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Bitcoin Investing 101: Buy the Rumour and Sell the News

Maya Mandzikasvili | Nov. 20, 2018
Bitcoin Investing 101: Buy the Rumour and Sell the News

November 20, 2018 | AtoZ Markets -This article is not supposed to be financial advisement but more a collection of personal views. However, you might find it quite useful, as it gives some refreshing insights.

If you following the market of digital currency, you might start finding weird and interesting shapes, scattered around various technical data, which give a refreshing view on the market.

Always Check the Market Sentiment

First of all, check on the market sentiment. It is an overall attitude of investors toward a particular security or a financial market. It dictates market behavior. To find out when it is a better time to sell or buy any securities or cryptocurrency, check google trends. People tend to check on Bitcoin the most when prices are at its highest because their decisions, mostly, affected by their expectations for quick profits. It is very useful to keep in mind, that, ”before the thing gets better, it can always get worse.” And never fall for the typical lie, saying, that a continuous bearish sentiment will eventually drive prices upwards.

Smart Money 101: Buy when there Is Fear, Sell when there is Hype

Secondly, it is very useful to follow smart-money and not to go against it. If you are going against the entire market, the chances you are going to lose are pretty high, unless you know what to do. Here are three main tips on how to play against the market:

a) Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family used to say, that "the time to buy is when there is blood in the streets." It is one of the main rules of contrarian investing. According to this rule,  the worse things seem in the market, the better the opportunities are for profit.

b)"Buy the rumor, sell the news." It is a phenomenon that happens in most financial markets. Any kind of trading is based on the news, whether it is news about changes in tax laws, military conflict or the publication of financial statements. The news can be unexpected and expected, whilst the first ones cannot be foreseen, the second ones can. Most of the news is preceded by rumors: “an unnamed source in the government reports ...”, “according to the interlocutor of the publication ...”, “they say on the sidelines of the forum ...” and so on. The sources and beneficiaries of such rumors can be varied, and each of them can pursue different goals. The only question is the trust in the source of information.

c)“Buy when there is fear, sell when there is hype”. Sometimes, when investors are worried about bankruptcy, upcoming financial crisis or inflation, they want to dump their stocks as soon as possible. Driven by fear they sell their shares. That means if you buy stocks when investors are most worried, you get the same shares for a substantially undervalued price. Companies regain confidence after the threat of losing money fades away. After that, over the next few months, undervalued shares which were dumped during the crisis, could start increasing towards more realistic, much less fearful, valuations. Smart investors who have bought the fear, now have to find the most opportune moment to sell the securities.

Look at the Bigger Picture: Bitcoin Mining Difficulty

You need to balance carefully between different variables to understand the overall status of the Bitcoin market and see the big picture clearly. There might be a possible correlation between the hashing algorithm difficulty adjustment and the Bitcoin price swings. Difficulty shows how hard is it to find a hash below a given target. The Bitcoin network has a global block difficulty.

It changes every 2016 blocks depending on the time it took to find the previous 2016 blocks. At the rate of one block each 10 minutes, 2016 blocks would take two weeks. The difficulty is reduced if the previous 2016 blocks took more than two weeks to find. However, if it took less than two weeks to find 2016, the difficulty will increase. To find a block, the hash must be less than the target. There are two hypotheses about a number of miners and its correlation with the Bitcoin prices:

(a) The more miners leave, the less energy is needed to mine each block so the easier it gets to mine Bitcoin.

(b) The less energy is needed to mine each block the fewer are the costs.

That might translate in huge price swings, but those price swings unlikely go upwards every time. If you consider, that both investors and Bitcoin miners are leaving the market.

Don't Ignore Bitcoin's Hashrate Growth

Out of 20 richest Bitcoin addresses, 4 have had the very first UTXO created either in 2016 or 2018. UTXO is an unspent output from bitcoin transactions. UTXOs are processed continuously. They and are responsible for beginning and ending each transaction. After the transaction is confirmed, spent coins are removed from the UTXO database. More than 50% of all top 100 richest Bitcoin addresses have been created within the last 2 years. There’s a lot of people with a lot of money invested in Bitcoin, and they can potentially start a race, which might affect the Bitcoin price, which dropped today below the $5000 level.

A hashrate growth is one of the most important metrics for any cryptocurrency success. Hashrate describes amount of the mining power, which is being thrown at the network by users. Check on the fundamental drivers in the cryptocurrency market that affect the costs of production. Also, look at potential reversal of this negative difference for signals of reduced selling pressure. It will help to understand dependency of the Bitcoin hashrate growth more clearly.

Four Variable to Evaluate Cryptocurrency

There are four important variables to consider when evaluating cryptocurrency. Transaction capacity shows tips or transactions per second. Maximum transaction processing capacity is estimated between 3.3 and 7 transactions per second. It is limited by the average block creation time of 10 minutes and the block size limit. Transaction’s size, basic Bitcoin transactions with 1 input and 2 outputs are typically ~250 bytes of data. Transaction rate shows the number of Bitcoin transactions added to the mempool per second. Mempool is the set of transactions that have been broadcasted to the network, but have not yet been included in a block. Both, transaction rate and average transaction size will give the economic throughput of the system; a measure of its financial bandwidth per unit of time. There are few more metrics to remember while evaluating cryptocurrency transfer. Average transaction size * the number of transactions, which gives the value flowing through the system per unit of time. Also, it is important to remember about settlement assurances.

How Does the Private Sector React to Bitcoin and Blockchain Technology?

Another key measure to understand is how companies are reacting to Bitcoin and the blockchain technology. There is little correlation between blockchain-related jobs and Bitcoin price. Even though Bitcoin price keeps falling, the companies and businesses remain confident of the crypto market. They continue to make long-term investments in their companies, hire more people involved in the cryptocurrency industry.

Even though the crypto market cap is down 70%+ from its highs, a blockchain-related job openings in the U.S. showed a 300 percent increase over the same period last year.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ, nor should they be attributed to AtoZMarkets.