Cryptocurrency Trading for Dum-dums — Wait… It is?
“Hey, can I make money trading crypto?" — For technologists, this question is starting to feel like the new, “Can you fix my computer?”
Except that this question is so much worse, the stakes so much higher. So my response is to get all shifty and uncomfortable, launching into an super subtle staring contest with my drink.
Of course, the short answer is an eyebrow scrunching, lip puckering, “um… yes…?".
And yes, that’s a “yes” couched delicately between two ellipses, like an egg in the mouth of a Golden Retriever. Because “yes” is also the answer to a question like, “Can I be a spaceman and fly to the moon?”
The sad truth is that if you’re asking the question, you’re much more likely to lose money trading crypto. If cryptocurrencies are an ocean of opportunity, then it’s a terrifying ocean fraught with half-mad killer whales, spooky bottom-dwelling anglerfish, and decaying islands of garbage. You and me? We’re baby sea turtles seeking shelter in a thin patch of seaweed.
But you’re still reading, so I guess you’re still interested. Let me guess… Your niece works in Silicon Valley and you asked her about trading Bitcoin at a family gig? Well, a warm welcome to you! 🤗
There’s a lot of misinformation out there surrounding Bitcoin and its descendants — some malicious, some well-intentioned. To mine the interwebs and separate the nuggets of truth from the dross, I went undercover for a few months into the hard work, high stakes, bewildering world of cryptocurrency. Here, with no guarantee whatsoever, I present my findings.
SHORT ASIDE: What is a cryptocurrency?
First off, what is a “cryptocurrency.” I’m sure the currency part makes sense. A currency is a thing people generally perceive as having value that you can exchange for goods and services.
What about the “crypto” part? It is because they’re digital? While it’s true that cryptocurrencies, also called virtual currencies, are digital in nature, that’s not why they’re called cryptocurrencies. After all, most of our fiat money is already transacted digitally these days. How many people still use cash? In some countries, even buskers and beggars accept digital payment via smartphone apps.
“Crypto” takes the concept of digital assets and transactions and adds in a super strong dose of cryptography. The cryptography is used to prove ownership of assets, to ensure the consistency and integrity of transactions, and of course, to help ensure the security of transactions on the “blockchain.”
But what in the world is a blockchain? Is it contagious?
LESS SHORT ASIDE: What is a blockchain?
Consider a real world thing that currently does not use a blockchain — your bank statement.
You get a bank statement for a number of reasons — one of them is to verify that your personal records match up with the bank’s. If this is a business checking account, your accountants use it to make sure no one is embezzling from the company.
One common practice is to sum up all the financial transactions you’ve recorded for a financial period and compare it to the sum of transactions reported on the bank statement. If these two sums don’t match, you’ve got to reconcile the two and figure out where the money went.
Once all the transactions listed on your bank statement are reconciled and everyone is satisfied, you sign off on it and “close the books” for that financial period. Now, if someone tries to come in later and modify the amount for one of the transactions, what will that do to sum of the transactions for that period? It will be thrown off. If someone runs the numbers again, the close for that period will no longer coincide with the open for the next period. A fishy smell will waft dankly from the ledger, and a rat will likely be caught!
However, what if our rat doesn’t change a transaction amount, but is able to change a transaction description? If someone doesn’t think to check this against the bank statement, or the bank statement transactions are overly vague, this change just might fly under the radar because our “checksum” is only verifying transaction amounts. They could make illicit transactions, say a wire transfer to a shell corporation, appear legitimate.
Now… imagine we put all the transactions for a financial period in a blockchain. In a blockchain, everything about all the transactions in a given block is ran through a cryptographic function to produce a “hash”. This hash is similar to the transaction total on our bank statement, except that it isn’t focused only on that transaction amounts — it includes everything: transaction descriptions, dates, times, memos, amounts, whatever. This “hash” is then saved both to this block and the next block in the chain, creating an unbroken and self-verifying chain of blocks leading all the way back to the very first block.
If our dirty rat tries to change even one letter of a transaction in one of our blocks, the computed hash will change, breaking the chain and making the fraudulent attempt obvious. Pretty cool, huh?
Of course, if there were only one copy of the blockchain, our rat could just update the blockchain with their fake data and none would be the wiser. That’s why in the crypto world, blockchains are typically decentralized and distributed (copied) around the world. If the fraudster manages to corrupt one of the blockchain copies, it will become apparent that it is no longer in sync with the rest of the network.
So that’s cryptocurrency and blockchains in a nutshell. But should you trade crypto? Let’s talk about the pros and cons for crypto trading.
Crypto trading PROs
- You could make some money. With some work your ROI could easily outstrip even the best interest rates offered by your bank.
- The crypto market is often more volatile than traditional markets. While this is also listed as a CON, it means there’s money to be made in day trading or swing trading, provided you manage risk and choose the right entry and exit points for your trades.
- You could be getting in on the ground floor of the future of money.
- It’s a learning opportunity, a deep dive into the depths of trading, investing, psychology, security, smart contracts, proof of work, staking, etc.
Additionally, if you’re weighing trading stocks against trading crypto, crypto has a few selling points in its favor.
- The barrier to entry into the crypto trading world is lower than it is for trading stocks. For example, in the USA you need at least $25K in the bank before they’ll let you trade stocks on a US-based exchange.
- Transaction fees might be lower on a crypto exchange than they would be on a stock trading platform.
- Crypto exchanges freely provide a wealth of real-time data including market charts, technical indicators, and the order book.
Crypto trading CONs
- Likely to lose money
- Unregulated industry
- Highly volatile market
- Market manipulation
- Hacked exchanges
- The paper trail
- The psychological toll
Let’s discuss each of those potential downsides in turn.
CON 1. You’re “dumb”, and you’ll probably lose money
As an individual trading your own funds, you’re a “retail” trader. Just like paying retail prices at a department store is more expensive than buying wholesale, being a retail trader is more expensive that being a big shot institutional trader. Not only does your low-volume small potatoes trading mean you pay higher fees to the exchanges, you pay more because, well… you’re dumb.
Institutional investors refer to retail traders, people like you and me, as “dumb money.” We’ve got no fancy schooling, training, or apprenticeship. We don’t “know people.” There’s no inside track. And the icing on the cake? — we lose money, consistently. 80% of retail traders consistently lose money. So yeah, dumb money.
If 80% of retail traders lose money, where does it go? To the “smart money,” of course. Every time the retail traders start chasing the price, buying high because they’re afraid of missing out, selling low because they’re afraid of the loss, imagine the smart money whales flying around like Mario and Yoshi in a hidden coin palace collecting all the coins and extra lives. *Ding, ding, bling, ding, bling!*
CON 2. Lions and Tigers and Taxes, oh my!
If you’re in the United States, the IRS views crypto as a property, so you end up owing short-term or long-term capital gains taxes every time you sell or convert a cryptocurrency . If you actually do manage to make money, this can catch you by surprise. When Uncle Sam doesn’t get his money, he really gets his blockchain in a bunch. >.<
Heavy trading results in hundreds or even thousands of trades per year. Imagine adding all of those to the tax forms manually. Ew. Now imagine manually reviewing historical market data to grab the exchange rate for each of those trades. 🤮.
Basically, you’ll need an app to help prepare your taxes. CoinTracking and CoinTracker are supposed to be two of the best. They’ll cost you around $100-$200 per year, for starters. That’s rough, but they’re supposed to integrate with software like TurboTax.
CON 3. The industry is rather unregulated, for now
In some ways, the relatively unregulated nature of the crypto nature is actually positive, allowing for big gains. But the opposite is true as well — All hands! Brace for big losses!
For example, trading stocks on Wall Street is scary, but even those sharks have protection in the form of “circuit breakers.” If the S&P 500 index drops too far, trading is halted for a period of time until the dust settles and heads clear. You’ve got nothing like that with crypto. Take “Black Thursday,” for example. On March 12, 2020, Bitcoin leaped from its foothold of $7939 USD into the black of night, lurching and screaming, free falling, the only resistance the air in its virtual hair, until it finally bounced near $3800, a decrease of around 45%.
If terrifying, untested, no-safety roller-coaster uncertainty is your thing, you just found it.
And go for it quick! Governments are likely to impose further regulation as the industry matures. For one thing, decentralized currencies make it sort-of possible to sidestep government sanctions, resulting in long lines of grumpy executive branch eyebrows doing the outrage wave. What if you’ve got $100,000 USD parked in crypto and it’s suddenly made illegal? Even if you’re able to withdraw it, what’ll happen to the price before you get it out?
There is talk of replacing paper currency with a centrally-controlled “digital dollar.” On one hand this could be bullish for cryptocurrencies, the halo effect bathing them in the angelic green light of legitimacy. However, increasingly authoritarian governments may well end up banning those cryptocurrencies viewed as a threat to their own digital currency. Nobody really knows.
CON 4. The market is super volatile.
How much money can you make if the market is pancake flat? That’s right, zero dollars. But hey, you’ll also have zero stress. ✌🌴
You need some volatility to make money off the highs and lows. Crypto’s got volatility for days. Super high, super low, and everything in between.😧 You could end up flush with cash, or just flush with anxiety.
The hard thing with crypto volatility is that it can also be highly erratic. This is fine if you’re a patient swing trader with plenty of reserves to burn while averaging down . If you’re planning on day-trading though, that erratic volatility can wipe you out like a 70 foot Mavericks wave.
CON 5. Big players manipulate the market through big trades, bots, and dubious “news”
Big players in the crypto-ocean are called “whales,” and with good reason. They breach for air, selling 10,000 Bitcoin in one move, and the BTC market takes a big dump. Panicky plebes dump their lunch money too, driving the price down further. With a big green kelpy grin, the whales dive down and buy back their coin at the low price they created, then just wait for it to rise again. Which it does, because the dumb money is always there, buying the dip, hoping the price will moon one day. But the whales just eat their dreams — and their money — gulping them down like schools of hapless krill.
Big players can use their considerable resources to sponsor “news” articles discussing the future of Bitcoin and other assets, speculating on the possibility of hitting $50,000, $100,000, a million dollars per coin! As the price begins to rise they can throw 10 or 20 million bucks at it, pushing the price even higher. Our panicky friends who dumped their coin earlier now experience another fear — FOMO in crypto parlance, the Fear Of Missing Out. “It’s gonna hit $20,000 again and I’ll never get in this low!” They buy high. And of course it often drops again. The whale grabs back their 20 million on the way back down (with a nice little bonus), and the story repeats itself.
Whales and even exchanges have often been accused of shady tactics like using bots to engage in wash trading to create artificial volume in the market. If you throw a dart at a calendar and hit two o’clock on a random Tuesday, there’s a good chance that most of the trading activity is being conducted by bots, especially when the volume is low. Speaking of exchanges, Nomics ranks them based on how transparent and honest they are.
On the plus side, manipulating the market represents a catch-22 for the whales. A little market manipulation creates some nice volatility to profit from. A touch too much manipulation, however, and they’ve lowered investor confidence, ruining this good thing they had going. Think “killer whale over-hunting its favorite arctic spot.” Suddenly there’s no more of those cute waddly penguins in the water.
So if you decide to dive into the trading waters, try to ride the whales like a barnacle rather than a schooling around with the all the plankton. Be grateful the whales are generating these large returns. You’ll almost never make the kind of returns that they do because you don’t know when they’ll make their move, but you can come close.
CON 6. Hacked exchanges
Strangely, cryptocurrency exchanges get hacked a fair amount , more than their fair share I’d say, and way more often than stock trading platforms.
I’m no expert, but as a software person I can imagine these factors playing a part:
- New tech, new bugs. A distributed and decentralized architecture is a lot harder to get right than a centralized one.
- Rushing a good business idea to market before the tech stack is buttoned down.
- Hubris, on the part of the hackers and the hacked.
- Thieves emboldened by ambiguous laws and confused law people. “Mary, stop stealing Bob’s Monopoly money. He’s gonna cry again."
It’s hard to get serious with investing or trading if you can’t even trust the trading platforms with your crypto, your cash, and even your identity.
That’s why it’s never recommended to keep your crypto on an exchange or even in a “hot” wallet. Rather, a cold storage wallet like Trezor or Ledger is preferred. That’s like sticking your cash in a safe. On the plus side, it’s a lot harder to steal your goods. On the downside, you can’t quickly react to favorable or negative market conditions.
CON 7. The “paper” trail
One other thing to be aware of with cryptocurrencies is the paper trail. Counter to popular opinion, for most cryptocurrencies, what you do is not private, not even close. The distributed nature of the blockchain means that the whole world has a copy of your transactions. If they’re able to associate you with a given wallet address, they can calculate how much you’re worth, who you’ve done business with, and when.
With crypto, you really are “your own bank.” Certainly there are some upsides to that. But your bank is FDIC insured. Banks invest heavily in physical and digital security. What about you? That 1000 BTC in your wallet paints a pretty big target on your back.
Since it’s possible to see everywhere a certain Bitcoin has ever been, what if you purchase a portion of a coin and later it’s revealed that this coin was used in some illegal and socially unacceptable activity? What then? Might that taint your reputation? Now imagine that in the light of a dystopian “blockchainified” society where reputation tokens are used as rewards bestowed on the compliant majority and weaponized to punish the scorned minority. Now shiver, just a little.
The privacy concerns are real, and there are some cryptocurrencies trying to make crypto private-by-default, Monero being the foremost example.
CON 7. The psychological toll
Trading anything — crypto, stocks, forex, etc — can be oddly depressing. It’s probably just me, but I even find writing about it kind of depressing.
As a software developer I feel I’m creating value in the form of digital goods and services. Code that I write can literally put a smile on someone’s face. (Frowns abound as well, but I try not to think about those… 😋)
If I decide to trade crypto, instead of serving smiles, I’m basically just moving money back and forth. The only real service provided is to help the market find equilibrium, like some kind of market Jedi who has put aside their robe and lightsaber, stoically taking on the mantle of the keyboard and pocket square.
Then you start thinking about the big picture, the macro view. When you make a winning trade, who was on the other side of it? Were they happy with the results of the trade, or are you now wearing their shirt?
If you struggle with addictive tendencies, could you find yourself addicted to the rush of trade, finding yourself overextended in ever larger and riskier positions without sufficient planning or risk management?
Lastly, pretty much everyone enjoys roller coasters, but do you want to ride them all day long, professionally? That’s what you’re signing up for if you want to be a professional trader.
Making your first trade
You’ve weighed the pros and cons, done your risk and pysch assessment, and you’ve decided it’s worth it. Crypto is a massive (mine)field, but this may help get you started. Let’s talk about:
- Choosing an exchange
- Choosing your target
- Choosing entry and exit points
Choosing an exchange
The easiest to use crypto exchange is Coinbase . Coinbase tries hard to satisfy government regulations, even at the expense of features. It’s has a performant site and mobile app, a high degree of security, and… it’s popular! Popularity often translates to high trading volume and liquidity. Liquidity is important for a crypto asset. Trying to sell an unpopular altcoin on a little known exchange is like trying to sell a Pontiac Aztec at a Beverly Hills fine art auction.
There’s just one big problem with Coinbase: Compared to other exchanges, trading fees are super expensive! If you go the Coinbase route, at least do Coinbase Pro instead. It’s got a steeper learning curve, it’s mobile app is clunky, and compared to other exchanges trades are still a little expensive, but much less so than Coinbase. Coinbase is only a good option for that “non-technical” friend that wants some long-term investment exposure to Bitcoin or some other crypto, but they aren’t interested in trading.
A “less big” problem with Coinbase is that it doesn’t list many altcoins. If you’re interested in trading something besides Bitcoin and the most popular coins, you’ll have to search elsewhere.
Other popular exchanges that might work for you include Binance , Kraken , and Bittrex . Do your research on each one, checking fees, security, insurance, supported currencies, legality in your region, and don’t forget volume .
Once you decide on an exchange, you’ll need to transfer some fiat currency to the exchange using a bank account or even a credit card. It can take several days before the money is available to trade, so hopefully you’re not in a hurry. Use the time to do your homework and devise a trading strategy, or perhaps to reevaluate your life choices… :)
Choose your coin target
After you’ve settled on an exchange or two, you’ll want to choose an asset to trade. There are thousands of tradeable crypto assets, but here’s a shortlist of currently interesting options:
First up, the original decentralized cryptocurrency, Bitcoin (BTC). It has performed admirably since its inception in 2009. People often tout Bitcoin as a digital gold, which if true, would make it a safe-haven asset in times of crisis, as well as decouple it from the stock market. Whether that narrative is true or not remains to be seen, but it seems a little doubtful. Bitcoin is certainly much more volatile than gold. And one could argue that Bitcoin was coupled to the stock market as soon as institutional investors began to trade it.
If you’re considering a long-term investment in Bitcoin (being a Hodler in crypto-speak), take a hard look at its performance over the last ten years. Once it shot off parabolically to $20,000 USD, but most of the time it’s maintained a hard ceiling of resistance near $10,000 USD. If you look at the order books for the BTC-USD trading pair, you’ll see a massive sell wall around the $10K level and above. It’s currently around $9,500 USD.
Next up is Ethereum’s coin, Ether. Whereas Bitcoin is essentially “just” money, Ethereum is more like a big decentralized computer in the sky allowing you to manage any asset through a mechanism called smart contracts . You could even do something like stick your will on the Ethereum blockchain and have it automatically distribute your digital assets to your heirs in the event of your untimely bucket kicking.
If that still sound “meh”, another buzzword powered by Ethereum smart contracts is DeFi , or decentralized finance. Imagine a world without banks, where you can send and receive assets anywhere in the world at super low fees. Family in the Philippines? — No more international wire transfer price gouging!
Ethereum does have some downsides. A distributed blockchain is hard to get right, and… there have been hacks🏴☠️ over the years, resulting in stolen Ether and lost confidence. The other big downside is… s.l.😮.w.n.e.s.s… The Ethereum blockchain supports about 15 transactions per second. Compare that to Visa’s ~50,000/sec and you can see the dilemma. Ethereum 2.0 is supposed to speed things up.
Historically, ETH’s price action has been tightly coupled to Bitcoin. BTC goes up, ETH goes up, etc. However, with all that Ethereum has to offer, and the number of projects being built on top of it, many feel it’s currently undervalued and may eventually decouple itself from Bitcoin. While Bitcoin may be near its ceiling, Ethereum may be near its floor. It’s trading around $230 per coin.
Cardano is another one to watch. They are a bunch of smart people going for ‘Ethereum done right’, and done right, right from the get-go. If Ethereum 2.0 blunders, Cardano may step in to save the day.
You’ll hear a lot about Ripple , but you should probably stay away. It’s controlled by one company, and they often seem to be in legal trouble.
If you’re worried about the privacy issues with other cryptocurrencies, Monero has privacy built-in. Their buzzword is fungibility , wherein one unit of Monero looks the same as any other, similar to gold — If you melt down one gold coin to create another, no one would ever know, barring some future quantum tagging technique. I suppose you could say that Monero is even more fungible than cash, as even dollar bills have serial numbers.
Unfortunately, Monero’s untraceability makes it the coin of choice for criminals. On one hand, this lends Monero a strange kind of “horn” effect legitimacy. But on the other hand, it could eventually find itself on the wrong side of government regulators.
Monero price action tends to be pegged to Bitcoin. Lately its price has been oddly stable, for a cryptocurrency. Like Ethereum, Monero also appears presently undervalued at around $65 USD per coin.
Basic Attention Token (BAT)
The Basic Attention Token is key to a highly provocative strategy to fix creepy online advertising by anonymously and less invasively linking content publishers, advertisers, and consumers. It’s closely linked to the privacy-focused Brave web browser , which pays you (in BAT) to view online ads.
Interestingly, BAT is one of the only crypto projects with a real, already-happening, business model, a model that could very well be the future of online advertising. If you’re an advertiser or content producer, it’s time to jump on the Brave train.
But is BAT a good investment or trading choice? Good question. For it to rise in price, people have to “HODL” BAT for a while instead of just cashing out.
Choose entry and exit points
Once you decide what you want to trade, don’t just rush out and starting buying. You need to plan your trade, decide when you want to enter the trade (buy), and when you want to get out (sell).
Go to a site like TradingView and check out the price history. Bittrex is also nice. Figure out how to play with the time intervals. Set it to 1 day, 3 days, 1 week… Notice the price action. On some coins you’ll see a single parabolic pump and dump rise and fall, followed by a bunch of nothing. Realize that the price will probably never go that high again. Even if it did, it’s unlikely that you would be able to sell at the top.
You’ll see all sorts of technical analysis write ups with cool-looking arrows, fibonacci levels, and ascending and descending channels. For the most part, I think these analyses take pattern recognition too far and are the equivalent of modern tea leaf reading. Their power comes not from the patterns themselves, but from those that believe in them and trade accordingly. The price of a trading pair at any moment in time is a result of mass psychology, not due to a semi-sentient line on a chart. If enough traders recognize a head and shoulders pattern on a chart and believe that the price is about to dump, what do you think will they do?
Metrics that are useful, and also easy to spot, are support and resistance levels . Support levels are prices where the price tends to reverse upward after a declining trend. This is often a good place to buy. Resistance levels are the opposite, prices where the price tends to get “rejected” downward when it tries to rise past it — a good place to sell.
Here too, support and resistance levels are useful primarily because enough traders know about and use them. When a market is flooded with new retail traders that don’t respect the charts, anything can happen.
The order books can also give you a clue as to support and resistance levels. For example, see BTC-USD on Coinbase Pro and look at the chart with the green and red hills to the left and right of “Mid Market Price.” That is a visual representation of the limit buys and sells currently on the books. Today, I see that the green hill gets much steeper around $8,500, indicating a good support, and the red hill gets steeper around $10,000, indicating strong resistance. But… Don’t forget mass psychology and the endless game of Rock, Paper, Scissors. Shrewd whales can place limit orders with no intention to execute.
The order book is a good example of a “leading” indicator that may help you to predict where the price is going. Most indicators are “trailing” indicators, because they can only show you where the price has been, not necessarily where it’s going. Even a one-minute old candlestick is still one-minute old data. When you see a car driving down your street, you know where it’s been because, well, you saw it. You can even use this historical information to predict where it’s going, since most cars traveling down your street continue until they reach the stop sign. However, the car could still do a U-turn, decide to park in someone’s driveway, or even spin doughnuts in your lawn.
Here are a few technical indicators they may help you execute your trades:
- Candlestick charts visualize the tension between buyers (bulls) and sellers (bears), who “won” in a given time period, and how strong was their victory?
- Volume indicators, including VWAP help filter out high frequency bot trading, which is typically low volume.
- Relative Strength Index (RSI) is a momentum indicator that may indicate when the asset is either “overbought” — the price seems too high and may drop — or “oversold” — the price is too low and you should consider buying.
- MACD is moving average indicator you may find useful.
Depending on how long you’re willing to wait, place a limit buy near a support level and be patient. Once it’s yours, place a limit sell near a promising resistance level.
But what happens if the price breaks through your chosen support level and goes down instead of up? You could be patient and wait for it to rebound, or consider placing a stop loss . On many exchanges it isn’t possible to set both a limit sell and a stop loss, so sometimes only long-term investors set stop losses in order to preserve unrealized profits.
You may be able to set up simultaneous sell/stop loss orders with the help of paid subscription apps like 3commas or TrailingCrypto . Just be careful not to give them too many permissions when you’re setting up your API keys.
Conclusion: It depends
OK, so I’m tired of writing about crypto. But as to your question, should you trade crypto?
It’s up to you, my friend. Tread lightly, and with an abundance of caution.
Me, instead of investing in crypto, I’m thinking of investing in a snuggly heather hoodie with two bold words on it accented in salmon tones: “It. Depends.” The next time someone asks me if they should invest in crypto, I’ll just point, and wink. $50 well spent.