Understanding Finance: Capitalizing on Volatility
This article is the continuation of the first article explaining what volatility is.
Bitcoin is a volatile and decentralized asset, so it can be quite easy or difficult to detect and place in the lows to aim for the highs. And so a good investor is an investor who will look for the lows in order to sell the highs. So he's going to buy at the end of 2018, beginning of 2019, we're in the middle of a bear market, since the high of 2017 BTC has lost a lot of its value as it goes roughly from $20,000 to about $4,000. So our good investor, what does he do? He buys. He knows that Bitcoin is not going to collapse overnight (barring a major hack or massive power outage) because he knows that the protocol is robust and that Bitcoin is likely to increase in value in the months and years to come.
What happens next?
Well, what happens is that our good investor strengthens his position in July 2019 when BTC is worth $13,000 and then a few months later, the covid comes and crack, BTC goes back even lower than the first purchase price of our investor who bought it at $4,000 and it is now worth about $3,000. So it's interesting and it happens to all of us that we think we're buying Bitcoin at a good price and think that its price is only going to go up. We thought we had bought well, and then, poof, it went down... This is an opportunity to tell you that it doesn't matter. The Bitcoin price does what it wants. What we are interested in is: what is the buying price and what is the selling price? And so our investor makes a living, because when we have a portfolio it is to make a living, well he will wait for the 40 000 or 60 000 dollars. So he's made a huge performance. Then he waits. Patience is the secret in long-term trading.
At the moment, we are well below the 350 period linear regression line: the red line
So this might be a good time to reinvest. The idea in long term trading is quite simple: we want to buy at least one standard deviation below the linear regression line and sell one standard deviation above, two is the best. So, as soon as Bitcoin gets back above its regression line very quickly, the performance will be potentially incredible again. So you see, with this crypto, simple, that everyone knows, it is indisputable to say that our investor, potentially twice in a row, in a decade, will be able to see very well to earn his living.
So, let's take another example from the crypto market with this time a bearish line. To show you that it is even possible to make money with bearish regression lines. This is the chart of EOS, the record breaking ICO of 2017. It is an undeniable crypto like BTC, which is not going to disappear but it is a crypto that has known problems. So what can an investor do?
He knows by looking at the past that the ups and downs at EOS are easily 2 standard deviations, so, he waits and so we are between 1 and 2 standard deviations, what does he do? Well, he buys. And then it turns out that some time later the price is 2 standard deviations higher than his purchase and so he quickly resells. And then it turns out that some time later the price is 2 standard deviations higher than his purchase and so he quickly resells. So he's not going to wait any longer, because this is not a growth crypto on which we have an interest in holding the crypto for a long time because the regression line is bearish. So he simply plays on the differences in standard deviations from the regression line and sells. He still performed very well. That said, and this is a lesson in long term trading, you know when a crypto is falling sharply and when it is between -1 and -2 standard deviations then it is coming from +2 standard deviations. So that means it had just made a very big drop. So, in general, we know that when we have been practicing crypto a little bit, well, the crypto will stabilize a little bit before it goes back up. So our investor knows that and so instead of buying in a hurry, he waits for the stabilization to take place, he will buy between -1 and -2 standard deviations, he will not succeed in buying at the lowest, but you see the time between his buying price and his selling price after having made 2 standard deviations difference will be shorter and so this time he can still have a superior performance.
So there you have it, the lesson we can draw and that's what we wanted to tell you at Bitget Academy in this article, is that as soon as we have good fundamentals and that they are described to you in our Bitget Academy articles, well we know if it's a crypto that we can buy when it's between -1 and -2 standard deviations to simply wait for 2 standard deviations higher to resell and to make in any case a good or even a very good investment.
Disclaimer: This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
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