A Trading Strategy For Big Announcements
Traders love volatility – this is no secret. The number one thing that is going to help a trader make lots of money is volatility in the markets, and this is a lot of what initially attracted so many people to trading cryptocurrency. There was high profit potential without the need to leverage up.
And one thing that tends to put even more of an emphasis on the swings in the markets are large announcements. These tend to cause dramatic increases or decreases in the value of a cryptocurrency, and then temper out over time.
Coinbase Has the Pull
There are few things that will cause a massive swing in the prices of cryptocurrencies. You could have a country like Japan ruling favorably in terms of cryptocurrency regulation, or you could have South Korea cracking down on exchanges. These would both have a strong effect on the overall sentiment towards the sector. Additionally, if there was a major breach on an exchange or with a cryptocurrency protocol, that would have a massive affect too.
But on a micro-level (with a focus on certain cryptocurrencies), one of the highest causes of volatility is an announcement from Coinbase. As the largest and most reputable exchange, when they make an announcement regarding what coins they intend to list, there is usually a massive run-up in price. Following that, there tends to be a retracement back to the previous levels.
Recently, Coinbase announced it was considering adding Cardano, Basic Attention Token, Stellar Lumens, Zcash, and 0x to their exchange. This would be a significant expansion to their offerings, and it isn’t clear what the timeline is or how certain they are of moving forward with this, but it did cause quite the ruckus in the markets.
Similarities to the Equity Market
These swings are similar to a phenomenon that occurs in the equity markets. Usually with binary outcomes, there are similar spikes in volatility followed by a regression to the mean. This may occur when companies announce their quarterly earnings, as they can either outperform or underperform the predictions, but it bears the most similarities to announcements in the healthcare industry.
One of the most binary outcomes that can be announced is whether a drug has received FDA approval or not. The markets tend to show that when an announcement is made, there is a massive spike or drop in the price (depending on the result) and then the price moves back to its original levels in a short period of time. How similar does this sound to Coinbase announcements?
Two things are happening here. First, you have a perceived increase of the risk of an investment, and then the volatility dissipates as investors realize that the fundamentals of the stock (or cryptocurrency) have stayed the same.
How to Trade More Intelligently
When Coinbase makes an announcement such as this, there is no actual appreciation in volatility. There are just deeper liquidity pools. This can be a large positive for a company, since there are more people with access to the coin, but often investors think they are getting quick returns and then find out there isn’t demand behind the trade. None of this is to negate the fact that there is higher liquidity and this is a positive signal for the cryptocurrency, but the end effect on the price is somewhere in the middle of the first reaction and the retracement.
So knowing that the general tendency is for an overreaction that moves back towards the norm, the best thing to do might be to buy the dip. If a cryptocurrency receives positive indications from Coinbase, wait until it retraces back to earlier levels, buy the dip, and you should be setting yourself up for long-term profits.
Avoid Trading Based on “FOMO”
The crypto-world works very different from the equities world in that there are a large amount of retail-level investors who have massive pull because of their blogs and the high value placed on their opinions. This means that sentiments such as fear of missing out (FOMO) play a large part in the markets (many credit the December 2017 run-up in prices to FOMO), and should be factored into your analysis. Any buy you make should be with the long-term in mind, and it helps to understand trading trends such as the one outlined above.
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