The impact of the COVID-19 pandemic hit both financial and crypto markets hard and led to a major sell-off. This wave of panic selling wiped out months of gains in just a few days, exposing most of the unprepared investors. Was there a way for the average retail investor to protect themselves?
Please Note: This is a Guest Post by Ruben Cisternino of Coinrule.
No asset was immune from the crash, but some trading strategies could have prevented large losses. As data published by Coinrule, a platform that allows beginner traders to build automated trading strategies, shows, 63% of Coinrule users are still in profit even after such a historical drawdown. Automated strategies were able to successfully protect the wallets from market volatility.
Looking at absolute numbers, most of the active Coinrule users are still in profit, despite a once-in-a-lifetime market crash that even overshadowed the 2008 Financial Crisis.
Why is this so important?
One of the most common advice for beginner traders is to reduce the effect of emotions on their investment. Fear, euphoria, greed and stress are the most common feelings that lead to wrong decisions when it comes to deciding whether to buy or sell at a given time. They are indeed every trader’s worst enemy. Yet, it’s a very challenging task to stay cold blooded when the prices of your assets are plummeting 20-30% in a matter of hours.
When the price starts to crash, the typical first reaction of the average trader is to wait and see how things evolve. Only when the crash turns critical, will traders typically capitulate. Unfortunately, emotions lead to the exact opposite actions that should be taken to make the best out of this situation.
The experienced traders cut off their exposure immediately when the first signs of uncertainty show up. Then, during the capitulation phase, they buy back and profit from the rebound.
Market crashes usually happen fast, and those that act promptly often re-emerge as the real gainers. After all, for each trader in loss, another one is gaining. That is the simple and harsh reality of every freely traded market. You could assume that advanced investors, algorithmic traders and hedge funds are those who share the largest shares of gains, and that is still mostly true. Nevertheless, today, retail investors also have much more effective tools available at their disposal.
Not long ago, many exchanges only offered a few order options such as “market order” and “limit order”. Those were the main options for the average trader to manage his allocation of coins. Today, all exchanges introduced advanced settings, such as stop orders and trailing stops. Not only does this reflect an increasing demand for more advanced trading options, but it also enforces the effectiveness of such tools.
Data from Coinrule seems to validate this hypothesis. With a user-base mostly composed of retail traders, they represent a perfect sample of the average crypto-community struggling every day with volatile markets. Coinrule’s users were able to either remain in profit or at least to minimize losses and therefore to outperform the crashing market significantly.
How did they do it?
Overperforming the market during a market crash doesn’t need the very advanced skills you might think necessary. All it takes is to react immediately and firmly when the price breaks a key support level. Although easy to implement in theory, only an automated strategy can achieve the task of protecting the wallet effectively 24/7.
A stop loss is the easiest way to protect from severe losses in your holdings. Considering the magnitude of the price drop at the apex of the crash, selling into Stablecoins, such as USDT, or fiat currencies would have offered an immediate outperformance of a buy-and-hold strategy.
As a direct result, Coinrule users managed to exit their positions successfully while traders without automated strategies were not. They simply got stuck and confused with the dilemma “to sell, or not to sell”.
An automated strategy, like one of those provided by Coinrule’s templates, would have increased even more the profit by buying back the coin on price drops. Buying back coins at a lower price using the same proceeds coming from selling at a higher price allows traders to buy more of the same asset. That constitutes an additional source of profit when the price bounces back. This is by far the most profitable approach when the market crashes. A trading bot or an automated strategy doesn’t have feelings and is not scared to buy in times of high volatility.
Also, the importance of buying in times of drops is validated by Coinrule’s data. “Buy the Dip with a Stop Loss and Take Profit” is the most used trading template, chosen almost one out of three times across all the active rules on the platform. After all, the old principle of Buy-Low-Sell-High precisely stands its ground there.
What next for the market?
The Coronavirus panic selling already outpaced the crash that markets suffered during the early days of the Great Financial Crisis in 2008. Considering the number of countries still undergoing lockdown measures and the risk of new outbreaks when these measures will be lifted, the perspective of a quick recovery is unlikely. During the last great crisis in 2008, it took around one year for prices to reach the bottom. More volatility could emerge at any time, and cryptocurrencies could still be affected. The importance of keeping automated strategies, always running to protect traders’ assets is still very relevant.
But an automated trading system not only overperforms in times of crisis. The parameters of a strategy can be adjusted and optimized for every market condition, and that makes their real value emerge.
As the Economist wrote in a great article last year, algorithmic bots run over 65% of financial market volume. No wonder that the most profitable institutional investors and hedge funds run their trades using automated bots. So far, retail traders never had real access to such advanced tools. Advanced trading experience, the need for professional coding skills and a market structure not technologically ready for such strategies used to be significant barriers to access this money pot.
Coinrule’s data now proves that more hobbyist investors are joining in on this market (r)evolution. Crypto service providers realize more than ever that traders need more tools to automate their trading systems.
Now that more advanced tools are widely available to the mass market, the average trader has reliable tools to fight back against professional market participants.
The most interesting question is how long it will take now for the mass market to embrace such tools and how far this new wave of innovation will go. Quite possibly, professional investors are not willing to give up their market privileges without a fight and will be looking to improve their techniques to regain their edge. Nevertheless, this should represent a new push towards a renewed market efficiency even in crypto markets.