Bitcoin is the simultaneously the most popular cryptocurrency and most controversial asset in the world. While people love calling it "the digital gold" the reality is that Bitcoin's price increased has far exceeded gold (and most US stocks) by a considerable margin. And, with the the approval of the Bitcoin spot ETF, it's likely that this bullish rampage won't stop this year or the next.
|
Nevertheless, Bitcoin is at its all-time high. Most people who buy at Bitcoin's peaks can attest that holding on to their cryptocurrency in a bear market is not easy. The bear market for Bitcoin can last years, and when buying an asset like this, you have to understand the risks and be prepared to hold for a while.
|
So, if you're getting FOMO and want to buy Bitcoin, here's how you can do so while minimizing your drawdown.
|
In order to buy Bitcoin, you first need to have an account on a cryptocurrency exchange. There are many popular options like Coinbase, Gemini, Kraken, and Binance. However, for the vast majority of people, you don't need a crypto-specific platform.
|
If you trade crypto on an exchange like Coinbase, they will charge you money when you buy it, and charge you money when you sell it. This MASSIVELY reduces your gains. For example,
I sold $1,500 of Ethereum (ETH) on Coinbase and I was charged over $20.
|
This does not include the spread. Robinhood has by far the easiest, most straightforward platform for trading stocks, options, and cryptocurrency. Unless you're trading millions of dollars, don't overcomplicate it.
|
Limit Your Risks while Increasing Bitcoin Exposure
|
Naive Strategy – Going all in
|
If you firmly believe that Bitcoin is currently at the lowest price that it ever will be, then this is your best strategy. However, if history were to repeat itself (or rhyme), you could be at risk for a devastating financial loss.
|
Backtest "Buy and Hold" from October 09, 2021 to October 09, 2022
|
People who bought at the peak of the last bull rally lost over 70% of their investment in one year. This can be devastating, especially if you've invested thousands of dollars.
|
Even if they didn't sell for a loss, they only marginally outperformed the S&P500 after bitcoin recovered. This is the grey line in the chart.
|
Backtest "Buy and Hold" from October 09, 2021 to March 23, 2024
|
Surely, there's a better way to buy bitcoin after you've already missed the rally, right? There indeed is.
|
Risk-averse entry – Grid Trading and Dollar Cost Averaging
|
Grid trading is a popular trading strategy. The idea is simple – pick a fixed price, and then pick 3 levels below that price and 3 levels above that price. If the asset you're trading falls below any of the levels, buy more of that asset. If the asset flies well above the top levels, start selling the asset. Repeat ad infinitum until the heat death of the universe.
|
While this way is an effective way of entering Bitcoin (and will yield similar results), the way I like to implement grid trading is to look at the percent change of the position I'm holding.
Specifically, I'm trading two rules:
|
Buy Condition: If I have less than $100 of Bitcoin OR my Bitcoin positions are down 20% or more, buy 20% of my portfolio value in Bitcoin
Sell Condition: If my Bitcoin positions are up 10% or more, sell 5% of my portfolio value in Bitcoin
|
If you were to buy the peak of the last Bitcoin bull rally, here's what would've happened to your portfolio.
|
Backtest "Modified Grid Trading" from October 09, 2021 to October 09, 2022
|
You would've lost 30% which is still not great. However, it's also not devastating. It would be completely reasonable to deposit more into your account and buy a little more. Or, you can just wait for the crypto recovery.
|
And in fact, with this simple strategy, you would've gained over 40% of your initial value from the peak of the last bull run to right now.
|
Backtest "Modified Grid Trading" from October 09, 2021 to March 23, 2024
|
This is a lot more than just gaining 14%. You can see that in backtests, the maximum drawdown is a lot lower, the average drawdown is lower, and the sharpe ratio is higher. It's overall a much less risky way to trade your favorite cryptocurrency.
|
Now I'm not here to convince you that grid trading and dollar cost averaging is the best way to buy Bitcoin. As I mentioned before, if this is the lowest price Bitcoin ever sees, then buying and holding is the best strategy. However, with an asset as volatile as Bitcoin, you have to consider if the risks can outweigh the potential rewards.
|
Dollar cost averaging and grid trading is a smart way to gain exposure to Bitcoin. If Bitcoin trades in a range, then you can sell when the cryptocurrency is high and buy more when it is low. This can reduce your cost basis, reduce your risk, and still give you healthy exposure to Bitcoin.
|
Hopefully, this article has shown you a new way to think about your entry. You don't HAVE to buy all you can at once, and in fact, it's most of the time not a great strategy. Staggering your entry points is a great way to reduce your risk and gain exposure, especially when you're trading volatile assets like Bitcoin. NexusTrade gives you tools to test these types of strategies, and allows you to deploy them for real-time paper-trading. The strategy is also simple enough to be executed on nearly any brokerage.
|
So if you're looking to buy Bitcoin because you have FOMO, do not fret. Just be smart about it.
|
Disclaimer: The content provided in this post is for informational purposes only and is not intended as financial advice or a recommendation to buy or sell any securities. I am not a financial advisor. The insights and analysis shared are meant to demonstrate the capabilities of NexusTrade in automating financial research. It's important to conduct your own due diligence and consult with a professional advisor before making any investment decisions.
|
|
