Definitive Guide to Trading Bitcoin and Ethereum (new breakout alert!)

If you invested in Bitcoin in 2015 at $300 and sold at the peak in 2021 at $64000 in April 2021, you would have made 200x your initial investment! Which is amazing. And it was only 8 cents in 2010 had you got in even earlier. That means had you just invested $10, you could have had $8 million dollars! I was thinking of buying some at this price back then, but passed on it, not knowing what bitcoin would eventually be worth. I regret it in hindsight, but nobody knew it would be worth so much. It was also a pain to buy them back then, and the process seemed very shady. The market where you could use bitcoins to buy things was associated with the black market and eventually got taken down by authorities, rendering bitcoins useless. People just threw away their bitcoins.

We’ve got to keep in mind that it was never easy money for early bitcoin owners. Many of the people who got into bitcoin early lost all their money from hacker attacks. Others sold it early, or spent it to buy cheap items on the black market. Others lost their password and their money. Only few people actually got rich from it. 

 

My first foray into cryptocurrency

I got into Ethereum by mining them on my computer in 2016 (they were essentially free to me), then the value appreciated, and I sold for a profit. Then I put together more mining computers and ran them next to my toilet in the bathroom. My roommate thought I was a weirdo however it was nice to make some money. I also bought some Ethereum and Bitcoin from Coinbase, and after a couple months sold for an easy 200% gain. Wish I had bought more. But the days of easy money are likely over.

 

How to buy Crypto

There are many ways to store crypto (referring to Bitcoin and Ethereum), but the easiest way is to get a Coinbase account. It’s like a brokerage account, except you have a portfolio of different cryptocurrencies rather than stocks. The big ones are Bitcoin and Ethereum (analogous to Coke and Pepsi). I don’t know if the others are worth investing in.

An alternative way to benefit from crypto going up is to buy Coinbase stock (COIN), which goes up when crypto goes up, and down when crypto goes down. The great thing about Coinbase stock is that the company makes money through trading volume, by charging per transaction, so even mass selling makes them money. As long as crypto trading is popular, then Coinbase makes money. If you already trade stocks, this is easier. The bad thing about Coinbase stock is if crypto goes back into a bear market and sleeps, Coinbase will do similarly bad.

Another way to invest is to buy Grayscale Bitcoin Trust and Ethereum Trust from your stock brokerage, but I have no experience with this. There’s fees, which I don’t like.

 

How to trade crypto and technical analysis

There’s no way to instrinsically value Bitcoin so one must rely on a combination of technical analysis and market sentiment. Market sentiment right now is good, as people have cash on hand from government stimulus policies, and there is a high amount of fear of missing out in a lot of younger people. It’s been hit by the Chinese government, U.S. government crackdowns, and negative tweets by Elon Musk. At any given time, bad news can hit, leading to a sell-off. 

We see that there was a breakout in 2018, then it sold off as interest rates rose, as people had less play money. There was a high amount of leverage, so even a small drop from the peak led to accounts being wiped out. This led to a domino effect. Again in 2021, with even more play money in the economy, there was a new peak in April at $64k, after which bad news knocked Bitcoin down with a slow, gradual sell-off. We see a classic bearish head and shoulders pattern. I would have identified this pattern in late May after the new peak was lower than the old peak, and sold then, knowing that the head and shoulders pattern would complete itself with new lows the same as where it started.

 

Now at the time of this writing, Bitcoin has consolidated for a while and the market sentiment is good, with lots of spare cash in the economy, so it is going up and makes for a decent short term investment. Look at how it hit support at $30k and start a new breakout. It can potentially go up a lot, even make new highs, but that also means it can crash down quickly at any time. Due to this, I recommend against buying and holding. Instead, get in cheap and get out as soon as the new peak is lower than the previous peak. I would get in now and wait for new all time highs before considering selling. In terms of the macroeconomic situation, here's a lot of cash on the sidelines at the moment.

 

Taxes

The tax situation is still unclear until Congress passes a new law on it. Coinbase doesn’t send your gains to the IRS and people don’t file it during taxes. This will probably change eventually if Congress passes a law. There’s no way they can trace offline crypto transactions though, so many people will not be paying taxes on their crypto gains.

 

Future of Crypto

Cryptocurrencies have no inherent value because they suck as currency. The transactions are slow and expensive, and if it appreciates, then no one wants to use them to buy things as they would want to hold onto them. Furthermore, the market cap for bitcoin is nearly $1 trillion, so it takes way more money to push up the price. It won't increase as fast as when the market cap was low, back when single person can push up the price significantly. Most of the crypto investors are young people who have less money than retired people, and Wall Street with the trillions that they control are interested in crypto because they manage money for these retired people and need to be conservative. The young investors hope to get rich quick, and for fear of missing out (FOMO) if their friends get rich quick while they miss out.

People are buying crypto at extreme amounts of leverage so they will crash again if interest rates rise. Then it will sleep for a while, until after another 4 years when the government has easy money policies again make new all time highs, then crash yet again. We also don’t know which of the many cryptocurrencies will dominate in the future. My bet is on Ethereum due to being better technology but who knows.

You can still trade crypto if you can analyze the charts and figure out good entry points, good exit points. Buy low, sell high. Must have a good sense of market sentiment too. Bad news can spread fear, uncertainty, and death. It’s hard to make good money compared to in the past.

Bottom line, it’s not a good investment. Do stocks instead. Smaller companies can grow very fast too, 100x within a year sometimes. You could also 2000x your money had you bought Microsoft or Apple stock a long time ago. The inherent value of the companies go up (they make more and more money every year), whereas crypto has no inherent value. Crypto also crashes when other asset classes crash, so it’s not a good diversifier.

If one day crypto ever becomes good form of currency, then it will develop more inherent value and may be worth investing in. To be good currency, it needs to have a relatively stable value. The transaction costs need to be much lower. It needs to be more secure from hackers, be accepted by the governments, and be accepted by vendors. Any crypto that has these things won’t be as collectable anymore, since it won’t be going up much in value.

If you have a lot of money invested in crypto, I’d say ride this current wave, see how high it can go, and then sell it. It might make new all time highs but you know it will go down hard once the Fed tapers and rises interest rates. Use the money to invest in stocks or real estate properties instead. Build wealth the right way in assets that will always be going up since time immemorial. Then after 3-4 years, if the macroeconomic situation supports easy money policies again, you can get back into crypto right before another big spike. This time sell at the peak for quick profit, don’t hold onto it as it crashes back down.