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Trading 101: Utilizing Currency Pairs in Investing and Trading

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As we wrote in our previous look at fiat and cryptocurrency pairs, you can benefit from the properties of exchange rates n several ways. No matter if you are primarily a trader or an investor, it’s essential for you to be familiar with some of the simple methods in order to optimise your strategies and maximise your returns.

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Fiat Currencies

In the fiat world, the most important things that affect the value of currencies are interest rates, economic growth, and inflation. Trust is another crucial element, as the “value” of fiat currencies is based on the faith that the currency will be there going forward without losing purchasing power. The value of money also comes from the traditional functions that it serves in the economy:

The three functions of money (Source:disinfo)

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Currencies generally move slowly, with a 1% daily change already being considered a significant move. That said, in times of crisis, fiat currencies can quickly lose their value if the faith in them crumbles, destroying the savings denominated in them and jeopardising economic transactions in the territories that use them. Besides the traditional functions of money (store of value, medium of exchange, unit of account), international exchange rates give a new dimension to currencies with several different ways of profiting from them (with the risk of losing money as well).

The most common ways are:

  • Hedging investments in different currencies
  • Speculative positions, forex trading, usually using leverage because of the small movements
  • Benefiting from interest rate differentials (carry trade)
  • Covering exposures and expenses in different currencies; personal hedging

Cryptocurrency pairs

When it comes to crypto-coins, there are several huge differences. First of all, volatility is much higher in them, liquidity is lower (for now), and that has a profound effect on the price movements of the currencies, as well as the most successful strategies that investors should consider. As central banks are constantly destroying the “store of value” function of traditional currencies through inflation, the likes of Bitcoin, Litecoin and Ethereum are even superior in that regards. Also, the coins all have very important usability features that could define the demand for the tokens and their expected future values in addition to their value that comes from their traditional “money” functions.

That said, some of the usage methods of the crypto-pairs are similar to fiat currencies, although the investment component of these positions transforms it to a whole different playing field. Why? Because if you invest in crypto-pairs, so you hold your investments in crypto pairs (not to be confused with buying tokens with other coins such as Bitcoin), you are always betting on the relative performance of the two currencies and that can be a lot different from the performance in fiat terms. This is especially true when trading with leverage. But what is the difference exactly? Let’s see what the case is regarding the different investment/trading methods.

Investing in one or more coins through holding the coins

In this case, your position is simple. You have an exact amount of the various coins that can be changed at any time to other coins or fiat currencies. In this case, by default, the currency pairs are useful for information, and you don’t have to do anything with them. That said, you can still utilise them for hedging, especially if you have a relatively big position in one or more in the coins. This way, you can use currency pairs to temporarily reduce your exposure to the coins without having to sell them or exchange them for other coins.

Let’s see an example:

Let’s say you bought 10 ETH coins for $100 each ($1000 in all) and now those coins are worth $350 each ($3500 in all). Now, you think that Ethereum has risen too quickly, so you want to wait for a correction to re-enter. You could convert your ETHs to Dollars or Bitcoins, but that might take time and it could have steep fees.

What you can also do is to take a short position in the ETH/USD or ETH/BTC pair in any of the exchanges you trade to “hedge” your exposure. This is an instant and possibly cheaper solution than a sale, of course, depending on the transaction and margin costs.

Trading with currency pairs or other investment vehicles

This is the point where it might get a bit confusing for beginners, as with a margin account, the currencies or coins you own are not necessarily reflective of the trading or investment positions you hold. And as traditional brokers are broadening the ways of investing in cryptocurrencies, and we will probably soon see crypto-ETFs popping up, this will likely just get more complicated. So if you have a trading account denominated in Bitcoins, you might actually end up being short Bitcoin through pairs. Also, in the future, you will have more and more ways of getting exposure to cryptocurrencies without even having a wallet or as much as one coin.

So, even if you have a trading account denominated in Bitcoin or Ethereum, you might actually end up being short those currencies through pairs. In the future, you will have more and more ways of getting exposure to cryptocurrencies without even having a wallet or as much as one coin, meaning that you will always have to exactly know what positions you have in the different vehicles and what those mean for your portfolio.

The most important thing, again, is that currency trading means “betting” on the relative performance of two currencies not just investing in a currency. When taking on a leveraged position, these bets might be outsized compared to your portfolio, especially given the volatility of the crypto-world, while also coming with huge transaction costs in the form of commissions and fees.

The different performance of the most traded crypto-pairs in 2017

Of course, as is the case with traditional forex trading, the profit potential is very tempting, but beware that entering the world of investment through short-term trading or day-trading often leads to steep losses, as it is one of the most challenging fields of financial markets. On other note, you can actually reduce your risks with cryptocurrency pairs as well, and get exposure only to the relative performance of two coins, and remove the generally huge volatility of coins versus fiat currencies, like Ethereum’s swings against the Dollar on the chart above

As you can see, currency pairs provide fascinating investment opportunities if you take the time to understand their basic properties. Once again, we would like to encourage you to ask your questions and give your personal insights about the topic in the comment section.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Altcoins

Bitcoin Cash Spikes on South Korean Volume

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Bitcoin cash (BCH) resumed its uptrend Friday following a sudden spike in South Korean trade volumes. Recent activity in the Asian country suggests that the bitcoin alternative could gain more exposure in the short term.

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BCH/USD Price Levels

The BCH/USD exchange rate surged above $1,750 on Thursady, where it was still some $800 shy of the all-time high. Prices would later consolidate below $1,700 as markets paced the gains. At press time, BCH/USD was up 6.6% at $1,662.

With the recent gain, bitcoin cash is worth a combined $28.4 billion, according to CoinMarketCap. That puts it third among active cryptos, behind online bitcoin and Ethereum.

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Thursday was bitcoin cash’s second major spike of the month, with more traders backing the alternative blockchain. After months of futility, BCH caught fire in mid-November after the backers of Segwit2x abandoned their planned hard fork. Following an initial spike, bitcoin (BTC/USD) declined sharply.

The complete opposite has occurred in recent weeks, with bitcoin cash tempering its advance and BTC adding thousands en route to multiple record highs. The original bitcoin was down more than $110 on Friday, but continued to trade well north of $8,000.

BCH has put up strong gains in recent weeks, a clear sign that the market has moved to a higher base. The cryptocurrency struggled to make a name for itself after it broke away from the original blockchain on Aug. 1. Based on the latest price action, BCH is making the case for a return to $2,000.

South Korea Factor

Trading activity in South Korea continues to be at the center of bitcoin cash’s rally. The Asian country has emerged as a major player in the global cryptocurrency market, with investors there showing a greater propensity to adopt altcoins.

On Thursday, the country’s Financial Supervisory Service (FSS) said it had “no plans” to monitor the cryptocurrency space because it believes the digital tokens do not represent real money.

“Though we are monitoring the practice of cryptocurrency trading, we don’t have plans right now to directly supervise exchanges,” said Choe Heung-sik, the agency’s chief. “Supervision will come only after the legal recognition of digital tokens as a legitimate currency.”

Positive vibes from South Korea may be partially responsible for the huge upswing in trading volumes tied to BCH. Trading volume in the cryptocurrency has risen above $4.1 billion in the past 24 hours, according to CoinMarketCap. That’s the highest level in nearly two weeks.

Bitcoin cash is also benefiting from Bitstamp’s decision to integrate the cryptocurrency next month “in response to the demand.”Bitstamp is the world’s twelfth largest digital currency exchange, according to Business Insider.

Separately, digital wallet provider Bitwala announced plans to integrate BCH into its platform, a clear sign that the token was gaining wider acceptance. The platform, which has more than 57,000 users, said it will now facilitate storage of BCH as well as money transfers. The team also said it is working hard to integrate mobile BCH wallets in the near term.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Analysis

Technical Analysis: Litecoin and Ethereum on the Move as Rotation Continues

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The altcoin bull run continued today despite the US Thanksgiving holiday, as trading remained active in the majors, and another important break-out occurred, this time in Ethereum. Litecoin is also strong today, and the coin is testing the key $75 resistance level, as it follows in the track of ETH again. The currency still looks set to hit the next target at $82.50, with the all-time highs below just below the $100 level also in sight. While the long-term momentum is edging towards overbought territory, the coin remains bullish on both time-frames, with strong support still found at $64 and $56.

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LTC/USD, 4-Hour Chart Analysis

Ethereum scored a new record high after moving past $400 for the first time in five months, and considering the lengthy consolidation before the move, more upside is likely for the second largest coin. With the long-term momentum still not being overbought, the token’s price might test the $500 mark in this leg higher, with Fibonacci targets ahead at $475 and $512. Support levels are found below $400 at 4380 and $350.

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ETH/USD, 4-Hour Chart Analysis

Ripple is also attempting another bullish move, while Monero and Dash are consolidating just below their recent highs, while IOTA is in a short-term correction pattern as well. More and more altcoins are now in the latter phases of their rallies, just like Bitcoin, but traders still have opportunities with favorable risk-rewards ratios. Let’ see the short-term charts.

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Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Altcoins

Zcash Dip Offers Chance to Buy

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The ZEC/USD pair went into a downtrend for several days after hitting the 435 level in June. It shed more than half of its value before establishing strong support at 140. The market tried to reclaim resistance at 310 twice, but was sent back on both occasions. As a result, we have a massive reversal structure that might skyrocket the pair into a new all-time high.

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The market closed above 310 a couple of days ago on weak volume which is why it’s struggling to stay above that level. Technical indicators show that momentum is weakening, increasing the likelihood of a dip. A slight correction not only gives the market legs for its next move up, but it also offers you a chance to place orders.

They key indicator to watch for is volume. As long as volume remains sluggish, the market will most likely slide down to 280 first and then 262 next. That’s a good zone to accumulate positions. If volume suddenly spikes, at least 230k at Bitfinex, then we have a legitimate breakout that will take the market to 465.

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 Summary of Strategy

Buy: between 280 and 262 OR confirmed breakout with volume of at least 230k at Bitfinex

Support: 280, 262, and 243

Resistance: 310, 352, 400, and 412

Target: 465

Stop: If the market breaches 243

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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