Another tool in your trading toolbox
This article walks you through an actual use case for elevated crypto investment risk (High Crypto Risk Index) before November 2022 crash of crypto markets, and how investors could have seen the signals and avoided losing their capital investments.
We provided an overview of the Crypto Risk Index (an innovative index introduced by https://cryptomarketbuzz.com/ provides the level of cryptocurrency market investment risk and also risk level of top 5 cryptocurrencies) in Introducing Crypto Risk Index: the ultimate technical index for your cryptocurrency trading needs. This index is another tool in your crypto trading toolbox to inform your trading strategy.
In this article, we look at two cases where the Crypto Risk Index provided crash signals to investors ahead of the price drops for Bitcoin and Ethereum.
Figure below is from https://cryptomarketbuzz.com/ on Nov 30, 2022, and shows the last 365 days of price and risk index trends for Bitcoin. Generally speaking, as we have explained on the website and also in our introductory article, when the risk is High, the chances of a price correction increase significantly. The reason for that is the Risk Index takes into account the short-, mid-, and long-term price movements, short-term volume changes, and short- and mid-term volatility into consideration. Therefore, a high index is an indicative of highly unstable prices. Let’s look at Bitcoin risk index and price trends between Nov 2021 and Nov 2022. On Dec 25, 2021 the price was at $50,800 +/- and the risk index was at 51 (Elevated). On Feb 9, the price dropped to $44,300 +/- while the risk index went up to 61 (High). This was a price correction signal (lower price, higher risk). But something even scarier happened after that. On March 29, even though the price increased slightly to $47,500, the risk index went up to 77 (Very High). When comparing March 29 price with Dec 25 price, we can see that the price was 7% lower but the risk index was 50% higher. It meant, the asset was cheaper comparing to last Dec but much more volatile and unstable with elevated risk of investment. This should have been a strong signal that a price correction was around the corner, and exactly that’s what happened! Bitcoin went into free fall mode and lost 61% of its value between April and June 2022, immediately after the April signal. I hope you didn’t get caught in that slippery slope!
Now let’s look at Bitcoin between August 2022 and Nov 2022. On August 13, 2022 Bitcoin was trading at $24,400 with a risk level of 60 (Elevated). On Nov 5, 2022 Bitcoin was at $21,300 with a risk index of 78 (Very High). Basically, 13% lower price with 30% higher risk! What does that tell us? Yes! Red signal that a price correction was coming, and it certainly did! Bitcoin lost about 27% of its value between Nov 5 and Nov 9, 2022.
Crypto Risk Index is not a magic bullet. It’s also not a predictive index (no such thing exists!). The Crypto Risk Index only gives you more information about the crypto market at that point in time and it’s another technical index in your trading toolbox. You need to fully understand the underlying fundamentals of the cryptocurrency market and use technical indexes together with your own knowledge, intuition, and risk tolerance when trading crypto assets.
Looking at the Bitcoin case in early 2022 and late 2022, we can learn a few lessons:
- Generally, don’t enter a trade with the risk index is above Elevated. The higher the risk index, the higher probability for a price correction.
- Look at short-, mid-, and long-term price/index trends. When the price is lower but the risk is higher between two dates, there’s likely a price correction around the corner.
- Crypto investment is a risky business, know your risk appetite, have a trading strategy, know when to enter, and have an exit strategy (or HODL strategy).
The information provided on the CMB website and also the Crypto Risk Index are for informational purposes only, and do not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such.
We do not recommend trading cryptocurrencies, including buying, selling, or holding any type of cryptocurrencies. You need to do your own research and understand the underlying volatility and legal and political aspects of cryptocurrency markets. Also, you need to consult your legal, financial and tax advisors before investing in cryptocurrencies. There are risks in cryptocurrency investments. Do your own research and invest wisely. This article or the CMB website are not responsible for your capital loss.
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