Crypto as a trading vehicle

Crypto as a trading vehicle

Traders continue to be drawn to crypto as a trading vehicle. Not just because of its ability to trend for a prolonged period, or due to the nature of impulsive momentum that traders can identify and jump on. But also, as we’re seeing now with increased two-way opportunities, and for those that will trade the flow long or short. 

For those who see crypto as a vehicle to trade and not just for the long-term adoption story that investors tend to want to be involved with, then from a spread/movement (or volatility) basis crypto is one of the best vehicles out there.

We’ve seen that case-in-point over the past 24 hours - A rapid flush out of longs in the market has seen $866m liquidated across exchanges - 31% of that in Bitcoin alone.

Again, we look to China where authorities are warning SOEs about cryptocurrency mining, broadly detailing they would increase electricity rates and levies for companies still involved here. While China going after the crypto market is obviously not new, it reminds us that increasing the costs associated with crypto is one of the key influence’s governments can utilise to impact the crypto market, as they can with potentially influencing the fiat-to-stable coin transfer. 

There has been some focus on the passing of the US infrastructure bill where a provision has been set for the exchange (or “Broker”) to report customer intel to the IRS – clearly not a popular move for those in the US participating in the crypto market, although it won’t kick in until 2024. This becomes somewhat political, given 1 in 10 Americans have bought and sold crypto in the past 12 months. It perhaps doesn’t shock then that a group of US senators are looking at exempting participants who are involved in the development and innovation of the crypto ecosystem.

Either way, crypto will react just like any other asset class to news around regulation, and just as investors are inspired by news of innovation, adoption, or efficiencies - regulation will promote short sharp moves lower, as we have seen periodically. 

As a trader, these headlines need to be incorporated fully into one’s risk management. Price moves are the immediate red flag, and a sudden move needs to put us on notice. Personally, when I see a move of 3% in Bitcoin or Ethereum within a 30-minute window, I will assess the headlines and the severity of the issue, as we often see a far slower burn to fully discount news than say spot FX.

First movers’ advantage in crypto can therefore be genuinely beneficial and while hedge fund algorithmic activity has dramatically increased in this space over the years, with the technology to react to news far quicker than retail traders, it is still as not as efficient as other asset classes. 

This can help level the playing field.

The cost to movement trade-off 

Our flow is predominantly always seen in Bitcoin and Ethereum – and, while we offer 16 coins in total, these two have the best liquidity, and for an average spread of $33 (on Bitcoin), $5.4 (Ethereum) we see the 12-month average high-to-low percentage range at 6.8% and 8.6% respectively over the past 12 months. 

Another popular way to see this is the 5-day Average True Range (ATR). In pips, the 5-day ATR in Bitcoin is 3453 – so this is a spread as a percentage of the daily trading range of 0.96%. On our standard account (comm is incorporated into the spread) this same dynamic in EURUSD sits at 0.97%. 

So, in essence, on a spread-per-movement basis Bitcoin is comparable to EURUSD and even gold. 

The current set-up

Bitcoin daily

Crypto as a trading vehicle - 1

After a move into 58,621 in Bitcoin, we’ve seen the 50-day MA act as support and buyers stepping in. The 28 Oct swing low of 57,762 is also one to consider, and if we were to see a breakdown through the 50 day and the 28 Oct low and Bitcoin could stage a rapid move into 54,000. As it is, this has the feel that we could see some messy two-way action, and it wouldn’t surprise to see 68,000 capping the upside, 57,000 the downside. 

Ethereum daily

Crypto as a trading vehicle - 2

Ethereum has found support into the lower Bollinger band (20-day MA, 2.5 standard deviations) but has broken the channel support it held since late Sept. That doesn’t mean it will collapse, but the markets propensity to follow the trend is over given price is no longer making higher highs. Another where the near-term price action could get messy and chop around with better two-way price moves. 

DOT is one that has seen some good volatility of late and another that is holding the 50-day MA for dear life. A close below 39.66 and this could open a deeper move – a factor which could be appealing as we pay 7.5% on shorts. 

As always in trading keeping an open mind is key and for those who want to trade crypto rather than HODL, it feels like the stage is set for two-way opportunity.

Chris Weston

Chris Weston is our Head of Research and holds over 19 years of experience in the industry. A highly-respected financial services expert, Chris has supported both retail and institutional clients at IG, Merrill Lynch, Credit Suisse and Morgan Stanley, covering research as well as sales and trading roles. His extensive exposure to the FX, equities and fixed income markets puts him in a unique position to provide inspiring insights, research, ideas and risk-management strategies that support every step of your trading journey. Based in Australia, Chris is a well-known global media figure, regularly appearing on Bloomberg, Bloomberg Arabia, Channel News Asia and Sky News Business.

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