – we would earn less. If a Dump happens – we would lose less.
Stop the loss
Trading occurs 24 hours a day 7 days a week. Apparently our eyes are closed sometimes, when we sleep, or we are not always in front of the screen, getting updated. During Bitcoin volatility periods it’s very important to spread some Stop Loss commands, as well as to Take Profit. Just so you can really sleep quietly and not to wake up to a bright red candle in the graph.
For further information: Continue to our article – 8 must read tips for crypto investors.