Make Money Trading Bitcoins and Other Cryptocurrencies
Warning: bitcoins and other cryptocurrencies are considered speculative assets. If you engage in a trade, you may lose a part or the totality of the sum invested. Furthermore, the gains and losses can be associated with gambling and therefore, may result in an addiction. Any trade you engage in is under your sole responsibility.
Be fearful when others are greedy and greedy when others are fearful. W. Buffett
Tl;dr: buy low, sell high
The Internet is full of pricey-guide and videos explaining HOW TO MAKE A MILLION WITH BITCOIN!!!
I like to think that if you know how to make a million with bitcoin, you make the million.
You don’t make a video about it.
In this article, we’ll discuss how to trade cryptocurrencies and other bitcoins.
The One Rule About Trading Bitcoins
The one absolute rule about bitcoins and about anything you trade on platforms, in general, is the following: no one knows for sure if it will go up or down neither tomorrow, or a year from now, and anyone telling you the opposite does not know what they are talking about.
Having said that, let’s take a step back: there are indeed ways to maximize your chances to have bitcoins increasing in value instead of decreasing in value.
Let’s have a look at that.
What Is Bitcoin?
Bitcoin is a cryptocurrency; it means it is money under electronic form.
The particularity of bitcoin is that it is not managed nor created by a state like classic currencies and therefore freely fluctuates according to the market (a bit like the stock market).
While normal currencies are controlled by central banks controlled by governments, the idea of bitcoin was to create money controlled by no one to empower people.
Bitcoin is very much libertarian technology, such as peer-to-peer filesharing applications, which reject any centralization of any kind.
Buying cryptocurrency is somewhat similar to buying gold, except that gold fluctuates much less than bitcoin.
Gold and bitcoins share several characteristics: there is a finite amount of both; anyone can have access to it; its value resides in the fact that…it has value; they are both mined.
Indeed, bitcoins are not “printed” by anyone like money is, but mined by miners which, in exchange for their work, get rewarded in bitcoins.
There are, in 2020, about 18 million bitcoins that have been mined out of 21 million.
Once the last bitcoin will be mined (around 2140), there won’t be any bitcoins left unless of course, the protocol that rules bitcoin creation is changed.
Since bitcoin is not regulated by anyone, it can highly fluctuate according to the demand and offer.
This fluctuation is what makes it risky.
It’s also what makes it interesting.
It can appreciate, say 30% in a month, but it can also depreciate, say 50% within a week.
This means that if you buy bitcoins for 100 euros, and it appreciates by 30%, the bitcoins you bought are now worth 130€.
You made 30 euros. Hooray!
If it depreciates 50%, the bitcoins you bought are now worth 50€.
You lost 50€. Bouh!!
The purpose, therefore, is to buy bitcoins when the value is low and might appreciate, and to sell when the value is high and might depreciate.
It is not more complicated than that.
Which makes it very complicated of course.
It is indeed a game where most people lose money.
And that is due to human psychology.
Human’s Psychology to Trade Bitcoins
You see, human beings tend to give more importance to what they have than to what they don’t have (yet).
It’s called the endowment effect. Let me explain.
Let’s say we rate emotions on a 0-10 scale for this experience.
If I give you 50€, the pleasure you will experience will rate at say, 6/10.
Now, if I take 50€ from you, the pain you will experience will be 8, maybe 9/10.
For equivalent value, you give more importance to a loss than you would to a gain, which means that you value more what you have than what you don’t.
And how couldn’t you?
Part of the explanation is because you value more what you get after hard work than what you easily get.
As such, a 1000€ earned at the lottery will not feel the same as a 1000€ earned selling sandwiches (which why it is not uncommon to see people winning the lottery going broke within a few months or years, it’s not money they respect. But that is a whole other story).
So how does this psychological effect of holding more importance to what you have than to what you don’t have applies to bitcoin trading?
Let’s consider a chart with the value of bitcoin over time.
When bitcoin is going down, we tend to refrain from buying because we are afraid that the trend will continue and that we will lose money (February, June).
When bitcoin is going up, we think it will keep on going up and we are therefore happy to buy because we think we will make money.
In effect, you should do the exact opposite.
As you can see in January, the bitcoin was worth about 0.2. It peaked at 4 in February, then back down at 1.5 in March.
Due to our psychology, we have a lot of trouble to buy bitcoins when its value is depreciating because we don’t know when it will stop depreciating and we don’t want to risk losing money.
It is a short-term vision and it is biased.
Indeed, if the value is going down now, you can reasonably expect it to go back up at some point.
Why? Because this is how it works.
If it is going down now, it will go up later.
If it is going up now, it will go down later.
It is a never-ending cycle, both in the long and mid-term.
Your purpose is, therefore, to buy when it is low (when most people don’t buy since if they were buying, it wouldn’t be low) and to sell when it is high (when most people do buy, as, if they weren’t, it wouldn’t be up)
Let’s Use a Practical Example
Let’s say Mrs. Smith is buying bitcoins in March, and Mr. Dupont is buying bitcoins in May.
Who will make the most money?
Disregarding the future evolution of bitcoin, we know it will be Mrs. Smith because she bought her bitcoins at a time when its value was lower than Mr. Dupont.
The trick is therefore to know when bitcoin reaches its lowest value possible, that is, the end of the downward cycle, and buy then wait for it to go back up.
The precise end of a downward cycle is impossible to predict.
The job of bitcoin enthusiasts is therefore to buy when they believe that the value of bitcoin cannot go lower than it already has.
To know that, you can base yourself on past performances of, let’s say the last 1, 2, or 5 years of bitcoin value.
By looking at the lowest value bitcoin reached at those times, and buying when the current value is the closest to that lowest value, you maximize your chances to buy at the unknown lowest value of the cycle.
And as we all know, once the lowest value has been reached, bitcoin goes back up again and you make money.
The same principle applies to the maximum value. Once the bitcoin reached the maximum value of the cycle, it is time to sell and wait for it to go back down, only to buy again.
Looking at the duration of the past cycles and their maximum and minimum values are good indicators, but it doesn’t mean that the way bitcoin behaved in the past is similar to the way it will behave in the future.
If governments around the world start chasing bitcoin owners, prosecute them, and make it illegal to buy, sell and hold bitcoins, you can be quite certain that the value will go down.
Who would use the bitcoins then, besides criminals?
Similarly, if the European central bank decides to replace the Euro with bitcoin, you can be quite certain its value will go up.
As no one knows what the future is made of, no one can predict the value of bitcoin over time.
We can only predict that it will keep on increasing, then decreasing, then increasing, then decreasing again, and that a cycle can last 6 days, 6 months, or 6 years.
That’s what makes bitcoin great! It can appreciate quickly…but also lose value even quicker!
The art is therefore to buy at the right time and sell at the right time.
Our psyche being inversely adapted to trading, you will have to go against your instinct when buying and when selling.
Trading values is counter-intuitive, and this is why most people lose money: the effort is too hard to make.
Most people buy bitcoins when it is up, and sell when it is down “not to lose more money”.
This short-term emotional perspective is why trading is dangerous: it is a game not only against the market and against the majority, but yourself as well.
These lessons are each expressed in a quote, one from legendary investor Warren Buffett and one from a hedge-fund manager whose name I forgot.
Buffett said: Be fearful when others are greedy and greedy when others are fearful.
This simple sentence summarizes the whole psychology of trading.
You thought you had to study an MBA in finance and a degree in financial engineering? Please.
People buy when times are good because times are good. If times are good now and the values are high now, it means that bad times and a decrease in values are eventually coming.
Inversely, people sell when times are bad because times are bad and we know that if times are bad now, they will be good again.
It is the law of economic cycles.
Buying right after a market crash when all assets lost 50% of their value, like in 2008, is how you can make big money.
The lower the value at which you are buying your assets today (compared to past performances) is, the higher the chances for that value to go back up.
Buying when the value is already high is too late.
The risk for the value to go down is higher and often too high. This is after a crash that the likelihood of a crash (measured in percentage loss, not over time) is the smallest.
It is quite trivial to understand.
Yet only a few people apply it.
The second quote is the most successful hedge-fund manager is the one with the panic button the further away from his desk. The idea of this quote is to never give in to panic or emotional decisions because as we have seen, our emotions are playing against us.
Let’s take an example.
Kevin and Melissa buy bitcoins for 100 euros at the same time each.
Shortly after, bitcoin loses 20% of its value and Kevin and Melissa’s bitcoin wallet decreased to 80€ in value.
Distressed by the idea that Kevin might lose more if bitcoin keeps on going down, he sells, gets back his 80€, and loses 20€.
Melissa decides to wait. She knows that after a decrease, an increase in value is expected.
Bitcoin decreases more and now lost 40% of its value.
It is so cheap that the best investors see the opportunity and start buying.
After 6 months, bitcoin has appreciated and Melissa’s wallet value is now 120€. Aware that such a big increase in value in such a short time is great, Melissa sells and pockets 20€ in profit.
Kevin heard that bitcoin was in a fantastic increasing value period, and buys bitcoin, hoping to make up for the 20€ lost.
After all, everyone is making so much money off it at the moment that Kevin cannot imagine that everyone is wrong.
Shortly after Kevin bought his bitcoins, the increasing cycle ends and begins a new downward cycle. Kevin, panicked again, sells and is now left with 60€ compared to its original 100€.
He suffered a loss of 40€.
Kevin is much more emotional, and as you can see, it doesn’t serve him well. Melissa did not panic one bit.
She patiently waited (she could have bought more bitcoin when it was down 40% of its original value) and eventually made money off people like Kevin.
The bitcoin up and down cycles do not exactly follow a pattern. I thought at some point that bitcoin was behaving like a refuge value (a place where to put your money when everything falls, like gold), but the last economic data did not confirm that.
It seems bitcoin follows its cycle, at times linked to the economic situation, at times not.
The Bottom Line
Buying bitcoin is very simple, which makes it very complicated. You need to determine if the bitcoin has a low value at the moment to buy and if it has a high value at the moment to sell.
For that, you need to bet against everyone and your brain.
If you want to try, I would make four recommendations:
1. Read and learn more about trading, this article is quite simple and not enough to start trading. Invest money you wouldn’t mind losing.
2. Start small to see how you feel and whether you manage to handle your emotions and see “the big picture”.
3. Follow the news: any media coverage about bitcoin such as laws regarding cryptocurrencies or other cryptocurrency projects such as Facebook’s libra will influence its price.
4. Select a trusted and high-security broker. You don’t want to see all your bitcoins stolen, do you?