Don’t give up on cryptos and avoid bad habits with tech

Between July and Decem­ber last year, cryp­tos such as bit­coin expe­ri­enced an extreme boom-and-bust cycle as traders were gripped by a spec­u­la­tive fren­zy. Pos­i­tive news hint­ing at the accep­tance of these dig­i­tal cur­ren­cies into main­stream usage attract­ed buy­ers chas­ing a fast buck. These traders over­in­flat­ed prices through greed and over­con­fi­dence, then sent them crash­ing down again as pan­ic sell­ing took over.

We then saw more cog­ni­tive errors in the cryp­to mar­ket this year as some traders who had bought at a high price held their loss­es for too long in the hope of recov­ery. Instead, cryp­to prices, which had already fall­en more than 50 per cent from their peak, lev­elled out for a few months, only to fall a fur­ther 40 per cent in the two weeks to Novem­ber 24.

The Novem­ber falls prob­a­bly occurred because these traders final­ly accept­ed their loss­es and sold out to lim­it fur­ther dam­age.

Such behav­iour­al prob­lems are well under­stood thanks to aca­d­e­mics such as Daniel Kah­ne­man, Robert Shiller and Richard Thaler. Their work has iden­ti­fied that humans make 95 per cent of their deci­sions using men­tal short­cuts, or rules of thumb, based on anec­dotes and stereo­types, rather than dis­ci­plined strate­gies. This leads to a wide range of irra­tional behav­iours and, in the finan­cial world, mar­ket mis­pric­ing.

David Jones, chief mar­ket strate­gist at trad­ing plat­form Capital.com, says the cryp­to boom attract­ed many new entrants to trad­ing, but many of them will have learnt a harsh les­son about mar­ket psy­chol­o­gy.

“Peo­ple saw easy mon­ey,” he says. “But easy mon­ey doesn’t last for­ev­er. We’ve seen it many times before, for exam­ple, in the dot-com bub­ble of the 1990s.”

Capital.com pro­vides the only plat­form that uses arti­fi­cial intel­li­gence to look for pat­terns that could indi­cate behav­iour­al mis­takes among indi­vid­ual traders

How­ev­er, Mr Jones says traders inter­est­ed in cryp­tos should not aban­don the asset class; if there is volatil­i­ty, there will still be oppor­tu­ni­ties.

“You can prof­it from mar­ket falls, by sell­ing short, as well as from ris­es,” he says. “So traders need to be aware of mar­ket sen­ti­ment cre­at­ing sud­den moves in either direc­tion. Much sen­ti­ment is news led. News flow about cryp­tos and there­fore volatil­i­ty was low in the six months to Octo­ber, mak­ing it less attrac­tive for traders because these mar­kets were not expe­ri­enc­ing the kind of move­ment they had pre­vi­ous­ly.

“But with volatil­i­ty return­ing in Novem­ber, it becomes attrac­tive again for those look­ing to prof­it from short­er-term swings.”

Despite the lat­est crash, some econ­o­mists still believe cryp­tos will play a key role in future economies. The lat­est, Dr Saifedean Ammous, asso­ciate pro­fes­sor of eco­nom­ics at the Lebanese Amer­i­can Uni­ver­si­ty, report­ed­ly pre­dict­ed in Novem­ber that cryp­tocur­ren­cies will enable a return to a gold­en era of cap­i­tal­ism. Oth­ers are less pos­i­tive; for exam­ple, War­ren Buf­fet, chief exec­u­tive of Berk­shire Hath­away, has said the idea that there is intrin­sic val­ue in cryp­tos is a joke.

Mr Jones high­lights that bit­coin lost 56 per cent of its val­ue in 2014, but went on to add 2,400 per cent in the year to Decem­ber 12, 2017. So traders should not rule out anoth­er resur­gence.

But antic­i­pat­ing the tim­ing of any rebound is about mon­i­tor­ing news flow and sen­ti­ment, not under­ly­ing val­ue.

He says: “Tra­di­tion­al mar­kets such as shares or com­modi­ties are hard enough to val­ue; this is a much more ethe­re­al mar­ket. You can use mar­ket charts to see the direc­tion of trends and over­all sen­ti­ment. But don’t get psy­cho­log­i­cal­ly tied to a fixed val­ue.

“The lat­est sell-off could end up being a sign that the worst is over and we can antic­i­pate some recov­ery. When the last of the spec­u­la­tors sells out, often the only way to go is up.

“As the mar­ket rose last year, we saw bit­coin spend some time around $3,000, which it has returned to at the time of writ­ing, so it might build a base from here. I’m bas­ing that pure­ly on the sen­ti­ment of mar­ket par­tic­i­pants last year.

“Oth­ers think it will sink fur­ther. But whether you feel the mar­ket will rise or fall, the key to suc­cess­ful trad­ing is main­tain­ing dis­ci­pline, stick­ing to your plan and avoid­ing bad habits.”

Tech­nol­o­gy can help here, says Mr Jones. Capital.com pro­vides the only plat­form that uses arti­fi­cial intel­li­gence to look for pat­terns that could indi­cate behav­iour­al mis­takes among indi­vid­ual traders. For exam­ple, it can iden­ti­fy when you might be chas­ing loss­es if they become much big­ger than your prof­its, then nudge you towards tech­niques such as stop loss orders to man­age risk.

Or it can spot over­con­fi­dence if you are trad­ing too much or too fre­quent­ly fol­low­ing some wins, then remind you to main­tain a dis­ci­plined strat­e­gy.

“Peo­ple typ­i­cal­ly come to cryp­tocur­ren­cies with more bias­es because they think they can make lots of mon­ey and it may be their first expe­ri­ence of trad­ing,” says Mr Jones. “There’s a big oppor­tu­ni­ty for this tech­nol­o­gy to iden­ti­fy when they are start­ing to bend their own rules and nudge them back on track.”

Capital.com offers cryp­to trad­ing through con­tracts for dif­fer­ence (CFDs), a deriv­a­tive between a trad­er and their bro­ker, under which one par­ty agrees to pay the dif­fer­ence in val­ue between the open­ing and clos­ing posi­tion. CFDs are an option for those who wish to trade a cryp­tocur­ren­cy, but do not want to buy the cur­ren­cy itself, which requires a dig­i­tal wal­let.

“There have been sev­er­al sto­ries about hack­ers access­ing dig­i­tal wal­lets recent­ly,” says Mr Jones. “With a CFD, you don’t need a dig­i­tal wal­let, just a trad­ing account. It also enables you to enter and exit mar­kets in sec­onds. Capital.com is a 24/7 plat­form. It has 29 cryp­to trad­ing pairs avail­able and offers ‘two times’ lever­age. It is reg­u­lat­ed by the Finan­cial Con­duct Author­i­ty, there is zero com­mis­sion and it has the tight­est spreads on bit­coin and oth­er cryp­tos.”

The plat­form also allows trades in frac­tions of dig­i­tal coins, as low as 1 per cent of a bit­coin, for exam­ple. So at cur­rent prices, you would only need around $30 to trade bit­coin, not $3,000, says Mr Jones.

Most impor­tant­ly, with pio­neer­ing arti­fi­cial intel­li­gence keep­ing you on track con­stant­ly, it can help you stay well ahead of less dis­ci­plined traders, he con­cludes.

CFDs are com­plex instru­ments and come with a high risk of los­ing mon­ey rapid­ly due to lever­age. 78 per cent of retail investor accounts lose mon­ey when trad­ing CFDs with this provider. You should con­sid­er whether you under­stand how CFDs work and whether you can afford to take the high risk of los­ing your mon­ey.