The way to trade booms and bubbles is to put a box around volatility and sell when the price breaks down through that volatility. It works a good 80% of the time. These are the kind of odds you want when big profits are at stake.
Sometimes the price can break even the most generous volatility range and then bounce up and race away again. That’s tough luck and all part of the life of a trader. At least you get to keep a lot of your profits.
I’ve drawn a few examples of this box for bitcoin in articles here and this is a recent example:
You would be doing okay if you bailed out when this box was broken. However, if you are a bull and you want to know “what next,” what is the picture?
Unfortunately, you have to put your box here:
This means bitcoin (BTC) has to get moving sharply up to give you hope and the bounds of prediction are ridiculously wide.
An hour or so after I wrote this article bitcoin jumped $1,000 a coin in a flash, but the following still holds.
So what to do?
If you are a trader, well you are going to have to trade the volatility and in the end you don’t care about price levels, you care about swings. There will be a lot of them and they will be huge. If you can’t make money out of that, you shouldn’t trade at all.
For position traders, for example, people looking for the near-term direction, you are out of luck. One certain thing about this level of volatility is that it is anyone’s guess. If you think of this chart as a measure of signal to noise ratios, you can see the levels of noise are huge. That makes predicting direction extremely difficult.
For investors, and I take it these people don’t question the long and glorious future of bitcoin, it’s just a matter of when to start acquiring more. As a buyer down around the $4,000s, I’m loathe to buy much at these levels, but will certainly pick up more at and below $8,000.
I do not believe this year’s rally is a 2017 aftershock; I believe it’s just the beginning of the next move up for bitcoin. In the short term I expect BTC is likely to be above $10,000 but would not be shocked if I’m horribly wrong and BTC tilted into the dumpster for a bit. (As it happens it is now $10,400 about three hours after the above screen shot.) If it doesn’t give me a fat opportunity in the coming days, it’s a high likelihood that we are still on for $20,000, let’s say, this year.
In the short term bitcoin is a wild gamble but in the long term it’s a great investment.
It is seldom a good idea to gamble but generally a sensible idea to invest.
So while crypto skids manically around I’m happy I’m not trading it as that would be very trying indeed. Instead I’m just spectating and wondering if I’ll get an opportunity to get a lot more bitcoin at great prices.
In these situations you have to do three things:
- Be very, very, sure of your opinion
- Manage your risk to be able to absorb being the idiot that got it wrong
- Have a plan
Then you can sit back and pilot the journey. One thing is for sure–it’s going to be a bumpy one.
In 2018, Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards.