If you try to time the crypto market you’ll fail – here are six reasons why
How many times have you tried to enter the investment market at the bottom, right as prices are about to go up? And how many times have you managed to sell your crypto investments just before it all comes crashing down?
Timing the market is a well-known strategy that’s established itself as this elusive unicorn that we all know exists, we’re just never the ones to see it…
What is timing the market
One textbook definition of timing the market we took from Investopedia is the following:
Market timing is the act of moving investment money in or out of a financial market – or switching funds between asset classes – based on predictive methods. If investors can predict when the market will go up and down, they can make trades to turn that market move into a profit.
In theory, timing the market seems like the perfect strategy – you buy when the market is at its lowest and you sell at its highest, making a hefty profit in the process. Then how come it’s so hard to implement? Well, looking at the definition again we can see it more clearly – based on predictive methods… No one knows for sure when the market will turn, so investors use different statistical models to predict how the markets will react, based on historical data or the way the markets have reacted to similar situations in the past.
If your statistical model works and you manage to predict the movements correctly, timing the market can be a very lucrative strategy, and that’s even more true in the crypto universe. We’ve seen coins skyrocket like no other financial asset with 100x and even 1000x payoffs. Making a single investment at precisely the right moment in time, and then selling it again at also the exact right moment, is hard to beat by any other strategy out there. With the high perks, however, come the high risks. So here are some of the main pitfalls that you need to consider and prepare for.
Why timing the market is difficult
#1 It’s counter-intuitive
Emotional investing is a real thing and it’s one of the most common pitfalls, especially if you’re not a professional investor. Timing the market requires A LOT of self-discipline as you need to move exactly when everything tells you not to, rather than when your heart tells you to.
#2 You need a system, and you can’t deviate from it
In an effort to overcome your emotions you need to create a system that you can base your decisions on – and then you need to follow it rigorously. This system needs to be proven, one that you trust and that feels right for your investment profile, but also easy to manage. And here is when it gets tricky – there are so many approaches to building a system many investors lose focus in an attempt to incorporate everything – including gut instinct.
#3 Higher transaction costs
Every trade you make in order to enter or exit the market comes with a transaction cost. And trying to capitalize on the market movements requires a lot of movement from you as well. So if you’re not careful the costs of all the transactions might end up eating a big chunk of your profit.
#4 It comes with high opportunity costs
Even more so than the transaction costs, you need to take into account the opportunity cost of not being in the market. By definition, the timing-the-market strategy means that you wouldn’t be invested when the market is falling. But the falling and rising of the market isn’t a straight line, it’s a series of jagged ups and downs. In fact, the biggest rally days usually come close after the biggest drops. The costs of missing those could be the difference between profit and loss.
#5 It’s time consuming
If you want to be successful at market timing, you need to know the market in and out. You have to keep timely checks on the price movements of different cryptocurrencies, the trading volumes, the sentiment of market news… You get the point. This daily attention can become tedious and draining, slowly luring you back to pitfall #1 of making emotional decisions.
#6 Crypto is young
We’ll be the first to admit, this is not a bad thing and not necessarily a pitfall, but just a simple fact you need to be aware of. It comes back to the statistical modeling and historical data we talked about earlier. Financial analysts are trying to predict markets with more than 100 years of data at their disposal (like the US stock market) and still success is elusive. Crypto on the other hand is barely 15 years old and in its short life has disrupted the financial scene like no other asset this century. It’s undoubtedly exciting, but also hugely challenging to predict.
When is the best time to buy crypto?
The best time to buy crypto is when its price is lowest. And if you’ve got this far into the blog, you’ll know by now that there is no way to tell when that moment has arrived. What we can do instead is show you a bit of a different approach that we’ve built to overcome all the pitfalls we discussed here – a trend following strategy.
Instead of trying to predict what the market will look like, we use technology to follow the trend it already has. Similar trend following systems have been proven in traditional finance, in some of the most successful hedge-funds, and can be very well implemented in the crypto world as well.
AQRU Trend is an automated crypto trading strategy that uses a sophisticated algorithm to identify trends in the top ten cryptocurrencies* in order to decide whether to invest in them. When the market is bearish, a higher percentage of the portfolio is allocated to cash (USDC in this case) to protect your investment. And when the market is bullish, the portfolio is re-allocated into the cryptocurrencies that show a positive trend, so that you are able to benefit from potential gains as the market rises.
The algorithm identifies a trend based on price points for one, two and three months back in time. What this means is that, in essence, most of the time you won’t catch the highest highs or lowest lows, but you will only enter the market when there is a sustainable positive direction and exit the market when a definite downward movement is happening.
When creating AQRU Trend, we back-tested the strategy against the last two years of market data and it achieved a return of 723%, compared to the 120% return from a single-coin purchase of Bitcoin.**
The AQRU Trend portfolio is rebalanced weekly and the only fees you pay are 0.35% on your way in and 0.35% on your way out, saving you all the transaction costs you will incur, should you decide to build the portfolio yourself.
Letting the algorithm do all the work also takes the emotions out of investing, not to mention all the time it saves to follow each coin movements and trend.
To top it all off, while your funds are in USDC they pay you a 0% yield, ensuring that you earn a return even when the market is falling.
This is what we call intelligent diversification!
* Excluding stablecoins, security tokens and tokens constituting specified investments
** Past performance is not indicative of future results