Now the Bitcoin price is going south we’ll expect a crypto snowball. What is it and how to trade against or with it?
After the surging of the Bitcoin price in the last days we see a downward correction this afternoon. We’ll analyze a phenomenon that happens often when the Bitcoin price suddenly goes south. One of the effects is the so-called crypto snowball. We’ll explain what this crypto snowball means and how to trade with or against it. Before we do that we take a look at the Bitcoin price.
What happend with the Bitcoin price today?
Until this afternoon (European time zone) the Bitcoin price kept rising. During opening of the American financial market the sentiment changed and Bitcoin went down. At the time of writing the current BTC price is $ 63,181.30 (EUR 54,245.28), which is 4,69% lower than yesterday.
Why is the Bitcoin price lowering?
At this moment we can’t identify a direct cause yet. Although there was bad news regarding the possible bankruptcy of the Evergrande Group this morning, the Bitcoin price didn’t respond directly. Perhaps American investors have a different point of view.
However as we noticed yesterday a correction is a price development to be expected. Of course the question is what to expect and how to handle.
Beware of the crypto snowball
One of the effects of a sudden price drop is the so-called crypto snowball. Due to a fast decrease of the price there might be a snowball that causes both the Bitcoin price as well as the prices of other crypto to lower as well. This effect has two causes.
One of the advanced trading options for Bitcoin (and other crypto) is leverage trading. We’ll explain this later, but it means that you put your crypto portfolio as collateral for an extension of your (in most cases) Bitcoin positions. Once the value of these Bitcoin positions decreases to the point of value of your collateral the crypto exchange will execute your collateral automatically. Since these effects take place on much exchanges at the same time there will be a sudden rise of supply in various altcoins as a result of which the prices of these altcoins will lower as well.
There we see a first snowball incoming. The lower prices for altcoins will mean that the collateral will decrease in value. When the Bitcoin price keeps decreasing, more collaterals will be executed.
However, there is another cause that will thicken the crypto snowball.
More and more crypto investors use automatic trading tools such as trading bots like Cryptohopper. Since these investors have predefined the conditions to sell automatically the amount of automatic trading sells will increase. This is because often used triggers are a percentage decrease in a certain amount of time. So when these triggers are hit automatic sales increase. This leads to an increase of supply and a further pressure on the price.
Along these developments media start to report that ‘something is going on’ and in a worst case scenario the non-automated investors start panicking and sell as well.
How to protect your investments from a crypto snowball?
To prevent your investments against the loss that might occur during a crypto snowball there are four phases to protect your crypto investments. These are: precaution, prevention, damage control and use the opportunities. We will discuss these four phases hereafter.
Precautions for a crypto snowball
First of all you might run the risk of being hit with a forced execution when you participate in leverage trading. Therefore we recommend to be careful with this type of trading. The return can be high, but return is a risk reward. So be sure you understand leverage trading and the risks involved.
Furthermore, when you’re not involved in leverage trading you can use objective media to detect possible changes of the trading sentiment incoming and prepare yourself. With this site and the daily crypto updates we provide for WANT.nl (in Dutch) we try to provide this information.
Preparing for changing market sentiment
We have explained more about trading in uncertain market conditions.
Damage control during a market correction
If you didn’t take preparations it’s important to control your damage. First of all it’s important to determine the causes of the decrease of the Bitcoin price. Is it a regular correction or is there a genuine change in the risk appetite due to fundamental causes?
When you determine a regular correction it might be a consideration to sit out the correction and hodl your Bitcoin until prices will rise again.
If you see a genuine change of risk appetite or you’re afraid that you might lose to much you can perform money management to determine to get (perhaps temporarily) out of market with (a part of) your investments.
Embrace the chances of a market correction
In a bull market the Bitcoin price won’t go up in a straight line forever. The same goes with a correction. At some level the correction will stop and the Bitcoin price will recover. Of course the question is at what price level that might be. Once you get an insight, there are two ways to profit from a short term market correction: you can buy the dip or buy the recovery trend. We’ll explain both ways.
Buy the dip
The first option is to buy as close to the bottom of the correction as possible. This is a quite risky tactic which is only advised for advanced traders. To spot a possible bottom of the correction you can use two sorts of data.
First of all you can use the Bitcoin order book of your exchange broker like BItvavo. In the order book you can see at which prisepoint the buy orders accumulate.
The second way to spot a bottom of a correction is to use on-chain metrics. Intotheblock for instance gives you an insight of the actual sentiment of traders on the blockchain. They also provide you with an insight of trading activities from large investors like whales and/or institutional investors. It’s often seen that the market will reverse once they start buying.
Buy the trend
When you want to be more secure and want to put less efforts into trading you can also use the trading bot (like Cryptohopper) since these bots are also usable to buy Bitcoin and other cryptocurrencies. It’s even possible to order trading strategies from renowned experts for your Cryptohopper bot.
As you see, when you understand the market and the factors that causes movements it’s possible to earn money in rising, uncertain and corrective sentiments.
Do you wonder if a crypto snowball is going on right now? Check our overview of live Bitcoin and live crypto prices!
Note: We never provide financial advice, so you can’t interpret our contributions that way. Always do your own research and make rational decisions about whether, when, in what and how much you want to invest.