Is It Possible to Time the Crypto Market?
Can you reliably time your trades to make a profit and come out ahead?
13:05 05 September 2022
All cryptocurrencies deal with at least some pricing volatility. Prices go up and prices go down, and savvy investors can reap the rewards of buying low and selling high. If you bought Bitcoin in January of 2020, you could have gotten it for $7,193. A month later, in February 2020, you could have sold it for $10,457.
But is timing the crypto market really so straightforward? Can you reliably time your trades to make a profit and come out ahead?
The Problem With the “Crypto” Market
First, we need to acknowledge a terminology problem with the cryptocurrency market. There isn't just a single crypto market, since there are dozens of prominent coins and hundreds of less prominent coins in active circulation; each of these coins functions independently from the others, often utilizing different systems and different approaches, so it's impossible to paint all of these with the same broad brush.
There’s Bitcoin, arguably the most popular cryptocurrency. There’s Ethereum, which trades on Polygon (once known as the Matic Network). There are also “meme” coins like Dogecoin – and new coins being added on an almost daily basis.
Still, we can generally assess whether timing your trades for individual coins is a worthwhile strategy.
Factors to Facilitate Better Timing
Hypothetically, you could study the following variables to execute better timing in your cryptocurrency trades.
- Public hype. How does the general public feel about this coin? Are they excited about it and talking about it regularly? Have they kind of forgotten about it? Reading the momentum here can help you plan whether it’s better to hold onto your existing coins and buy more or quietly exit your position.
- Broad economic conditions. You also need to think about broader economic conditions. In some ways, cryptocurrency is an effective hedge against inflation and economic recessions. But at the same time, fewer people are interested in speculative investments when the economy isn't performing well. This is a complicated variable that interacts with cryptocurrency prices in many different ways.
- Regulatory news. Any news related to regulations surrounding cryptocurrency can affect cryptocurrency prices. If it looks like cryptocurrency is going to be banned in certain countries, or that it’s going to be more heavily regulated, the price may fall. If the cryptocurrency is increasing in adoption or decreasing in regulations, that's usually associated with positive pricing momentum.
- Technological breakthroughs. Major breakthroughs in technology can also inspire crypto optimists. If cryptocurrency can do more things or if it becomes more accessible, it's naturally going to rise in value.
- Historical precedent. You can study the potential effects of almost any variable by looking at historical precedent. By studying patterns and pricing changes over time, you can form reasonable conclusions about how certain external conditional changes could influence the price of a given asset.
Why Timing the Crypto Market Is So Hard
Timing any market is difficult, but timing the crypto market is especially hard for a few main reasons:
- Lack of historical data. Cryptocurrency has been popular for less than a decade, while we have stock market data spanning more than a century. There simply isn't enough historical data to understand the ebb and flow of cryptocurrency prices. It makes it almost impossible to study trends or identify patterns in pricing changes over time.
- Volatile developments. Cryptocurrency is relatively new, so the variables that influence it are volatile. Public hype can spike and plummet in seemingly random patterns, regulations could emerge at any time, and new technologies are constantly emerging.
- Unpredictable variables. There are also some unpredictable variables associated with cryptocurrency. Even the most brilliant crypto traders are sometimes left scratching their heads, wondering why the coin price is moving the way it is.
What If You Can’t Time the Market?
So what if you can't time the crypto market? What if it's a bit too volatile and a bit too unpredictable to safely time?
- Practice dollar cost averaging (DCA). One of the best solutions is to practice dollar cost averaging (DCA). In this strategy, you'll buy a fixed amount of a specific asset on a regular basis, such as buying half a coin every month. Because you buy consistently, your average buy-in price will stabilize.
- Diversify your portfolio. It's also a good idea to diversify your portfolio. Make sure you have multiple cryptocurrencies in your crypto portfolio, and broaden your portfolio even wider by investing in stocks, bonds, and real estate.
- Exercise caution when executing time-sensitive strategic moves. There's nothing wrong with trying to time your purchase or sale, but you should always exercise caution when doing so. Don't put all of your life savings into a single asset, thinking it's a sure thing the asset will rise in the next few days.
The truth is, it's not possible for most people to consistently time the crypto market. You can try to time your decisions as best you can, but you're still going to be subject to the volatile whims of the market.
The best thing you can do is protect your strategy by exercising more caution and distributing your bets more broadly.