Crypto Investing #2 – How To Use Volume & Liquidity When Trading Cryptocurrencies

Tai: What’s up guys! This is Tai Zen and I got my buddy Eric G with me.

Eric: How’re you doing, fellas?

Tai: And we’re cruising right now at 33,000 feet in the air heading from Dallas to Las Vegas to spend all the riches and all the profits that we made from investing into Ethereum.

Eric: I don’t know about you but I’m making money in Vegas. I got a plan.

Tai: Yeah so, I guess we’re going to Vegas to blow all the profits we got guys. Now seriously guys, we are headed towards Las Vegas to meet with our business mentor and coach so that we can build our online business. In this video guys, I want to discuss with you guys the importance of volume and liquidity when you are trading Bitcoin and cryptocurrencies.

Eric: Well, when we started getting into a lot of trading and more particularly when we started trading cryptocurrencies, Bitcoin, things like that, we constantly got a lot of questions asking about volume and liquidity.

Tai: Can you speak a little bit louder than I can barely hear you?

Eric: You don’t need to hear me. I got a microphone. They can hear me just fine. What I want to do is to go ahead and just pose that question to Tai, record it and say, “Hey, what is it about volume, what is it about liquidity that people keep asking that you can share as far as trading in cryptocurrency market?”.

Tai: When you look at trading or investing into a… Trading is where you buy and sell it on a short-term or a long-term and investing is buying and holding over a long-term. So just to make sure that we’re on the same page here, the people who are traders usually use technical analysis, use the price charts to make their decisions.

And the investors usually make their decisions based on fundamental analysis or the value of the what they’re trading. So when you are trading or investing in Bitcoin or any cryptocurrency, it’s extremely important that you guys look at the liquidity and the volume of what it is that you’re trading.

Because what happens is when you want to buy something, you want to be able to get killed instantly. So for example, if you guys buy Bitcoin, there’s like 60 70 million dollars’ worth of Bitcoins traded every day.

To give you guys an idea, a stock like Costco or Best Buy or Broadcom, they would trade like 3 million shares a day, 3,4 or 5 million shares a day, somewhere around there, and the price of those stocks are usually around, let’s just say for example $50, right. If you take $50 times 3 million, I don’t know what the math is on that, really quick.

Eric: He’s not a Scientologist. He can’t just do the math on the spot like that.

Tai:

No, I’m not one of those Asian guys that’s good at math, right. So if you take stock at a rate 3 million shares a day times $50/share, we’re talking about 150 million dollars’ worth of stocks being traded for public and popular companies such as Costco or Best Buy or Broadcom or Clack or Yahoo.

So you’re saying that 150 million dollars’ worth of stocks being traded, that would represent the volume of things being moved around.

Yeah of how much value or dollar amounts being traded. So when you go into just… I just wanted to throw that out there so that the people who are new to trading cryptocurrencies are Bitcoin, they understand, they have a frame of reference in mind.

Because then you know, most people understand what Yahoo, what Broadcom, what Clack, what Costco or Best Buy, what they are. So when we talk about cryptocurrencies, it’s important that they related to something they already know, right. So that’s what I like to do.

So if you look at something like Bitcoin, it trades about 70 million dollars a day, that would be like the equivalent of a $50 stock that trades a million to a million and a half shares a day.

Now in the world of trading, normally you do not want to trade something that trades less than like a million dollars a day, like a million shares a day because what happens is that there’s not enough liquidity or enough volume of shares or enough volume of Bitcoin being traded, every time you hit the Buy button or the Sell button, your orders don’t get filled immediately.

And so what happens is when your orders don’t get filled immediately, you get hit with a spread or what they call slippage. So let’s say that I want to buy… Basically the slippage or the spread is the difference between the bid and the ask of what the people want to sell it for, so if you want to sell your Bitcoins for $400 and I want to buy it for $395, the difference between that is like $5 so that would be the spread.

So the more liquid something is, the tighter the spread. So if Bitcoin, it’s usually trading within 5, 10 cents, sometimes within a few pennies, so the liquidity is very high, there’s a lot of volume being traded, so you get a very very tight spread.

Now if you take something like Dogecoin or something like NXT right now, the difference between what the buyers want and what the sellers want is a little bit wider, so when you go in and you buy it, you already take a hit because you have to pay a little extra for that spread.

So the more volume that you have, the tighter the spread and the easier it is for you to unload your cryptocurrencies when it’s time to get rid of it or when it’s time to buy it, you get killed instantly.

Eric:

So when you’re talking about volume versus liquidity, they’re essentially the same thing in terms of more volume, more liquidity means that there’s more buyers and sellers there that they’ll make it a closer price, whereas if you absolutely have less volume being traded at any given day, then it’s going to have less liquidity.

Because you cannot get rid of or purchase the shares or currency or whatever it is that you’re trading at the price you’re looking at, because there’s going to be a bigger spread. It’s not always a buyer there. It’s not always a seller there at the exact price you want.

Tai:

Exactly, what happens is when you choose to trade a cryptocurrency, any type of cryptocurrency, the first thing you want to do is you want to select a cryptocurrency that has a lot of volume being traded. So in the world of cryptocurrencies, they don’t refer to it as shares.

If you trade Bitcoins, they just refer to it as how many Bitcoins are being traded each day, and if you’re trading Litecoin, they check to see how many Litecoins are being traded. So because the number of cryptocurrencies like Litecoin, Dogecoin, or NXT or Ethereum or Bitcoin is different every day.

Since we live in America, the easiest way for us to have a standard so that we know how much is being traded every day is to convert it to US Dollars. So when you look in the price charts in the exchanges, they all convert Litecoin to US Dollars, they all convert the Ethers that you trade to US Dollars.

Eric: It’s easier for most people to think of things in terms of the value against the Dollar.

Tai: So if you happen to live in Europe for example, you might want to switch your browser or your platform or your software to where it shows in Euro instead, and the reason for that is because most people live in Europe, they understand the Euro. You and I live in America so we don’t use Euros.

Eric: It just provides some form of consistency wherever the trader is versus where you’re trading.

Tai:

Yeah, it’s a common benchmark or a common standard so everybody knows what it is. So for example, just to give you some ideas like I checked before we got on the plane today, Bitcoin was trading around 70 million dollars as of yesterday.

And then yesterday there was like, I think like 8 million dollars’ worth of Ethereum, the second most popular cryptocurrency that’s being traded right now. It’s hot on the markets. It’s skyrocketing so everybody is jumping on it.

The other thing too is that Litecoin for some reasons has always been very popular and it’s trading around 2 million dollars yesterday of volume because if I tell you like it traded a few million Litecoins, you don’t have a frame of reference.

But if I tell you that Bitcoin traded 70 million dollars yesterday and Ethereum traded 8 million dollars yesterday, and then Litecoin traded over 2 million, almost 3 million yesterday. Now you have a reference of how much volume is being traded.

And so for example, the next one is Dogecoin, it was trading like around $400,000. Why it’s still trading high I don’t know, but I guess that’s a good thing because I have a bunch of Dogecoin also, and then like NXT, the NXT that you and I invested in, it’s trading around 41,000 yesterday.

Eric:

So we talked about the importance of having a higher volume. Obviously whatever market you’re trading, if you’re trading Doge, if you’re trading Litecoin or trading Ethereum, Bitcoin, you’re going to want to look for what is a good volume for that cryptocurrency, you want to apples to apples not apples to oranges.

So what is a good volume for the market that you’re trading in? But let me ask you another question, let’s get down to brass tacks and I think the listeners really want to know, I want to know what exactly do you do to look at volume? How do you find that information and then you implement that?

Tai: So one of the best places that I like to use, one of the best websites I like to use to look at how much volume is, one way is to go to each exchange like for example, like you can go to BitFinance and check the volume that’s traded on Bitcoin, and then you can run over the Bitstamp and then check out how much volume is traded there, and then right over to Poloniex and BTC-E, all these different exchanges and add them up.

Eric: Even though you’re just exchanging one cryptocurrency, there are multiple exchanges trading different amounts of the volume of the same thing.

Tai: Yeah it’s not like you’re trading oil futures or copper futures or S&P 500 futures where all of it is at the same exchange in Chicago. Right now the way that the cryptocurrencies are traded, they’re all over the place, they’re traded at different exchanges. There’s one, not big player that controls everything just yet.

Eric: So the idea would be first, you want to check out all the players, see who’s got higher volume and that’s who you prefer to trade with on that day.

Tai: And the easiest place that I found to go find that so you don’t have to do the math because I’m not one of those Asian guys that’s good at math, so I’d like to go to a website called coinmarketcap.com and it smells just like you hear. ‘Coin’ like a Bitcoin, ‘market’ like stock market and ‘cap’ like the cap you wear on your head and coinmarketcap.com, and every day they sort out the biggest, the highest volume cryptocurrencies that are being traded, and ever since the website came out, Bitcoin has always been number one, and then the rest of them…

Eric: What really nice is in coinmarketcap.com, if you click the currency that you want to trade, the cryptocurrency you want to trade, let’s say Bitcoin or Ethereum for example, you click on it, it’ll take you to a second page where it shows you all the details for that coin and then it also shows you the various exchanges and how much volume each exchange has.

Tai: Exactly, so let’s say I want to trade Dogecoin for example, I would go to coinmarketcap.com and I would see where most of the volume is being traded at and then after that I would go to that exchange, open up an account and then trade the volume there, trade the Dogecoin there or the NXT there or the Bitcoin or the Ethereum or anything like that.

Eric: Now is there a way for people to look up the volume history so that way they can see because if you’re looking at a really small chart, then you’re getting a really magnified look at what it is so you don’t really have a comparison of if that’s high volume or if that’s low volume.

Tai:

The best place to go is still Coinmarketcap because they consolidate all the data from all the exchanges so that you can know about it. So hopefully that helps you guys understand more of how to use volume and the liquidity to determine what cryptocurrencies to trade. Now here’s something that our friend Leonfu.com and David and I are all trying to figure out, is what’s the ideal dollar amount that’s being traded.

So far we’ve noticed that if something trades over half a million US Dollars or higher, right, then it’s worth trading, but if it’s less than that, they become very very risky, because the spread is a lot wider. So in the beginning, if you’re an experienced trader, I would say that you can take the risk of trading a cryptocurrency.

So if you are an experienced trader and you have experience trading like Forex, stocks or futures or options or anything like that and you’re successful at it, then I would say that you can afford to take the risk of trading a cryptocurrency that trades like half a million dollars or higher.

You can even go as low as like three or four hundred thousand, but just keep in mind that the spread is going to be very wide so every time you buy and sell something, you will lose a lot on the spread.

Eric: Now this might be getting into a different arena, but I’m going to go ahead and ask the question anyway. When you are dealing with volume and we’re very familiar with stocks that hey if the volume is below X amount, you just don’t even trade that day.

Tai: Yeah like for short-term trading, I don’t trade anything less than a million shares a day and for long-term trading, I don’t trade any stock that trades less than half a million shares a day.

Eric: So that’s my exact question. We have short-term traders and long-term trader investors with the cryptocurrencies as well, will that make a huge difference in terms of when they should enter when they should exit if they’re a long-term trader? Because maybe they don’t care about $5 worth of slippage if they’re looking for a long-term trade.

Tai: That’s a very good question because if you have a long-term approach you’re not trying to scalp the market which I don’t recommend anybody scalp the market, especially in crypto, as the liquidity is horrible.

Eric: And scalping is where you’re basically just trying to get in, make a little bit advantage then get out and you basically make a couple bucks every time you trade.

Tai: Yeah so it’s every time the price moves up one or two ticks, you grab it.

Eric:

So what some people do, it’s not particularly our style but for a cryptocurrency market, you need extremely high liquidity to be able to do that.

Yeah so to answer your question, if you are a short-term day trader and you just want to trade in and out, I would recommend sticking with something like Litecoin. Well, Bitcoin is the number one liquidity and volume, and then I would recommend something like…

I don’t know if I can recommend anything because I’m not a licensed financial advisor so just be aware that guys I’m not a licensed financial advisor and in America, we are not allowed to recommend anything if you are not a licensed. I’m broadcasting from one person to thousands of people that are listening to this.

According to US law, I should not require a financial advisor license but, just to be on the safe side, I don’t want to get in trouble so I’m going to say that, if I was short-term day trading, I would make sure that I trade the highest volume and highest liquidity cryptocurrency

And the number one right now is obviously Bitcoin, it traded 70 million dollars’ worth yesterday, and then I would trade the second one would be Ethereum, it traded like over 8 million dollars’ worth yesterday, and then Litecoin traded over 2 million dollars yesterday. And the fourth one would have to be something like Dogecoin, believe it or not.

Eric: So we’ve got a recommendation for what you would do for a short-term trading strategy. What about a long-term trading strategy? What kind of volume would you want there? Obviously, I know how you are. You’re usually really precise, you like a nice clean entry and a nice clean exit.

Tai: Yeah, I do, because it minimizes my risk

Eric: So you still like a high volume when you’re entering and exiting even on a long-term trade, but what about those out there? Is the tradeoff basically whether or not you’re willing to take the slip that’s worth 10 bucks 20 bucks whatever the bucks you’re trading?

Tai: It’s not really it worth because it adds up. Let me just do the quick math for you. Let’s say that I trade something that has a lot of slippages. Typically, for a long-term trade, I typically invest anywhere between 1,000 to 5,000 US Dollars into that cryptocurrency.

Eric: So let’s just say 10 Bitcoin to make a nice round number.

Tai: Yeah so well, Bitcoin’s at 400…

Eric: Four-twenty so it’ll be about $4200.

Tai: Yeah so 10 Bitcoins would be about $4200 So what happens is if you get slipped too much, what happens is some of those currencies that for example, like right now NXT, it’s trading at like 40,000, so let’s say that if I wanted to buy a thousand dollars’ worth of NXT, the problem that you run into is as soon as you start buying it, guess what happens to the price.

Eric: It’s changing.

Tai: Yeah then I become the person that jacks up the price of the NXT simply because there’s so very little volume that when I go in there and buy it, sometimes they only buy that day, at the moment that I get in, there may be only a thousand, two thousand dollars’ worth of liquidity.

Eric: So you only get a partial fill at the price if you’re buying a more special rate.

Tai:

Exactly so you know, it’s just really really hard to get filled, so I actually hurt myself investing in something that’s low liquidity. So like for example, like when you and I invested into NXT, back when it first came out in 2014, there was a huge rush to come in.

Because it was the first true Bitcoin 2.0 cryptocurrency that was not a duplicate of the Bitcoin software but completely new software, so at that time there were hundreds of thousands of dollars and sometimes it would be over a million dollars traded in a day.

So at that time when you and I got into it, it was worth it because we did not get hit hard on the difference between the buyers and the seller’s price. But nowadays, I recommend that if you are going for the long-term, if you don’t pay attention, some of the smaller traders and investors, and when I say smaller, I’m talking about people that invest or trade less than $500.

Eric: Actually, I’ve got a question that might be a little off topic. Is it considered being a financial advisor in the cryptocurrency world if we’re talking about investing in stock? I don’t know if that’s a…

Tai: The thing is then that none of the government’s recognized it as a real currency so maybe I can. But I think that according to US laws…

Eric: So technically I can license you to be a crypto advisor.

Tai:

From my understanding US laws that if you broadcast your message out to more than one person, then it’s not really considered financial advice, but just to be on the safe side. I like to be on the safe side so you know.

But back to what I was saying. Let’s say that you want to invest a long-term, some of those smaller traders if you read in the troll boxes and in the comment sections of a lot of the sites, when they discuss trading, they want to invest into a small altcoin or a cryptocurrency, where it goes up like 50 times or a hundred times.

Eric: They all invest in a lump of coal and hope it turns into a diamond.

Tai: Exactly, the problem with that is for someone like us, to make it worth for a while, we need to invest like a thousand dollars or something. There’s not enough liquidity there to invest in it. So that really is prohibited to us and to people who want to invest more than a thousand dollars into that cryptocurrency. So that’s why I just stick to the ones that trade over a million dollars a day.

Eric: I think it’s important to note also that, if you’re trading in a market with small volume, small liquid, low liquidity, and let’s say you want to put in 5000 bucks, $5000 or 10 Bitcoins’ worth into that altcoin or cryptocurrency, then what happens is your investment moves the market and you’re also getting a partial flip at the value you want in the rest of your field.

You’re getting at a higher rate so you’re paying more than you intended for your entry. You’re not actually getting in down here. You’re getting in here here here here here here here here, and your exit strategy was up here, but now the whole window is closed.

I wanted to mention that it’s important to note when it comes time to exit in that same scenario, it’s going to happen again. Your exit strategy, now you try to get filled here, but you got filled from here through here. Now your exit strategy was up here.

Once the coin reaches that amount, let’s just say in a perfect world it goes straight up to that value, and you decide to exit. Guess what, you’re pulling out ten Bitcoins’ worth, you pull out $5,000 worth of that cryptocurrency.

It’s going to move the market again against your favour because now that you’re exiting, you’re selling off, you’re going to push the price back down, and now you’re not getting filled the exit price. You’re getting filled all the way down. So you’ve got a really mushy profit margin there.

It’s really changing the entire time that you’re going in and you’re going out. With high volume, high liquidity, you get a clean fill at your entry target price and you can get a clean fill your exit target price, and that’s really important for short-term and for long-term investors, traders.

Tai:

Alright guys, so I appreciate you guys watching this video with us. If you guys would like to learn more about trading and investing in cryptocurrencies and Bitcoin, make sure you subscribe to our channel and once in a while guys, we’re looking at doing some webinars on Google hangout and also on the YouTube live stream once I figure out how to use it.

So if you guys would like to join us, look under in the description below this video on our site, and there will be a place for you to enter your email address and if you enter your name and email address in there, whenever we have these live events, I will email you guys and let you guys know.

I personally enjoy the live event because I get to answer and talk directly to the other traders, other cryptocurrency traders and I know Eric enjoys as well, because neither one of us like to type, so we’d rather just look at the comments come in and just answer it from there.

So thanks for watching this video guys. And if you guys have any friends or family or relatives or your fellow investors or traders that are interested in learning about more about trading and investing in Bitcoin and other cryptocurrencies, make sure that you guys subscribe to our channel, share this video with them. Alright, thanks guys and we’ll see you guys in the next video. I accept Bitcoin.

 

 

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