What is Crypto Trading?
Cryptocurrency has created an extra asset class to trade with even though a number of persons have one or two reservations with it. This includes many who have not engaged in trading on any level. One of the problems attributed to cryptocurrency is the seeming extreme volatility.
Like any other asset class, crypto trading is the act of speculating the movement of the price of crypto assets either through a CFD trading account or through the basic buying and selling of the exact asset on a crypt exchange. Many have opined that the best way to trade is through a CFD trading setup but irrespective, almost what affects a spot trader affects the CFD trader since they are exposed to the same market performance. However, one of the advantages of CFD trading over spot trading is the need for a spot trader to be worried about the security of his/her wallet or that of the exchange. This is to say that a CFD trader is not affected by anything called wallet or exchange compromise.
The Benefit of Crypto Trading
As mentioned earlier, crypto trading is all about speculating the price movement of the crypto assets in the space. in this section, we will consider the benefits of trade trading in this asset class are:
1. Crypto Volatility: One of the things that make the crypto markets exciting is their inherent volatile nature. This is because the space is new and it is attracting a huge among of speculative interest. Even though this comes with huge trading risks and can be a negative experience if not managed well, volatility gives trading opportunities to leverage (either long or short) with the rapid intraday price movements.
However, the best advice is that there must be thorough research before diving into the space. Also, every crypto trader is advised to develop a strategy for risk management.
2. The Unlimited Market Hours in the Space: compared to the traditional markets, you can trade cryptocurrencies 24 hours a day 7 days a week including public holidays. This is because there is no central authority backing it up. All the crypto transactions take place within the entities involved, either individual, institutions and crypto exchanges.
Other benefits include improved liquidity and margin trading for traders engaging the CFD trading.
How do the Crypto Markets Works?
Cryptocurrency is built on the idea of decentralization and this means that there is no central controlling agency or authority like a government that controls the market. Even though, different governments in different jurisdictions are already developing a regulatory framework for the space and the market. Instead, the crypto markets run on a network of computers, and crypto can be exchanged through an exchange and can be stored in wallets.
Compared to the traditional currencies, crypto is a shared digital record of ownership kept on the blockchain. This means that the process of transferring crypto from one digital wallet to another is not considered final until it is verified and included on the blockchain. This process is called mining, and it is the process that births new tokens.
What Drives the Crypto Markets?
Like most markets, what drives the crypto markets is demand and supply. And because the markets are decentralized, political and economic concerns have little or no effects on the markets compared to the traditional currencies markets. It is worthy to mention that there are some other uncertainties attributed to the crypto space, and they have the power to affect the markets. In the same way, the factors listed below are considered potent to have a significant impact on the crypto market.
1. Market Capitalization: This is the value of all coins and tokens that existed in the market. And this is a way users perceive the adoption of the space. the crypto market has a history of surging when the overall market cap gets to a milestone.
2. Supply: As mentioned earlier, what drives the crypto market basically is the law of demand and supply and supply in the crypto space talks about the total number of coins available and the rate at which they are being exchanged, lost, or destroyed.
3. Press: Since the blockchain and cryptocurrency are a new technology, there are still many staying aloof from them. This is because of the uncertainties and the government’s invalidation of the space as received over time. However, the market responds significantly to how the press and media portray the markets per time.
4. Key Events: There are events in the crypto space that has the ability to affect the crypto markets. Major events like security breaches including exchange and wallets compromise, regulatory updates especially from jurisdictions many users in space.
5. Integration: Another thing that drives the crypto markets is the extent to which crypto can be integrated easily into the existing systems like the e-commerce payment systems. This will help people to see a more realistic side of the asset class through the expression of use cases.
Introduction to Crypto Seasonality
In the traditional markets, there are some financial data that shows seasonal trends like the Gross Domestic Product (GDP), which can be used to compare the recession and expansion seasons. Also, it is believed that the price of a given commodity can respond to climatic change, hence, having the winter trends versus the summer trends. There are some financial data like the calendar events for the stock price of a company that shows how prices respond to seasons in the market.
Over the period of time the crypto market was instituted, there have been sights of seasonal trends in its data, especially bitcoin, which is the first and the biggest of all crypto assets in the market. Some of these trends are built on different hypotheses like the response to the tax season, the response to public holidays like Christmas (Santa Claus rally) and Chinese New Year, and increased blockchain/trading activity in the winter months.
Experts have even developed a heat map to track the ROI on bitcoin since mid-August 2010, and it was discovered that from the entire 113 months considered in the study, there are about 28 months where BTC has given a positive ROI on a 30-day investment. For instance, in 2019, every single day in April, May, and June gives a positive return for every bitcoin investment.
Also, while the tendency is that the market will remain red for a 30-day investment in a calendar month, we have seen such strong momentum from September to October 2014 where the three months were entirely red (given green for positive returns and red for negative returns).
On a general outlook, the heatmap shows the response of the BTC market to holidays like Christmas and Chinese New Year, which has consistently been negative between 2016 and 2019. Also, there is a direct effect of tax deadlines on the market, especially in countries like the UK and the US (around late March to early April). Around this period, the market gives a red response because investors most likely engage in tax-loss harvesting where they sell their digital currency to incur losses and reduce the burden of the tax. Another perspective to it is the sales of crypto assets to clear capital gain tax and every other tax liability. On the heatmap designed, this season shows negative ROI on a 30-day investment for seven years out of nine.
What is Crypto Seasonality?
There is an existing perception that cryptocurrency, especially Bitcoin will rise and fall over a certain period of time which has drastically contributed to the overall performance of the crypto market generally. This perception is what is called Crypto seasonality.
Bitcoin, for now, still remains the biggest cryptocurrency in the world as much as it is the first-ever one to be created, and this has given it the opportunity to lock up massive value into it at all times. However, every subsequent coin after the bitcoin which is also known as altcoins has its values tied to the bitcoin in some way.
For what it takes, bitcoin is not a stable asset. This means that the value of the first cryptocurrency in the world is ranging. It can rise and drop up to tens of thousands of dollars at any time mostly without any clear signal that predicts the moves. Also, it is expected that the volatility of the asset will reach its peak every four years before crashing hard relatively due to the Bitcoin halving.
Relative to the bitcoin halving event, it is discovered that the market tends to correct itself, which can lead to a massive increase in the value of the asset due to the scarce phenomenon created by the halving event. However, after a short period of time, the market crashes as investors are pulling out their funds in order to book their newly-earned profits. This will then lead to the overcorrection of the market which can often cause panic among other investors, who often eventually pull out their funds to invest in altcoins.
Judging Crypto Seasonality: is it Good or Bad?
The basic truth of this phenomenon is that it affects everyone, but either it is good or bad depends on the investment personality of the investor. Also, when looking into crypto seasonality, the effect depends more on the perspective of the investor as well.
For new traders, crypto seasonality can be a good thing, since they entered the BTC market at a lower price. For them, the sudden surge in the value of the asset can look like a perfect time to book their profit from the market. On the other hand, this might look bad for other investors who have a long-time perspective on the market. They despise the crypto seasonality phenomenon because they are always expecting the value of their BTC holdings to fall every four years. Most often, this forces them to wait out the lows or pull out their funds to reinvest in the altcoins market.
Irrespective, you can always expect BTC to rise again after reaching a balance in its demand and supply. Ideally, there is no guarantee to this belief, but considering historical performance, the leading crypto asset has a history of reaching higher highs after each halving event.
How Crypto Seasonality Affects Investors
The crypto seasonality has a number of effects one of which causes investors who invest in bitcoin alone to gamble in other altcoins markets. When the price of Bitcoin crashes, investors are forced to pull out their funds from the BTC market to invest in the altcoins. This is to ensure continual profit generation from the crypto market. However, the altcoin markets can be quite unpredictable as you’ll have a project booming today and crashes suddenly the next day.
Also, there are huge scams in the altcoin markets, and it is can be dangerous for investors. Project owners can use deceptive marketing and rug pulls to take advantage of investors. Also, there are regulatory policies at work, and they can affect the experience of traders negatively as it unfolds. Also, exchanges can be a victim of cyber-attack, and every investor’s holding can be stolen. Generally, there is no telling of the possibilities of events that can happen in the wild west of the altcoin markets.
Of course, there are more ways for investors to earn from the altcoin markets, which are considered safer than direct investments. One of them is investing in established passive income methods like Liquidity Pools of exchanges like Uniswap (UNI) or participating in the coin staking process or mining. Even though there are risks involved in these methods, they are considered safer than direct investment.
Navigating through the Storms of Crypto Seasonality
There are actually diverse solutions to the issue of crypto seasonality. One of them exists in the form of the continuous accumulation of crypto assets. Another one is pioneered by a crypto startup called Seasonal Tokens. The startup is developing a safer alternative to the known traditional methods. Seasonal tokens, however, are designed to rise and fall over the course of about nine months with the intention of giving investors a safer and more stable alternative for the downtrends in the bitcoin market.
The crypto startup divided all its tokens into four seasons, namely winter (WINTER/USD), Autumn (AUTUMN/USD), Summer (SUMMER/USD), and Spring (SPRING/USD). The ideal is that investors will buy into the spring tokens when they are cheapest and hold them till their value increases. However, investors will be required to switch the tokens they are holding – like from Spring tokens to summer tokens. The tokens they are switching to are considered the ones that will rise in value next. This cycle continues all through the seasons.
Given a perfect scenario, an investor will trade spring for summer at the time the spring tokens are the most expensive and the summer is the cheapest in the market. This will also increase the number of tokens they own. Also, when the summer token has increased to the highest possible, the investor will exchange them for the autumn tokens which will predictably be at their lowest at that point. This will also lead to more token accumulation.
These ups and downs in the market are believed to be the cause of the production cuts that happen at the interval. This is similar to the bitcoin halving. For instance, the production of the spring tokens will be cut in half in June, and their production will be more expensive than every other token in the market. At the time when the spring starts again, users will be required to exchange their winter coins to their spring tokens. This will help them to benefit from the scarcity without having to contribute more real-world funds.
With this new model, Seasonal Tokens is looking to offer an asset that will have its value rising and accumulating constantly. This is in hope that investors will have a safe space to keep their funds during the BTC downtrends.
Conclusion
What every trader must understand is that the crypto space can be unstable on many occasions. This is because it is still a novel technology. However, those trading CFDs, might not experience the crypto seasonality phenomenon because they can profit off the market without necessarily waiting for the value of the assets to appreciate. However, if you are a spot trader, you might have to consider the solutions listed above.
Here is a quick disclaimer: this article is put together for the purpose of education alone and not to serve as a financial advisor. This is to say that the responsibility of your financial decision is on you and not this content, hence, you are required to DYOR – Do Your Own Research before considering any investment.
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