Cryptocurrency trading has sparked back into action in 2019. With triple-digit returns being observed, it is easy for traders to get carried away. Risk remains a key part of the equation and we delve into both the past data and theories from analysts to assess how risk relates to returns in the cryptocurrency markets.
- Both bitcoin and altcoins have increased over 100% in price year-to-date in 2019
- Cryptocurrencies have outperformed all other major asset classes on a risk-adjusted basis
- Altcoins make up a large part of the cryptocurrency market and their returns tend to amplify the returns of Bitcoin
- Traders who have performed best in this market have made use of the brokers with the best quality trading platforms while also demonstrating exemplary risk management techniques
Cryptocurrency Trading Returns in 2019
The price of bitcoin is up over 150% year to date at the time of writing on the 21st June 2019. With the year only approaching its halfway point, traders and investors may be set up for big price movements in the second half of 2019.
The last time cryptocurrency traders experienced such large returns was in 2017 where the price of Bitcoin recorded over 1300% returns. Traders may be concerned that the markets are setting up for a repeat of what happened in 2017 where the significant price increases were followed by a prolonged period of price declines. However, analysis from research agency Adaptive Analysis has shown that Bitcoin is in a much stronger position as an asset today than it was in 2017. The below table taken from the Adaptive Analysis study shows significant increases in some of the key metrics playing into the value of the Bitcoin network.
|Hash Rate||2.4 EH/s to 15.3 EH/s||36.94 EH/s to 54.86 EH/s|
|HHI||Highly Concentrated||Moderately Concentrated|
|Estimated Daily Value Transferred||~$14.3 billion at peak||~$3.5 billion currently|
|Key Developments||SegWit Launched||Greater Lightning Network Adoption, SegWit Adoption, Liquid Sidechain, Schnorr and Taproot Proposal|
The strong performance of the cryptocurrency market in 2019 extends itself beyond just Bitcoin. Bitcoin is the bellwether of the industry but numerous research studies have demonstrated high levels of correlation between the returns of Bitcoin and the returns of top altcoins. The altcoin market excluding Bitcoin has also increased by over 100% based on data from CoinMarketCap. After long periods of consolidation and declines in 2018, conditions are setting up to be far more lucrative for cryptocurrency traders in 2019.
Risk versus Reward in Cryptocurrency Trading
A commonly noted concern among traders, especially newcomers, regarding cryptocurrencies is the sharp price movements and risk associated with this new asset class. There is no denying it. This emerging asset class is subject to volatile price movements. But what about when the returns are adjusted based on the level of risk in the asset class. The Sharpe ratio is a commonly used metric which financial analysts use to assess returns in terms of risk. Data has shown that over long holding periods, Bitcoin has outperformed every other major asset class. The chart below, generated from cryptocurrency analyst Willy Woo demonstrates Bitcoin far outperforming all other asset classes in terms of Sharpe ratio.
Sharp price movements are not necessarily a bad thing to have in markets. Many traders who outperform do so because they have honed their skills to capitalize on trending markets. This helps these traders achieve returns above and beyond the returns that the market provides. This is commonly called alpha returns in the investment industry and it serves as the lifeblood of traders.
The early nature of the cryptocurrency markets has actually helped traders in this regard. Matures markets such as equities have been in existence for over 400 years and the analysts have converged on fundamental analysis models. Early markets such as cryptocurrencies have been found to be more subject to trends and movements which are driven by the sentiment of crowds. Analysts such as Chris Burniske from Placeholder VC have done extensive research in this area.
Zero to Hero in Cryptocurrency Trading
There are countless success stories of traders who have amassed fortunes in the cryptocurrency markets. There are also countless stories of traders who have lost fortunes in the cryptocurrency markets. Those who have managed to outperform the markets have typically demonstrated a deep understanding of how to manage risk.
Many analysts and traders in the cryptocurrency industry tend to maintain anonymity by using pseudonyms. The motivation for doing so mainly relates to their privacy and security. Some cryptocurrency figures such as Ian Balina are publicly known as their identity is closely tied to how they make money. Balina is paid large sums to appear as an advisor for projects which are raising funds. Little can be learned from these personalities when it comes to trading and investing.
Others have built a reputation from the quality of their analysis skills. We have seen the pseudonymous analyst Crypto Cred become increasingly popular over the past few years due to the quality of his technical analysis live streams and educational articles. Crypto Don Alt is another analyst who has increased in popularity due to the
popularity of his educational content.
Other analysts have been around for longer and have built reputations based on their balanced investment advice. Crypto Cobain has been around for many years in the cryptocurrency space and has a large following on social media. Others that have been around for many years such as Ryan Selkis have gone on to build important companies in the cryptocurrency industry. Selkis co-founded cryptocurrency data provider and analysis company Messari which is acting as one of the closest competitors to CoinMarketCap.
Altcoins and Tokens in 2019
Bitcoin is undoubtedly the bellwether of the cryptocurrency industry. At the time of writing, the Bitcoin market valuation represents over 57% of the entire market cap. However, tokens and altcoins comprise a large part of the market and are an important source of returns. Altcoins tend to amplify the returns of Bitcoin. This can be a trader’s best friend or worst enemy depending on how well they manage their risk and analyse the markets. We have reviewed the best cryptocurrency brokers so that readers can be informed of the best service before entering into this market. Tools such as charting indicators, sentiment analysis, and advanced order types can all help traders choose the right entry and exit points when trading in this volatile market.
Why Trade Crypto in 2019?
The cryptocurrency market has been reignited in 2019. With large price movements already being observed, it is likely we will see more of this in the second half of 2019. Those who succeed in cryptocurrency trading typically demonstrate high-quality risk management techniques. Those who have succeeded in the long-run have gone on to