We come to the cryptocurrency circle to trade cryptocurrencies with the goal of making money.

Many new friends think every day about making money and care about which coins are worth buying, but do not understand the investment logic behind it. This article discusses the logic of cryptocurrency trading.

Criteria for judging the quality of cryptocurrency trading methods

The core is whether money can be made; this is also the main goal of trading cryptocurrencies. The higher the yield, the higher the success rate, the larger the accommodating scale, and the better if the drawdown rate is lower.

The yield is easy to understand, it is the return rate. The success rate and drawdown rate refer to the fact that making money cannot purely rely on luck; if it’s just good luck this time, it might not be next time, and if a failure results in significant loss, then this 'profit-loss ratio' is extremely poor, which is a bad method for trading cryptocurrencies.

Scale refers to what capital amount is suitable to operate. For example, if you see Binance announcing the listing of a new coin and you immediately buy it at market price on other exchanges, this can indeed yield profits, but the amount of capital is limited. For instance, if your capital is 10,000, 100,000, or 1,000,000, the suitable strategies differ. When the capital is small, you might focus on potential return rates; when the capital is large, you focus on low drawdown rates. After all, as long as you don’t lose money, there are many opportunities.

The core logic of trading cryptocurrencies

The core is 'buy low and sell high'. Buy at relatively low prices and sell at relatively high prices. As long as you can achieve this, you can make money. The better you do, the more stable and longer-lasting your profits will be.

As for how to 'buy low and sell high', there are various methods. They represent different ways of looking at problems from users, correspond to different reasons for market price fluctuations, and also correspond to different success rates, time frames, potential return rates, and potential drawdown rates.

Common methods for 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 price. Therefore, as long as the bought assets are valuable, long-term profits are guaranteed. There are also such investors in the cryptocurrency space.

The stock market has a relatively mature valuation system, such as the price-to-earnings ratio calculated as market cap/net profit. Digital currency projects themselves do not belong to any company, and there is no net profit. However, there are similar data, such as user numbers and deposited capital sizes.

Valuation can be understood through 'analogy'. The market cap level of Bitcoin can be simply compared to that of gold and leading U.S. stocks, to see what proportion corresponds to gold. The market cap level of Binance Coin (BNB) can be compared to brokerages to understand a reasonable level. Overall, the valuation levels of Bitcoin and Binance Coin are still appropriate, especially Binance Coin which is even undervalued.

With Bitcoin and Binance Coin as baseline valuations, other projects can be assessed for reasonable market cap levels based on user numbers and deposited capital sizes.

Simple value assessment of cryptocurrencies

The above discusses how to use 'analogy' to calculate cryptocurrency valuations, but in actual investment processes, there’s no need to be overly precise with specific values. Because valuation levels are derived from market games, existence is reasonable. Generally, we use two methods to simply judge which cryptocurrency to buy.

1. Whether it captures value, whether it has long-term users.

Bitcoin, Ethereum, and platform coins clearly have value. Bitcoin is digital gold, occupying nearly half of the market cap in cryptocurrencies. Ethereum (Eth) is the second largest, a smart contract platform, the underlying computing platform in the cryptocurrency space, and practically all token issuance and various applications require it. Exchange platform coins like Binance Coin (BNB) follow similar value logic as brokerages; a large number of users trading generate fees that will buy back and destroy BNB. As for whether other coins have long-term value, that requires careful examination.

2. Grasp hot sectors tightly, and focus on sector leaders.

Hot sectors and leaders don't need your judgment; it's the market that tells you with sustained rises that big funds recognize this direction and project. The longer the duration, the more the sector truly has value.

Often, you might think that a hot sector and leader have already bubbled, but they may just be starting to rise. It’s recommended to pay more attention to hot sectors and leaders and buy them when they face corrections.

The sector leader is the valuation ceiling of the sector. Usually, they have the largest market cap, the best business, rise the most, and fall the slowest. Only buy the industry leader; you can buy the second if it is very cheap, but don’t buy the third or any cheaper alternatives.

For example, in the 2020 DeFi sector, there were waves of trading, and when people thought it was too expensive, the price increased by 4 times, ultimately reaching 10 to 20 times overall. The NFT market in 2021-2022 was similar; during the second half of 2021, many thought trading small pictures was ridiculous, yet it continued to be traded in 2022. Coins not within these sectors performed very mediocrely.

Don't be greedy and buy into obscure sectors and non-leaders; cheap has its drawbacks, so don’t be overconfident.

Application of value investing

More suitable for long-term investors; the holdings consist of funds that are not usually used. It may not be good in the short term, but the success rate is relatively high in the long term, and the returns far outperform the market.

There are two key points; otherwise, it's easy to fail.

1. Position control. Don’t always go all in or heavily invest; if market timing isn't good, even a cryptocurrency you are optimistic about could drop by 80%. At that point, it would need to rise several times to break even.

2. The chosen target must be a true value target, or a leader. Remember not to buy just because the leader has risen too much and this coin seems cheap with huge potential; this is basically a 100% failure.

Trading based on technical analysis of candlestick charts

The logic comes from two points:

1. Trends will continue. What is rising will continue to rise, what is falling will continue to fall.

2. Prices reflect all factors, so one can just look at the price to speculate the next move, although it is probabilistic.

Those who want to learn can keep an eye on the following articles. The most important thing to remember is, 'buy rising, not falling; those who fear high prices are doomed to suffer'.

The hotter the bull market, the more the market sentiment rises, and the more reliable price action trading becomes; entry (breakout) signals are clear, and stop losses are also clear. At such times, value investors already feel 'prices are outrageous', and they miss out on the bubble.

Generally, when actually using, one can simply pay attention to the 30-day and 120-day moving averages on daily charts. If above MA30, it indicates a positive trend phase. You can attempt to enter; if it falls below MA30, it indicates a short-term negative trend. MA120 is a more sluggish reference, representing the 120-day average price, and is often used as a bull-bear dividing line. Above MA120, one believes that the bull market is still on; below MA120, it is considered a bear market.

Trading cryptocurrencies based on news

This is suitable for taking part of your position to speculate. For example, if you see some positive news for a coin, buying before that often leads to an increase. For instance, Bitcoin halving events have often resulted in significant price increases. Similarly, when Musk announced that Dogecoin would go to Mars, buying at that time was also valid.

Only news is generally useful in a bull market; in a bear market, it usually bounces back down immediately, and you may end up getting burned.

Trading cryptocurrencies based on news should only be done with small positions. You need to ambush early, act quickly, and decisively exit.

More suitable for smart newcomers with relatively small capital to test the waters. Personally, I think it won't make big money and is prone to losses.

There are generally three types of cryptocurrency trading methods. I recommend that newcomers focus on value primarily, with technology as a supplement, and rely on news as it comes. Remember two key points: 'only buy the leading ones', 'buy rising, not falling'.#加密市场回调 #以色列伊朗冲突