Bitcoin Chaser - February 25, 2020
Once Bitcoin and altcoin prices start rising, traders come out of the woodworks. You see more crypto trade talk on Twitter and other social media, as well as tons of charts and technical analysis. The excitement is so exuberant that you might think the bull run will last forever. Then, suddenly, there is a hiccup along the way, you ignore it and that results in an unforeseen downturn that ties you to your crypto assets for way longer than you would expect. These hiccups often come in the form of wild cards, the kind that technical analysts never see coming because they are so caught up in the beauty of their math. This is why we will explore that one wild card event that can throw your portfolio off, so you know what to watch out for.
At times, these wild card events have come and gone without any consequences. In other instances, markets have deflated on their own. But there are some of these wild cards that never materialized but still threw crypto traders off. These are as important as the wild card events that you should be paying attention to.
One clear example was the UASF. Back in August 2017, there was no way of knowing where Bitcoin was going to go once the soft fork to activate SegWit happened. Traders decided that Bitcoin was a clear buy despite the gravity of this fundamental change, which could have created a sudden mining power dearth and other serious issues.
Similarly, there are wild cards that have nothing to do with cryptocurrency fundamentals but are still given too much importance. Bitcoin futures trading for instance was supposed to bring institutional players in and keep the party raging. Nevertheless, following the Cboe and CME listings, Bitcoin prices plummeted. A bear market that lasted more than a year and a half set in and cryptocurrencies tumbled.
The truth is that no one knows how traders will react to many of these exogenous factors. In fact, the movements we see in cryptocurrency markets following these wild cards, only make sense in hindsight.
Back in 2017 when Bitcoin futures started trading, investors probably thought that Bitcoin and other cryptocurrencies were overvalued. Futures trading allowed them to short Bitcoin. This contributed to the subsequent fall from all-time highs.
This brings us to the wild card that can throw your crypto trading strategy off this time around. Its name is Coronavirus. This epidemic that is spreading through different regions in China, as well as other countries, has the potential to throw many aspects of the economy off.
These could have positive or negative impacts on cryptocurrency trading, but no one knows for sure. Therefore, we have a short list of things you should consider when you trade in the shadows of this wild card
Reports from China indicate that Coronavirus can survive on surfaces longer than expected. The implication is that bank notes and even credit cards can become tools that spread the virus to a wider population. China is now actively collecting banknotes and either sterilizing them or destroying them.
Cryptocurrency can of course serve as a good alternative to banknotes and credit cards. But, if there is a liquidity crunch, this wild card can completely turn your crypto trading strategy on its head. If there are less banknotes out there, people will pay more for them, so cryptocurrency prices might suffer as a result.
But cash availability considerations might not move the needle too much when it comes to crypto. Hype from other parts of the world can easily overcome increases in demand for Chinese banknotes.
What hype from elsewhere around the world cannot do is supplement production of electronics. Therefore, Coronavirus could disrupt the production of mining equipment. This can affect cryptocurrency-based businesses elsewhere, but it can also have an effect on local Chinese mining operations.
So far, mining has not been affected at all, but this is something that cryptocurrency traders must keep an eye on.
The biggest effect that Coronavirus may have on cryptocurrency trading should be indirect. After all, Coronavirus could trigger all kinds of exogenous pressures on the world economy and the ripple effects from those, could hit cryptocurrency traders.
If Coronavirus disrupts global trade too much for an extended period of time, economic growth can stall. The global economy is more fragile now, so a serious outbreak can tip it over the edge. This means that some might be buying cryptocurrency now to hedge themselves and sell if this happens, because they expect a sell-off to capture profits on the back of calamity.
That is, if sustained global economic disruption doesn’t drive more people to buy even more crypto. That could also happen, since more people will be looking for alternatives to hedge their exposure to a sudden hollowing of international commerce.
This is a reminder that no matter how weird the wild card might be, even if it is a global pandemic, it is still difficult to understand how the event will affect crypto trading. Just make sure you pay attention to these events and try to build different scenarios to see how the market will react. Within those scenarios you must have clear indicators that can show you how the wild card is going to break, and then, based on those indicators, you can adjust your crypto trading strategy.