Many people consult me about methods for trading cryptocurrencies, so I will analyze in detail how to make money in the crypto space.
People come to the crypto space to trade and buy various digital currencies to make money. Many new friends think about making money every day, wondering which coins are worth buying, but they do not understand the underlying investment logic. This article discusses the logic behind trading in the crypto space.
Criteria for Judging the Quality of Cryptocurrency Trading Methods
The core is whether you can make money, which is also the core goal of trading cryptocurrencies. The higher the return rate, the higher the success rate, the larger the acceptable scale, and the lower the drawdown rate, the better.
Return rates are easy to understand, as they refer to the rate of return. Success rates and drawdown rates mean that this money cannot be purely based on luck; if it's just good luck this time, it may not be next time. If the losses are severe if it fails, then this 'profit-loss ratio' is extremely poor, making it a poor trading method.
Scale refers to what amount of funds is suitable for trading. For example, if you see Binance announcing the listing of a new coin and you immediately buy it at the market price on other exchanges, you can indeed make some profit, but the capacity for funds is limited. If your capital is 10,000, 100,000, or 1,000,000, the suitable strategies will vary. When your capital is small, you might focus on potential returns, while with larger amounts, you would prioritize lower drawdown rates, as there are plenty of opportunities as long as you don't lose money.
Core Logic of Cryptocurrency Trading
The core is 'buy low and sell high.' Buy at relatively low prices and sell at relatively high prices. As long as you can do that, you can make money. The better you do this, the more you earn, and the more stable your income will be over time.
As for how to 'buy low and sell high,' there are many methods. They represent different ways users perceive issues, corresponding to different reasons for market price fluctuations, as well as varying success rates, time frames, potential returns, and potential drawdown rates.
Common Methods of Trading Cryptocurrencies
Value Investing
Valuation Methods for Cryptocurrencies
In the stock market, there are value investors represented by Buffett. They believe that prices cannot be predicted in the short term, but long-term value will align with prices. Therefore, as long as you buy valuable assets, long-term profit is guaranteed. There are also such investors in the crypto space.
The stock market has a relatively mature valuation system, such as the price-to-earnings ratio calculated as market value/net profit. These cryptocurrency projects are not tied to any specific company, so there is no net profit. However, there are similar metrics, such as user numbers and deposited fund sizes.
Valuation should use 'analogy.' The market value level of Bitcoin can be simply compared to gold and the market-leading stocks in the U.S., estimating what proportion is appropriate relative to gold. The market value level of Binance Coin (BNB) can be compared to brokerage firms to determine what is suitable. Overall, Bitcoin and Binance Coin's valuation levels are still appropriate, especially BNB, which is even undervalued.
Besides the valuation benchmark of Bitcoin and Binance Coin, other projects can be evaluated based on user numbers and the scale of deposited funds to calculate a reasonable market value level relative to benchmark projects.
Simple Value Judgments of Cryptocurrencies
The above discusses how to use 'analogy' to calculate the valuation of cryptocurrencies, but in actual investment processes, don't get too caught up in specific values. Because valuation levels are determined by market competition, existence itself is reasonable. Generally, we use two methods to simply judge which cryptocurrency to buy.
1. Whether it captures value and whether it will have long-term users.
Bitcoin, Ethereum, and platform tokens have clear value. Bitcoin is digital gold, accounting for nearly half of the market cap in cryptocurrencies. Ethereum (Eth) is the second-largest, a smart contract platform and the fundamental computing platform for various applications in the crypto space. Exchange tokens like Binance Coin (BNB) have a value logic similar to that of brokerage firms, where a large number of users' trades generate fees that are used to buy back and burn BNB. As for whether other coins have long-term value, that needs careful examination.
2. Focus on hot sectors and leading projects.
You don't need to judge the hot sectors and leaders; the market tells you through continuous price increases that large capital recognizes this direction and project. The longer it lasts, the more valuable the sector is.
Often, you may think that hot sectors and leaders are already in a bubble, but they might just be starting to rise. It's advisable to pay more attention to hot sectors and leaders, buying when they encounter a pullback.
Sector leaders represent the valuation ceiling of that sector. They usually have the largest market cap, the best business, rise the most, and fall the slowest. Only buy the industry leader; if the second is very cheap, it can be bought, but avoid the third or cheaper alternatives.
For example, in 2020, the Defi sector experienced multiple waves of trading; when everyone thought it was expensive, it rose 4 times, ultimately reaching 10 to 20 times. The NFT wave from 2021 to 2022 was similar; many thought trading small pictures was absurd in the second half of 2021, but it continued to be a hot topic in 2022. Meanwhile, coins not involved in these sectors performed very mediocrely.
Don't be greedy and buy obscure sectors and non-leaders; cheap has its drawbacks, so don't be overly clever.
Application of Value Investing
More suitable for long-term investors, holding positions with funds that are not usually needed. It's hard to say in the short term, but the long-term success rate is relatively high, and the returns far exceed the market.
There are two key points; otherwise, it is easy to lose everything.
1. Position control. Don't always go full or heavy; if you haven't timed your entry well, even the virtual currency you are optimistic about could drop by 80%. At that point, it would need to increase several times to break even.
2. The selected target must be a real value target or a leader. Remember, don't simply buy a coin because the leader has risen too much and this one is cheap with huge potential; this is almost a guaranteed failure.
Trading Based on Technical Analysis of Candlestick Charts
The logic comes from two points:
1. Trends will continue. What rises will continue to rise, and what falls will continue to fall;
2. Prices reflect all factors, so just looking at prices can help infer the next move, although this is probabilistic.
For those who want to learn, you can check the articles in the technical analysis tutorials. The most important thing to remember is one phrase: 'Buy high, don't buy low; those who fear heights are doomed.'
The stronger the bull market, the more exuberant the market sentiment, and trading based on price action becomes more reliable. Entry (breakout) signals are clear, and stop-loss levels are also defined. During such times, value investors already feel that 'prices are outrageous,' and they miss out on the bubble.
In practical use, you can simply focus on the 30-day and 120-day moving averages on the daily chart. A price above MA30 indicates a positive trend for a period. You can try to enter; if it drops below MA30, it means the short-term trend has turned negative. MA120 is a slower reference, representing the 120-day average price, often used as the boundary between bull and bear markets. Above MA120 indicates a bull market, while below MA120 indicates a bear market.
Trading cryptocurrencies based on news
This is suitable for taking a portion of your position to speculate. For example, if you see a favorable news event for a certain coin, buying it before that often leads to a price increase, like how Bitcoin has surged multiple times during its halving every four years. Another example is when Musk announced that Dogecoin would go to Mars; buying then was also a good move.
News is generally useful only in a bull market; in a bear market, a single spike may lead to a drop, and you'll likely get cut.
Trading based on news can only be done with small positions. You need to lay the groundwork early, act quickly, and exit decisively.
More suitable for newcomers who are clever and have a smaller amount of capital to test the waters. Personally, I think it's hard to make big money and easy to lose money.
There are generally three methods for trading cryptocurrencies. I advise novice friends to focus on value primarily, with technology as a supplement, and news as a variable. Remember two key points: 'Only buy leaders' and 'Buy high, don't buy low.'