How Market Volatility, Illiquidity Can Be Quite Profitable for Bitcoin Traders

Price Analysis Featured Image

Bob Coiney

August 8, 2018

The popularity of Bitcoin reached an all-time high in Q3 2018 with many people falling head-over-heels to grab the wonder coin. Beyond the hype, government pronouncements, hackers, and mixed messages have conspired to take the shine off the Bitcoin price surge.

Market volatility has dogged the cryptocurrency market for the greater part of the last 12 months. There is a plethora of reasons for the price swings, and somehow, it is not all bad news. While it is understandable for stakeholders to voice their preference for price stability, this might be a long way off.

Anyone who understands financial markets will be better placed to appreciate the opportunities that market volatility presents. Illiquidity results when there is less money chasing the available Bitcoin in the market. This gives a good opening for the market price to stabilize.

Let us examine some identifiable factors for the profitability of Bitcoin trading below:

Mining and Market Price

The pace of Bitcoin mining has increased in recent months with the introduction of ASIC miners. In a sense, this also ensures efficient mining processes. As to the fear of over-supply, this is far-fetched as Bitcoin still has a fixed supply of 21 million.

Since new coins are released on the Bitcoin Blockchain after a successful block mining, the linkage to price levels is existent. A trader might want to see the linkage to the market price that mined blocks can produce.

The effect of a surge in market price for Bitcoin is the increase in acquisition of mining capacity by miners. As new blocks are approved, the miner gets a share of the block rewards. Converting the block rewards to cash gives the miner a boost in purchasing power.

Technology cannot obviate the need to solve the necessary mathematical difficulty that gives rise to a block. What is enhanced by newer mining processes is the mining efficiency. A trader might pay less attention to developments in Bitcoin mining as the market price go on a swing.

Price Changes

A price change on the up or downswing can be both an opportunity and a threat. For a newbie, a price fall is an alert to dump as many coins as possible. For the experienced trader, this is not a straight-line issue.

Every price rise means that anyone who bought Bitcoin at a lower rate can sell off for a profit. However, when the volatility is persistent, the response will not be as easily defined. Buying and selling of Bitcoin daily, and for big-time buyers, a small change in price can produce a huge profit or loss.

To use an illustration; buying 1,000 BTC at $5,000 means an outlay of $5 million. A price change that leads to a quote of $5,050, provides a chance to earn $50,000. Let us say that the price dip leads to $4,800 quote per BTC, a loss of $200,000 will arise if a sale is made.

To keep a tab on price changes requires that the Bitcoin trader understands the mood of the market. A sale or a purchase cannot be made just in the face of price swings. To wait until a price swing stabilizes is a better way to make money as you trade Bitcoin.

Market Price Stability

While there are many factors that can lead to sustained Bitcoin price stability, illiquidity surely makes the list. Many people who heard of the meteoric rise in Bitcoin price in 2017 thought of it as a good chance to make fast money.

In a sense, with more funds in the marketplace snapping up Bitcoin, price swings happen easily. This, however, can be attributed to the hype and not real substance. Entrants into the market at such times when price bubbles heat up the demand and supply function can be misleading.

As can be seen in the history of financial markets, when speculation is dampened, the market can become illiquid. This gives an opening for price growth to be organic and not contrived. Bitcoin traders at a time of price stability can earn a fair reward with a minute but stable price rise.

Entry and Exit Points

Price volatility can be an opening for profitable Bitcoin trading. Volatility means that the price can swing both ways. Making a profit in the marketplace is also a 2-way function. You can buy low and sell Bitcoin as the price rises.

Bitcoin traders are faced with setting entry and exit points when market volatility sets in. This is the point when traders are advised to use stop-loss mechanism for trading. You simply need to set a profitable price without incurring a loss.

Using a market order mechanism, you will set your order at a price that you are persuaded is a near-bottom mark. Buying Bitcoin at such levels helps you to accumulate some coins in the expectation that a rally is around the corner.

See the CoinMarketCap image below to understand the highs and lows of price levels:

The four arrows in the image above depict the lows and highs of Bitcoin market price from December 2017 to June 2018.  A look at the image here shows clearly that a Bitcoin trader has a chance to reap some gains between the low and high price level.

When the price drops, the market goes illiquid with fewer buyers on the scene. This sets the stage for the next price surge for those who know the market. It becomes a good time to enter the market. As the price surges again, you can then sell to make a profit.

Major Trading Pairs

As far as Bitcoin is concerned, it is not going away anytime soon, and this makes it worthy of a trader’s attention. In several cryptocurrency exchanges, traders can only cash out when they convert their altcoins to ETH or BTC. This gives Bitcoin an increasing relevance in the marketplace. In most cases if an exchange does not offer FIAT pairs, you have to buy bitcoin in order to buy altcoins.

In view of the dominance of Bitcoin in many exchanges, it is safe to say that Bitcoin’s 42 percent market share is no fluke. Assured usage and ongoing relevance are some of the key drivers of Bitcoin that traders must recognize.

In serving as one of the default currencies in trading platforms, it is obvious that Bitcoin usage will remain prominent and preferred. As the leading cryptocurrency, a trader can be assured that holding BTC is safe. If Bitcoin is safe as a store of value, traders should avoid selling it on hype.

The Exit of Hot Money

When speculators swamp the marketplace with the hope of making a quick buck, then a price bubble usually emerges. When hot money leaves the scene, the price disruptions will be minimal.

The aftermath of a sustained price drop is the exit of hot money. When speculators leave the market, the price surge will not be wild, but steady. In a sense, Bitcoin traders can be profitable in their dealings when the impact of speculators wane.

Bitcoin trading is profitable when the correct timing is adhered to in buying and selling of the wonder coin. Every trader must master personal emotions so that sell-offs that lead to losses can be avoided. When it is possible to defer a sell-off, it should be done based on informed opinion.

Several Bitcoin analysts might sound an alarm of a bottoming-out in the market, and they might be right. However, after prices hit the trough, a rise normally will begin again. The period of price recovery provides a new opportunity.

A Stable Rise in Value

It is evident that many hype-traders exit the market as price drops occur. This the moment for people who know the dynamics get in. In following the Buffet rule, “enter when others exit”.

Illiquidity is sure to occur temporarily or in a sustained manner when people give in to FUD (fear, uncertainty, and doubt). No matter the coin traded, as the volume of funds chasing the security or commodity drops, price quotes will lose steam.

A discerning trader also prefers stable price gains than wild swings. Wild swings attract hype-traders and speculators. When the price gains are stable, traders can open a long position confident that the price appreciation pattern will endure.

Traders who go long will be able to make a profit if the prospect of a stable increase in price is feasible. Otherwise, going short will be preferred so that the trader can take immediate gains, and buy at new price levels.

The common fallout of price swings is the temptation to rush in and sell. In selling off your Bitcoin, it is better to be sure at what price you are making a loss or a profit. While some traders don’t mind taking losses not exceeding 1 percent, others wait and ride the downswing till a new high emerges.

In Bitcoin trading, the tools that help in decision-making are the likes of market summaries, price alerts, and an eye on breaking news. All of these can come into the picture at different times, and they can sway the market in a disruptive manner.

Remember folks, Crypto is comin!

Subscribe to our newsletter

Interested in other cool crypto posts….check out Uncorrelated assets, the “holy grail” of portfolio allocation.and The Price of Bitcoin vs Cost of Mining.

Follow us on twitter @cryptoiscomin