Bitcoin & Litecoin – Disparity Provides Opportunity – Position Trade

Position Trade:  LTCBTC: Buy LTC at 0.01368 –  Stop NA  – Target 0.01800 (see below for explanation)

In the previous article we mentioned it there was a good possibility we test the February low at 6000.  This was not a given by any means, but with market sentiment at extreme lows, it only needed a minor catalyst to push lower.  Japan’s Financial Service Agency provided this catalyst with an order for exchanges to improve practices against money laundering.  This resulted in the largest Japanese exchange, bitFlyer, along with several others, suspending the creation of new accounts while it addresses the situation.  Though this is good news in the broader perspective, it is also further proof that sentiment drives prices and anything that could be deemed negative, even if it is not, can trigger a selloff. 

Often many are shocked during these selloffs, caught like a deer in the headlights, with no plan, no strategy, and often miss an obvious trade that is sitting right under their noses.  This brings up a trade that I have done a few times and today is another potential opportunity.    

To provide some clarity, I consider myself a stacker of assets.  Whether it be metals, stocks, cryptos or other assets.  My goal is to accumulate and manage an inventory of assets for the long term.  Because I am long term I am not concerned with market downturns and selloffs, which I deem noise, I only see them as opportunity to increase inventory, or in this case, allocate inventory from one asset that is overvalued to another that is undervalued.  Hence the trade today.  This is not a market timing type trade, this is taking advantage of a time in the market where one asset is way out of favor to another.

Often you see analysts chart paired with Bitcoin, which is simply charting the XXXBTC ratio.  I rarely chart coins paired with Bitcoin because profits and losses always considered in USD terms.  However, like the gold/silver ratio chart (which I have posted on numerous times) this ratio often can often be used to find a commodity (like silver or Litecoin) which is undervalued to the primary commodity (like gold or Bitcoin).  Finding correlation with these types of ratios can be used to increase your inventory over time.  To be clear this is not a quick return but a long-term strategy idea to build inventory.

BTCUSD Daily Chart:

Bitcoin has pulled back to the 6102 level after briefly dipping below 6000.  We have been cost averaging into a positional trade, and we are currently below the 6620 level which is the last add.   If I was willing to buy at 6620 and higher, then 6000 would be even more attractive right?  Absolutely, however we can still go lower and 5458 is the current level in play.  We must be careful here as 6000 is a psychological level and a breakdown at this level could easily push us to retest the 4812 level.  There are numerous support levels between 4300 and 6000 including 5458 at this point.  I am less focused on where we may end up and more focused on what is the recipe for lemonade with all the lemons I have.  I may add some fresh money if the opportunity arises, but like most investors, I do not have an infinite supply of cash.  I want to use what I have at this point to increase inventory for the long term.  There are a couple coins I have been putting some money aside for and will post when I buy, with the obvious one being Elastos.

LTCUSD: Weekly Chart

Litecoin has pulled back and is currently testing the lower support range of 72.00 to 81.00 after consolidating at the 96.00 level which was major support.  This is a significant deeper pullback percentage wise then Bitcoin, and a zone we can look for a potential swing trade setup.  The 81.00 level is also a resistance and support level looking back at August and November of last year providing further evidence of a potential reversal.   The retracement has now entered wave 4 of the previous cycle which is another typical reversal zone.  I like Litecoin here and it was the reason why we added to our position a couple weeks ago.  If I had to choose between buying Bitcoin or Litecoin here it would be Litecoin and the next chart explains why.

LTCBTC: Daily Chart

For a little over a year Litecoin to Bitcoin ratio has traded between 0.01 and 0.02.  There is no chart for the actual ratio that I can find, and if someone knows of one I would appreciate the comment.  However, this is translated to a ratio between 50 and 100.   As the ratio increases toward 100 I am trimming off a little bitcoin and buying Litecoin.  As the ratio nears 50 I want to do the opposite and sell the Litecoin I bought back into bitcoin, where for every 50 Litecoin I sell I get one Bitcoin.  Currently the ratio is around 75/1.  So for every bitcoin I sell I am getting approximately 75 Litecoin.   If the ratio returns to 50 I can simply sell the 75 Litecoin buying 1.5 Bitcoin increasing my inventory without adding any trade or fresh money.   

Now this type of trade does not normally happen overnight.   This is a longer-term inventory management strategy that I personally use for gold and silver with the intent of the long term to increase my inventory in gold or in this case bitcoin.  In the end I want to increase my overall inventory of Bitcoin, just like gold.  Whether it takes a few weeks, months or a year, is insignificant to my long-term game plan.

As an investor we are looking to buy into weakness and one method of increasing our return without adding fresh money or using our trading funds, is trading these types of ratios.  Like silver generally outperforms gold when the metals rally, I expect Litecoin to rally where I will simply exchange back into bitcoin adding to my overall position.  This is the theory at least, but it is not without some risk, and there is never any guarantee.  However, these types of trades most often happen during extreme selloffs or when market sentiment is at an extreme low.  

Money management is key, and the Ethereum swing trade Marc posted added to our trading cash which in the overall picture reduces our portfolio costs.  If you are looking for get rich quick strategies, you will likely end up losing.  Sure we would all like to hit 90% of our trades for 50% plus returns, but this is simply dream trading.  Reality is that the road to riches is a long and tedious road with many obstacles and challenges.  How we deal with these challenges separates us from the herd looking for a lottery ticket.  This is a chip away at the rock over time strategy.

The strategy implies we always have cash on hand for trading, we manage the assets we have, and look for opportunities when the herd is running scared.  Using swing and positional trades such as this one and the Ethereum trade Marc posted, I am looking to slowly reduce the costs of my positions over a longer period.  Patience Planning and being Pro-active is key to successful investing. I am not worried about what my portfolio value is next week or next month, I am in this for the long term. 

Full Disclosure:  I already had a buy order in at 0.01400 that filled, and the current level is a better entry then the one at 0.0140 for this strategy.

7 Responses
  1. NEOhodler

    When do we get the major bounce? And if so, will this bounce go into thousands a day or will this go a few hundreds a day? Back in december we went up 3k in 1 day..

    1. Andrew Gonci

      If any of us knew that we would be rich ;). I like the bounce after it dipped to 5700 today but lets see what happens. Sentiment is just really low, and I liked what Brian Kelly said on Fast Money Friday.

  2. Craig

    Hi Andrew, thought provoking as always. To get a price ratio on TradingView try adding the “Comparative Relative Strength by vitvlkv” custom indicator. Change the input to the “base” ticker of your choice and enjoy.

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