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For beginners

10 tips for starting out in crypto

Cryptocurrency is a bewildering sector. If you’re just getting started, it can be overwhelming. Here are a few tips from people who have been here a while and bear the scars.

 

  1. Don’t keep funds on exchanges. Seriously. Just don’t.
  2. Don’t keep funds on exchanges (just in case you missed it the first time). It’s one of the best ways to lose money.
  3. Back up your private keys. Keep them somewhere safe, offline. Learn about cold storage for large accounts. Never break those rules, even once.
  4. Don’t enter your private keys online – anywhere. Especially not in a hurry, and especially not in a hurry because you need the funds to take advantage of a deal that’s too good to be true. Also especially not anywhere at all. JUST DON’T DO IT.
  5. Get on Discord. It’s where the action happens. And Telegram, if you can face it.
  6. Ignore trolls. You’re going to meet them. A lot of them. None are worth your time.
  7. Get used to shills. They will try to get you into their special coin. It will probably be XRP most of the time.
  8. Cultivate cynicism – if it’s too good to be true, it might be. This is crypto, so sometimes it won’t be. But be cynical all the same.
  9. Learn about computer security. And cryptography. And economics. And markets, technical and fundamental analysis, and group psychology.
  10. Ignore anyone selling a great new ICO token that’s a ‘Bitcoin killer’, ‘Ethereum killer’, ‘the next Facebook/Uber/anything’ or that claims it will ‘bank the unbanked’.

 

Can you explain why OneCoin is not a cryptocurrency? Well done, you have graduated!

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Difficulty for beginners

Hashrate just hit an all-time high. So did Difficulty. But what even are those, anyway?

 

You might have heard of Bitcoin’s hashrate or Difficulty mentioned as a metric of the health of the network, and not had a clue what it means. The crypto press tends to celebrate these two numbers rising, and wring their hands when they fall. But why?

 

Hashrate, and Difficulty (which is derived from hashrate), are measures of the interest in Bitcoin from miners – the ones who secure the network and process transactions. You can find both figures at https://bitcoinwisdom.com/bitcoin/difficulty. Bitcoin is known as digital gold, so we’ll use an analogy from gold mining.

 

Hashrate is the number of men with shovels digging for gold. Or women. Bitcoin mining is an equal opportunities endeavour, so long as you’re a machine.

 

Difficulty is the number of workers with shovels you need to find a nugget of gold every 10 minutes.

 

As more and more people find out about Bitcoin, more miners buy rigs and start mining – just like in a gold rush, more people buy shovels and start digging. But here’s where Bitcoin is different to gold. There’s a limited amount of gold and bitcoin in the world, but the rate at which they are mined is different. The faster you dig, the more gold you find. But when miners put more hashrate into finding bitcoin, that doesn’t mean more BTC are mined. Instead, Difficulty adjusts upwards. Difficulty is retargeted every 2 weeks, and its job is to make sure that the same amount of bitcoin are mined every day – in other words, that blocks are 10 minutes apart on average. More miners doesn’t mean more bitcoins, it means each miner receives less BTC.

 

When hashrate is high, and rising, it means that the network is highly secure and that interest is growing. Hashrate tends to follow price, because when BTC is more valuable, you tend to get more miners chasing it. When the price drops, fewer miners are able to cover their costs, and some switch off their rigs. That tends to lag a price drop, though, because miners have large sunk costs (their rigs) as well as ongoing costs (electricity).

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Beginners’ guide to dojis

No, they’re nothing to do with martial arts, but these candlestick formations can give your charting a kick-ass edge.

 

Chart candles come in all shapes and sizes, but there’s a certain kind that it always pays to know more about. Doji candles are a kind of candle with almost no body – that is, price opens and closes very close together. There may be long or short upper and/or lower wicks.

 

Dojis typically signal indecision or reversal in the market. The kind of doji, and where it comes in a trend, can strongly indicate where the market is likely to go.

 

For a full run-down of dojis, the different types and their significance, we recommend BabyPips’ pages on them. For now, we’ll whet your appetite by giving a specific example and explaining why it’s a big deal.

 

Bullish Hammer

Dojis can occur on any timeframe but we’re going to look at the one-hour chart for Friday 17 May. You can see the data range here.

 

You will immediately see the doji on this chart. It’s the third candlestick, and it’s what’s known as a Bullish Hammer Doji. You’ll see the short ‘body’ of the candle, with a long wick or shadow down. The candle is red, but this doesn’t matter much with dojis.

 

Here’s what it means. Within the space of that hour, sellers flooded the market, crashing the price of bitcoin by over $1,000. But buyers then rushed in, picking up cheap coins and pushing the price back up to where it started. You can see that the volume bar is high. Three times as many BTC changed hands in this one hour than for any other hour that day. This means the move was powerful and decisive.

 

What this all means together is that panic sellers were no match for the bulls. There was plenty of demand at the lower price, and so BTC bounced. This is a highly bullish candle, and a strong buy signal. You can see that the market stabilised quickly afterwards in the $7,000–$7,200 range, a thousand dollars higher than the bottom. Then it moved up again another $800.

 

The Bullish Hammer Doji showed where the bottom was, and the likelihood that bitcoin would not be dipping that low again in the near future. If you’d tried to buy the bottom of that move, it would have been like catching a falling knife. But if you’d bought the top of the doji when the hour closed, you still would have done very well out of it – and your risk would have been low.

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Beginners’ guide to moving averages

They’re one of the most commonly used trading indicators. But how can you use them to get ahead?

 

Bitcoin’s price moves up and down, often fluctuating wildly in any given trading period. Moving averages smooth out those ups-and-downs, giving traders a broader picture of what the market is doing.

 

For example, You might take a 100-day moving average. This is the average of the closing price (i.e. the price at midnight) for each of the preceding 100 days. You can plot the 100 MA line on the same chart as bitcoin’s price, and compare where the price is against that average every day.

 

Or you might take a shorter MA, like a 50-period MA on the 4-hour chart. The idea is the same. The MA screens out the ‘noise’ and give a sense of where the price is compared to where it has been in the recent past.

 

Why are they important?

Moving averages are used in trading to give a sense of where the market is going overall – the trend. That might be the short-term trend – maybe on a scale of hours or even minutes – or the long-term trend, on a timeframe of many weeks or months.

 

For example, you may have heard that the 200 daily moving average is an important indicator on a long-term timeframe. It averages the price over the last 200 days, so that line on the chart gives a good sense of how the market is trending overall. When the price moves above the 200 DMA, it’s generally taken as a bullish signal: it means that price has broken above its long-term average.

 

Crossing MAs

Many traders take two moving average lines and wait until they cross to make a trade. 50 and 200 DMAs are a classic one (a ‘golden cross’ or ‘death cross’, depending on which way they cross). When the 50 DMA crosses up over the 200 DMA, it shows that recent market sentiment is more positive than longer-term sentiment.

 

Traders use the same approach on all timeframes. So which MAs should you use? Well, that depends on your timeframe. There are no wrong answers here, though it would be odd to use the 100-week MA and the 50-hour MA, for example. 200 and 50 daily moving averages are a classic one for longer-term traders looking to understand the trend. On a shorter timescale, you might like to check out the 30 and 13 MA on the 4h chart. The best thing to do is to figure out your own timeframe – whether you want to make trades on a short-term or long-term basis – and Google around for a few prominent (and successful) traders to see what approach they take.

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Introduction to Litecoin and trading LTC

LTC is silver to bitcoin’s gold. In other words, if you think BTC is volatile…

 

Litecoin was created in 2011 as ‘digital silver to bitcoin’s gold’. It’s faster than bitcoin, with 2.5 minute blocks, and it’s easier to mine. In the early days, that made a bigger difference, though now you’ll still need Scrypt ASICs to do the job properly. If you’ve got into bitcoin and are wondering what else is around, you could do worse than look at LTC.

 

What’s Litecoin good for?

The fact that Litecoin has shorter block times, and the fact that there’s more space in blocks, means that it’s excellent for small, fast, low-cost transfers. If you need to move small amounts of cash between exchanges, or different wallets or other services (like cloud mining services, for example), it’s a great option.

 

More broadly, Litecoin tends to implement features faster than Bitcoin (which is not surprising, since Bitcoin is glacially slow). Litecoin’s team implemented SegWit before Bitcoin, giving it a reputation at Bitcoin’s sandbox.

 

Trading LTC

Like physical silver compared to gold, Litecoin is incredibly volatile. As we noted on Saturday, it tends to move in step with BTC, but rises in BTC terms as BTC rises against the dollar, and falls against BTC when BTC drops in USD price. This gives an exaggerated effect to price swings. Look at where BTC and LTC bottomed: $3,100 and $22 respectively. And while BTC has almost doubled in price since then, LTC has almost quadrupled.

 

This makes LTC very risky to trade. It’s available on most large fiat exchanges now, including Bitstamp and Coinbase, making it easy to access. And it’s supported with many different wallets, including mobile ones, so it’s easy to store. But trade carefully: LTC can be hugely rewarding if you buy at the right time, but it can lose a large proportion of its value in a heartbeat if you get it wrong.

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The beginners’ guide to trading: support and resistance

Buy low, sell high. Easy, right?

 

Trading isn’t as simple as it seems, otherwise everyone would be doing it and winning all the time. Which is impossible, of course, because for every buyer there’s a seller and for every winner there’s a loser. So, if you’re starting out in this space: be warned. It’s not easy. According to the disclaimers on forex and other trading sites, around 90% of daytraders lose money.

 

So, how do you learn what you need to without getting burned?

 

Firstly, we would strongly recommend the site BabyPips, which teaches forex trading strategies and techniques – equally relevant to crypto. You’ll find all you need here about all the major indicators and approaches.

 

Support and resistance

We’re going to start with one of the simplest and most important ideas, though: support and resistance. As you can see from this link, it’s not hard to understand. When the market heads higher and then pulls back, it has hit resistance. When it drops and bounces, that’s support.

 

Once an area has proven to be support or resistance in the past, it will very likely do so again – either bouncing or pausing at that level. That gives traders a piece of information that can lower their risk.

 

If price is approaching support, then it might be a good time to buy – certainly a better time than if it is approaching resistance (which might be a better time to sell). And if price does break through support, then there’s a good chance it will continue lower, potentially to the next support level. The same is true of resistance.

 

None of this gives any guarantees: there are no guarantees with markets. But it reduces your likelihood of placing a losing trade, and shows you which areas should be of most interest.

 

One concrete example. If bitcoin breaks down below the $5k zone, there is a good chance it will continue to the next support level. There’s some support in the mid–$4k range, but the real opportunity would be at $4,200, where bitcoin paused many times before finally breaking up at the beginning of April.

 

In any case, take a look at BabyPips, talk to other traders, learn other strategies – but, most of all, keep your emotions out of it. That’s about the surest way there is to lose on a trade.

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The Fear and Greed Index – big moves coming for BTC

This is a great indicator for short term sentiment in the bitcoin market.

 

Warren Buffett famously said you should be ‘Fearful when others are greedy and greedy when others are fearful’. (He also said that Bitcoin is ‘rat poison squared’, but we don’t have to listen to everything he says.)

 

Anyway, he has a point. The herd is wrong when it comes to markets, and it’s the moments of maximum fear and panic-selling that are the best buying opportunities. There’s good reason for this: when everyone who is going to sell has sold, there’s no one left but buyers. Then a bunch of those who panic sold rush to buy back in when they see the price going higher… For the same reason, moments of maximum greed and exuberance are the time to sell – the bubble tops.

 

A while ago we published an article on the Cryptocurrency Fear and Greed Index. This index aims to capture the sentiment of the bitcoin markets. It takes several different indicators and rolls these into a single value, between 0 and 100. 0 represents extreme fear, while 100 represents extreme greed. The indicator takes into account bitcoin’s volatility, market momentum/volume, social media sentiment, survey data, Dominance and Google Trends data.

 

So why do we raise this again now? Well, the chart on the Index’s page shows that it has been extremely good at predicting tops and bottoms for bitcoin. In particular, a value above 70 is a strong sell signal, and below 10 is a strong buy signal. The data is remarkably accurate over the course of the last year – though it’s not available for before 2018, so it’s unclear how reliable it will be in a bull market.

 

Take a look at the chart. You’ll see that it recently hit 71 – its highest for over a year! Last time it went above 70, we saw a major sell-off.

 

Now, we don’t know the same will happen this time. Last year was a bear market, which is characterised by greater fear and a tendency for the Index to gravitate to lower values – when it did spike, the drop was hard. So maybe more greed is possible if the market is in an uptrend. But we would not be surprised if we saw another wave of fear grip BTC traders, with the Index heading down into the 20 zone and BTC back into the $4,000 region – or even below.

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7 tips for crypto beginners

New to crypto, or still learning the ropes? Here are some of our top tips to keep you safe and successful.

 

  1. Don’t keep funds on exchanges. You might not be able to avoid using exchanges for buying and trading, but don’t keep funds there for any longer than you have to. Crypto history is littered with examples of exchange hacks and losses, and if your coins are stolen, they’re gone forever. Withdraw your crypto.
  2. Back up your private keys. Similarly, there are too many stories of those who have lost crypto because their wallets were corrupted, lost or destroyed. Don’t be one of those people. Keep digital and/or physical copies of your wallets and private keys.
  3. Don’t trust Crypto Twitter. It’s full of trolls, shills and the terminally uninformed. In short, while you can find useful information here, you’ll have to wade through mounds of garbage to get it. You may never recover your sanity or perspective.
  4. Learn to ignore trolls. This is like the rest of the internet, on steroids. You’re going to meet unpleasant people who will look to cause division and offence for the sake of it. They don’t like being ignored. Ignore them.
  5. Learn to ignore shills. There are plenty of crypto folk who want to get you to buy a coin for their own gains. You’ll learn to recognise them. They’re typically narrow-minded and incapable of seeing the bigger picture. They don’t add anything valuable. Ignore them too.
  6. Cost average. Unless you’re a legendary trader, don’t expect to call tops or bottoms of the market. Never go all in, and never go all out. The price can rise or fall more than you ever thought possible. There’s a time for making decisive moves, but if you make a decision in a hurry, it’s disproportionately likely to be a bad one. Save some dry powder for the unexpected, to average down your buy price or average up your sell price – if it comes to it.
  7. HODL. For the same reason, whatever else you do and whatever trades you make, HODL a few coins. Accumulate some crypto and then put some of it aside for the long-term. Forget about it and come back to it in two to five years. Future you will very likely thank past you for doing it.

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Network Value to Metcalfe (NVM) ratio

In a previous article, we looked at NVT, the Network Value to Transactions ratio, which is a basic way of valuing a crypto network.

 

NVT is simply the overall market cap of a crypto divided by the volume of transactions that take place on its blockchain. The thinking is pretty straightforward: more valuable blockchains should see more transactions. Comparing NVT for different cryptos, you should be able to see which are under- or over-valued. And changes in NVT do broadly correlate with price inflections.

 

But it’s not a particularly sophisticated metric, and doesn’t account for a lot of important factors (a spam attack, for example, sees a lot of transactions on the blockchain, but doesn’t reflect underlying value). A more nuanced approach is NVM, or Network Value to Metcalfe ratio.

 

NVM is not nearly so simple as NVT to grasp, but it turns out it’s quite good at predicting when bitcoin is over- or under-valued. Robert Metcalfe was an early Xerox PARC employee, and came up with the principle that the value of a network is proportional to the square of its nodes or users. So a telephone system with 200 users is four times as valuable as one with 100 members – not twice as valuable, as you might first think. This is why bitcoin is so valuable: its network is that much larger than any altcoin’s network, and the impact of that difference is squared.

 

Taking different implementations of Metcalfe’s law, Cryptolab Capital has come up with a model that works surprisingly well. Read the article in full for a proper overview, but the take-home message is that a rise in value should be accompanied by a rise in Daily Active Addresses – if not, price may be getting ahead of ‘real’ value (i.e. a bubble).

 

This may all change with the introduction of proper custodial services and exchange-traded products, but in the immediate future it’s another useful tool to add to the crypto investors kit.

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The Fear and Greed Index

Look at a bitcoin price chart. What do you see?

Red candles, green candles, volume bars?

Perhaps you’ve trained yourself in TA and you can see the patterns behind the bars. Support, resistance. Trends, ranges.

Or just maybe you see between the lines, the music behind the words. Greed. Elation. Caution. Panic.

Ultimately, a market is the reflection of all of its traders’ decisions, and many of those decisions are driven by emotion – particularly in a market like bitcoin, where institutional players are still just starting to come in.

That’s why Sentiment Analysis is an important tool, alongside Fundamental Analysis and Technical Analysis. What’s the market’s approach to this right now? Are they confident, fearful, interested, averse?

Take a look at The Fear and Greed Index: an analysis of emotion and sentiment taken from different sources and consolidated into a single figure. Zero means Extreme Fear. 100 represents Extreme Greed. You’ll see from the Crypto Fear and Greed Index that fear tends to correlate with buying opportunities, and greed with selling opportunities. It uses volume and volatility, social media and survey data, as well as bitcoin dominance and data from Google Trends.

It’s not a perfect measure, but it’s another useful tool for the smart bitcoiner’s toolkit.

_______________________

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