We know to buy low, sell high, right? Unfortunately, this isn’t always as easy as it sounds. For those who bought their crypto when it was high, any drops in price can be scary. Terrifying even. After all, the hard-earned money you invested is no longer worth what it once was. While this might appear to be the case, crypto downtrends also signify huge opportunities for traders. Before we uncover some strategies to help you make the most out of a downtrend, let’s make sure we’re on the same page about what it is we are looking for.
What is a downtrend?
To put it simply, a crypto downtrend can be defined as the overall declining price of a coin. So it is normal for any security to fluctuate between slightly higher and lower prices. However, a downtrend is also defined by lower lows and lower highs. When you view this on a graph, the general direction of the crypto cost is downwards (hence the term downtrend). It is important to watch out for downtrends, as without major changes your crypto may just be in trouble.
Every downtrend is made up of several fluctuations. Upon careful inspection, you might notice this pattern resembles a wave. Due to this observation, we’ll refer to their movement as price waves from here on out.
Downtrends are made up of two kinds of price waves: impulse and correction. An impulse wave is bigger, characterized by a significant drop in the price. After you notice this big dip in price, it is not uncommon for the price to rise slightly. This results in a corrective wave. Since an impulse wave is larger than the corrective wave, the price of your coin is still lower than what you started with. This folks, is the beginning of what we call a downtrend.
Crypto downtrends of the past
Downtrends are not always scary. In fact, they’re totally normal. Even the beloved Bitcoin has faced a downtrend or two in its past. One of the most significant downtrends in Bitcoin history occurred just last year. In 2018, Bitcoin experienced 6 consecutive months of lower and lower prices. Upon closer inspection, you might have noticed the year as a whole was not great for the coin. In this period Bitcoin lost 75% of its overall value; once having a market cap of over 480B and seeing a low of 120B at the end of the year.
The well-known cryptocurrency, Ethereum, had a similar experience experiencing 7 consecutive months with a closing price at the end of the month that was lower than the price it opened at.
Don’t let these downtrends deter you from day trading Bitcoin. For those who are newer in the crypto investing game, these patterns become more and more predictable. As you begin to pick up on these patterns, a Bitcoin trading cheat sheet might just be a handy tool to keep in your back pocket!
There are a number of opportunities that a cryptocurrency downtrend presents; perhaps the most obvious is the opportunity to buy crypto at a price lower than ever before. This is because when crypto begins to drop, many begin to panic at the thought of losing money and sell their crypto. As supply increases and demand decreases, you (the crypto buyer) now have the opportunity to buy low.
For advanced traders, you might already know about the opportunities for shorting cryptocurrencies. Many exchanges, such as Binifex, Poloniex, and Kraken, all offer opportunities to short crypto such as Bitcoin. However, this strategy is also viewed as riskier.
As a reminder, shorting a call means selling a given amount of a stock at a certain price and buying back the same amount of stocks at a hopefully lower price. Therefore, when purchasing a stock (or going long), your loss is limited to the amount that you invest.
On the contrary, when you short crypto, the price of your crypto could continue to rise. Since there is no maximum as to how high the price could rise, investors have a much higher opportunity to lose.
The HODL Strategy
Ever heard of the saying when people cry you buy? Rather than worrying about getting out before things get worse, there is a very simple acronym you can use to avoid being the crier. You might’ve seen HODL used in the crypto community. This means when things take a turn for the worse, hold on for dear life. In doing this, the belief is the high prices will once again be restored.
When watching your progress, you might become slightly fearful when noticing continuous declines. It might make you guess and second guess your investment choices. Don’t let this be why you start making uncalculated trades because you fear you made the wrong choice. Stand by your well-researched decisions and, as the experts say, hold on for dear life (HODL)!
How to make money
For the more advanced traders, you can also learn to trade within these crypto downtrends using short-selling strategies. Remember those corrective waves that we previously mentioned? If you happen to have been watching the crypto market, you might be able to make some predictions about which waves might be approaching. This presents you the unique opportunity to trade during a corrective-wave. You might plan to short-sell your coins with the expectation that following a corrective wave, a larger impulse wave will follow.
Another strategy for advanced traders is swing trading. If you have a knack for understanding the price movements in a coin’s chart you may decide to trade on the small price movements. This strategy can be implemented in a downtrend as, despite the price going down, there are always slight fluctuations within the price of the crypto. This strategy may be more for technical traders and only recommended for those who understand how to look for and use different patterns and indicators to inform their trades.
For those with lower risk tolerance, consider holding onto coins that generate passive crypto income regardless of market activity. These coins are known as staking or exchange coins. Staking coins are believed to be much more consistent and can be seen as similar to dividends. Exchange coins can result in higher income, but you are betting on the success of an exchange that may not happen.
Mitigate the risk
You’ve probably heard this time and time again, do your due diligence. This means research the crypto downtrends as well as the history of that digital asset. Then determine how much you are willing to invest that will not put you into debt if things go south.
Holding on to your investment’s long-term can be seen as smart investing. Even smarter investing is sitting with your eggs in several baskets. This means that your cryptocurrency should be sitting in a well-diversified portfolio that includes non-crypto assets. With this type of strategy, any losses incurred will be offset by the rest of your portfolio.
Additionally, if predictability and less risk are what you value as a trader, consider filling your portfolio with coins that are trading at high volume. Why would this make a difference? The fewer big traders the more impactful each trade will be. If your currency is governed by one or two big players, the purchase of large amounts of crypto could skyrocket the price.
Other strategies for smart trading including setting a stop-loss (S/L) and take-profit (T/P) point. The stop-loss point is a price level in which you will count your losses and sell, while the take-profit suggests a point where you will enjoy your profits. By knowing these prices ahead of time, you will not know what return your trades are making and will avoid any unforeseen fluctuations that can hurt your profits. Setting these price points will also help you to avoid any emotional trading that comes from seeing your favorite coin experience a crypto downtrend and will help you to come out on top.
A couple of things to caution against (and these aren’t necessarily crypto-specific either). It’s common for us to see our crypto decline in price, get scared, and accept our losses. This is especially true when we see other coins performing well. It’s true the fear of missing out (or as the youth of today say FOMO) is real. But don’t let this be the reason you lose. After all, you haven’t lost anything yet! While things might be looking bleak, your loss is only incurred if you go ahead and sell your crypto. So holding on for the long haul might just be a feasible solution.
Our second piece of advice is don’t just surf the trends. If you see crypto shooting up you will likely be very tempted to join in and make some quick gains. However, this is not the smartest move. It is not uncommon that as more people start to jump on these trends, people will begin to panic and sell driving the price down. This means your quick profits might suddenly be the start of a dip or even a full-blown downtrend. It might be tempting to buy crypto that is increasing in price, but remember the faster it rises the quicker it falls.
How do I predict trends?
Can anyone really predict trends? There are a couple of strategies that you might notice traders have used in the past. First of all, Coinmarketcap provides an abundance of graphs that show how the cryptocurrencies you have previously invested in have performed in the past. To truly analyze the data in front of you, consider the events that occurred in the market on days of jumps and dips. This will help you to make inferences about how future events might impact your profits.
In addition to considering history (let’s face it history does not always repeat itself), another area of consideration is the fundamental environment. These are factors such as the economy, the company’s management, etc. Finally, consider what the key players in the market are doing. Social trading can give you some indication as to what the experts are doing and what the public as a whole believes about certain cryptos.
A word to the wise
While we can talk about strategies for what to do in the event of a downturn, this article does not constitute financial advice. Before making any investments, please do your own research and consider how much you are willing to put on the line, before trading any cryptocurrency at scale.