Bitcoin has crashed. This is something that will happen repeatedly in the future. How do you profit from a bitcoin crash?
By setting up trades that skew the odds in your favor. These trades attempt to predict when and where bitcoin will bounce back. They’re designed so that even if you’re wrong half the time, you still make money.
This post will walk you through how to set up a favorable trade that attempts to predict the market.
First, you need to take a look at a chart of bitcoin’s price. I typically use the daily chart for medium term predictions for a variety of reasons. Here it is below:
When looking at this chart, your goal is to identify support and resistance. These topics are mentioned in my previous post 6 Reasons Cryptocurrencies Crash.
Support point #1 is in teal, support point #2 is in green. With these points identified on the daily chart, you can choose which you personally believe bitcoin will fall to. This is based on your own optimism/negativity regarding bitcoin and its price.
After choosing a support level (it could even be lower than one of these if you like) it’s time to set up a trade.
I recommend using Coinigy to set alerts when bitcoin gets near your desired price. You can also do more advanced things like set a limit order etc but we’ll skip those for now.
We now calculate our risk versus our reward. If bitcoin goes to support and we buy it, how much are we risking, and how much will we make?
Typically a stop is set $100 or so below the support range. In this example, the teal (1) level of support is at around 7500-7600. Always remember that support is a range, it’s not exact.
So, choosing the lower of those two, we decide the support level is at $7500. Therefore, we set our stop limit to $7,370 (always set it below an even number like $7400, even numbers provide psychological support.)
Therefore if we enter at $7,500 with a $7,370 stop we are risking $130. You can use an online calculator to convert that into a percentage.
$130 is 1.73% of $7,500. So we know our risk is 1.73% (I’d call it 2% to make it easy on myself).
Now we decide where, if we bought bitcoin at $7,500, we would sell it if it shot up. This is nuanced but I’ll use a simple example.
The next two resistance points from $7,500 are $8,400 and $8,800 respectively. Experience and your own level of risk tolerance will determine which you choose. But let’s say you choose to be conservative and target $8,350 (remember avoid even numbers.)
From $7,500 to $8,350 is an $850 gain. Converted into a percentage, that’s 11.33%.
Now, you know you’re risking 2% to gain 11%. (I round for easy math.)
This is an excellent trade.
Any trade with more than a 3 to 1 risk-reward ratio is good. This means any trade where you stand to gain 3 times more than you lose. In this trade, you stand to gain 5 times more than you lose.
The reason you want a 3 to 1 risk-reward ratio is so you can be wrong 50% of the time and still make money.
The last factor to consider is whether overall bitcoin is in a bull or bear market. This trading method only works in neutral or bull markets. Bear markets will be covered below.
If you decide we’re not in a bear market, this would be a great trade.
It’s that simple. With any luck, if this hypothetical happens, bitcoin maintains a neutral or bullish market and I laid out a decent trade for you.
Bear in mind there’s never any guarantee any single trade will work. You’re playing the law of averages. You make 10 trades just like this one, and so long as we’re in a bull market you’ll make money.
What if we’re in a bear market, you ask? Well…
The sky is falling, bitcoin is definitely in a bear market, and your normal trading strategies no longer work.
What do you do now?
Throw out everything you know about buying and trading bitcoin.
Navigating a bear market is tricky and higher risk than a bull market.
Over the course of its lifespan bitcoin is a bullish investment. This makes navigating sustained bearish periods tricky. It’s not for the risk averse or the faint of heart.
I’ll preface this by saying you can lose a lot of money very fast day trading in any bitcoin bear market.
This is because when bitcoin goes bullish, it tends to go bullish in a big way. Wait too long to cover a short, and you could be looking at losses of 50% or more.
And there’s never any guarantee that by HODLing your short bitcoin will return to previous lows. Doing that you could easily lose all the money in your short position.
It’s not all doom and gloom though. Measured, cautious and short-term shorting can be a viable strategy to hedge against bitcoin bear markets.
Here is an example trade analysis from a bearish point of view. Please note I am not recommending this, personally I’m almost always bullish on bitcoin.
Judging from this chart, there is a limited indicator that we’re in a bear market.
When looking at long-term market trends, I recommend using the weekly bitcoin chart.
Bitcoin has put in a lower high. Ideally you want to see 3 or more lower highs to confirm a bear market. Similarly, 3 or more higher highs confirm a bull market.
Without that, the market is uncertain. Uncertain markets are by far the most difficult to trade.
However let’s say that you dislike bitcoin, you think it’s going to keep crashing and you want to make money off of that.
You do the opposite of what I did in the previous post. You short bitcoin with a 3 to 1 risk reward ratio.
How do you short bitcoin?
Literally shorting bitcoin is tricky. You can do it via margin trading, but that’s complicated and beyond the scope of this post.
There’s a simpler way that people can do from any exchange.
What you do is this:
Sell existing bitcoin once it breaks support. I’ll provide an example chart showing this:
In this example you’d sell a portion of your existing bitcoin holdings at the red line.
Then, depending on how bearish you’re feeling, you could re-buy bitcoin at the green line.
The red line is $8,870. The green line is $7,715.
If bitcoin shoots up from the green line, hypothetically you end up with a larger bitcoin position than you would if you simply HODLed it through the crash and recovery.
Trading like this is risky though as you can sell right before a recovery. It’s only recommended when bitcoin has broken an obvious, extraordinarily strong support point like $9,000. Even then personally I’m hesitant to do it.
But if you’re someone with a more negative sentiment regarding bitcoin, this would be a great trade.
You’d plan to re-buy bitcoin if it went above $9,025 after you sold it. This is your “stop” for the short. You don’t want to miss out on future profits, so if bitcoin shoots up, you have to re-buy in here.
If not, you re-buy it at your profit target of (in this example) $7,715.
By doing this, you are expanding your bitcoin position by $1,155. Converted into a percentage, that’s approximately a 13% “gain” from the original price of $8,870. You would have 13% more bitcoin if it returned to previous levels.
So, you know your gain is 13%. What is your risk? If bitcoin goes up, you’d be forced to re-buy it so you don’t miss out on future profits.
As mentioned, you chose a “stop” for your short of $9,025. To find your risk you calculate the difference between your initial sell, $8,870 and your “stop” of $9,025.
That comes out to $155. Converted into a percentage of $8,870, that’s roughly 2% (again, rounding).
Now, you know you have a risk of 2% and a gain of 13%. That is a 6 to 1 risk-reward ratio.
This is a phenomenal bearish trade.
Once again, anything above 3 to 1 is considered “good”. If you forgot what a risk-reward ratio is, it’s mentioned in the previous section just above the title.
We are definitely at the risk of entering a prolonged bear market right now. One or two more lower highs will confirm it.
If that happens, it’s possible we could enter a second crypto winter. I sincerely hope that doesn’t happen, as crypto winters are some of the toughest times to trade.
As mentioned, bitcoin generally is a vehicle that increases in value. This fundamentally makes betting against it difficult.
Enough doom and gloom, time to wrap this post up with some long-term trend analysis!
Presently bitcoin’s chart trend is uncertain, skewing bearish.
As a rule of thumb, I try to be as much of a “reactive” trader as possible, not a “predictive” one.
This means I look at what’s already happened to measure what will likely happen in the future. I try not to project far out in the distant future based on my own optimism or pessimism.
Unfortunately, I’m not sure what will happen to bitcoin in the next few months.
It will depend on whether bitcoin’s next high is higher or lower than its previous ones. We’re at the start of a potential bear trend, but this will be rendered meaningless if bitcoin puts in a higher high soon.
Personally, I’m slowing down my trading frequency right now due to the uncertain nature of the market.
After interviewing many people I believe that bitcoin will go up a lot over the years.
It wouldn’t surprise me if we see 5x-10x gains from bitcoin over the next decade.
That doesn’t mean there won’t be periods of bearishness though.
This is part of what makes someone a reactive trader – being aware of when they don’t know the current trend.
It’s okay to be honest with yourself and simply say you don’t have enough information to determine a trend right now.
That’s often what separates mediocre traders from excellent ones.
There are specific strategies you can use in an uncertain market.
My personal favorite is trading on very short time frames, either the hourly or 15 minute charts. You can even go crazy and do the 1 minute chart if you wish, although I don’t recommend it.
To summarize, always look at the available highs and lows to determine the current trend.
Right now, the minimum requirement of 3 higher highs or 3 lower lows hasn’t been met. So a definitive trend statement cannot be made.
If you read closely you’ll notice that the two potential trades in this post take nearly opposite positions from each other.
One is a bet on bitcoin going up, one is a bet on bitcoin going down. At similar prices too.
This reflects my view on the uncertainty in the market at present. I’m not sure whether the market will trend upwards or downwards from here.
Always trade with the trend. When the trend is bullish, buy. When the trend is bearish, short.
It’s the uncertain times that are highly difficult. Typically I slow down my trade frequency if I don’t know the prevailing trend.
As mentioned though if you’re determined to make trading a full time career, simply go to a very short time frame.
After that, measure the hourly or daily trend. You can almost always see whether that’s bullish, bearish or neutral.
It’s very rare to have even the hourly and daily charts be uncertain. Usually there’s a trend to be found somewhere.
Just look at the highs and lows.
Also, use the risk reward strategy described in this guide to stack the odds in your favor.
You don’t need to be right half the time if you are taking bets at 3 to 1 or 4 to 1 odds.
You’ll still have failed trades, but over the long term your account will grow and grow in value.
Additionally, in periods of strong bullishness you can make tons of money very fast.
You’ll be used to finding and placing buys at 3 or 4 to 1 odds in a market where you’re right 75% of the time.
That is how you can make $10, $20, $30,000 within a month or two, or more.
Opportunities like that have happened repeatedly in cryptocurrency’s past, and they will happen again in the future.
The only question is… Will you be ready?