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Bitcoin is on a tear, rallying strongly. However, this has raised hype about where it may head next as well as fears that it has become a bubble. IG analyst, Chris Weston, looks at how it can be traded.
Many investors in Bitcoin believe it has a huge future including an everyday role for all households and businesses. These individuals would certainly not be shocked by the absolutely breathtaking moves we have seen in the digital currency through much of 2017.
Others have a reasonable understanding of Bitcoin, but never really actively traded the digital currency, preferring more traditional financial markets like the Dow Jones or the DAX. And there are also those who still have very little understanding of Bitcoin and cryptocurrencies more broadly, and are reluctant to trade something they haven’t researched. After Bitcoin’s 190% rally since 27 March, these individuals may also have little appetite for a financial market that can move with such ferocity.
IG’s client flows show that Bitcoin is not just gaining in popularity but is actually a product that is now firmly ingrained in client’s watch-lists. In a financial market devoid of volatility, and in many cases strong underlying trend and momentum, Bitcoin is looking attractive. One could say it trades akin to a micro-cap mining exploration company that is sitting on a tenement set to rival any of BHP Billiton’s tier one mines. However, we are not talking about a market capitalisation of $20 million. We are talking about a markets cap of $38 billion, where even the institutional players are involved in a big way these days.
IG has been offering Bitcoin for a number of years now, but in the last few weeks trading volumes have lit up. That happens when Bitcoin makes it onto the front pages of mainstream newspapers and on-line publications. Social media is abuzz with traders and financial market participants detailing meaningless random statistics, such as a $100 investment in Bitcoin in May 2010 would now be worth $72 million, and cries that ‘this is it, Bitcoin is going to $10,000.’
That view may well play out – we shall have to wait and see. But it looks like Bitcoin has almost certainly cemented itself as a case study in trend and momentum trading, and ultimately an exercise in following money flow. The most important aspect is that Bitcoin has schooled us in the concept of letting profits run and subsequently trailing the stop loss – key concepts to any successful trader.
We will look back in two years and talk of this run in Bitcoin and ask ‘were you in Bitcoin?’ and ‘how long did you hold on for?’ Some would have bought and held on for the price to rally to $100 and even $500 in some cases, before human emotion kicked in and forced traders to take the profits fearing that the exponential move higher comes crashing down. Psychology obviously plays a big part here – as human beings always feel the need to be right and taking profits always feels good.
However, instead of simply taking profits for the sake of taking profits, why not adopt a more mechanical mindset that keeps us in the trade for longer, in turn, etching out as much profit as we possibly can.
We can see that in a number of cases in the last few years, once price closes above the seven-day exponential moving average (EMA) it has a tendency to hug this average on genuinely strong rallies. In the early stages, and certainly when the move is really gaining momentum, every sell-off will be limited by buyers stepping in at this short-term average. It also helps if we see the relative strength index (RSI) rising sharply, showing the rate of change in price heading higher, and we want to see the seven-day EMA accelerating away from the 20-day EMA. One can look to close the trade when the price closes below the short-term average and preferably with the RSI moving back below 70.
One of the key selling points about trading Bitcoin as a contract for difference (CFD) is traders do not actually own the Bitcoins and are purely speculating on the price movement. Aside from the security of not being susceptible to the theft (of the coins), this offers the ability to profit from a trend lower. So while there are those calling for much higher levels, there are also many suggesting this move has been built on fear of missing out, and the term ‘bubble’ has been bandied about.
Clearly this is a market to watch and there is no doubt that Bitcoin is the talk of the town right now and one suspects it will be for a while.
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