Good Trades

The advantages and opportunities for extra gains in low volume exchanges

Trading in crypto can be very risky and trading low-volume cryptoassets can be even riskier, nevertheless, great rewards are associated with great risk. Assets with high volume get all the attention, because volume means participation. It means action. It is no wonder that traders like high-volume assets and neglect the low-volume ones. But this approach misses the potential of low-volume cryptos to find explosive moves.

Low-volume cryptos, typically, have a daily average trading volume of 10 BTC or less. They may belong to small, little-known projects trading on small or nascent exchanges, but can also be traded on major exchanges. Such cryptos remain outside of purview of the mainstream traders and investors and lack the general trading interest. These cryptos can be risky because their low volume leads to lack of liquidity and ease in price manipulation. Smaller and newer projects are also disproportionately represented in low-volume stocks. Such projects can simply go belly up and leave investors with nothing.

While the market is always right, its participants are mostly wrong. Most traders enter as a trend ends, explaining why trends end with climatic volume. On the other hand, few traders manage to get in before a trend starts. Thus, low volume may hint at the beginning of a trend.

Before venturing into low-volume cryptos, decide on an approach. Are you in it for short-term trading gains, or are you investing long-term in a little-known project that you believe in? Short-term traders can quickly reap profits from the sporadic price movements of low-volume cryptos. Because so few assets are usually traded, it does not take much to drastically change the price of the coin. And there is always a risk that you cannot buy or sell the asset for maximum profit due to the cryptocurrency’s lack of liquidity. However, it is relevant to note that exchanges with low volumes, but offering many trading pairs provide huge possibilities for arbitrage. 

Long-term investors in low-volume cryptos should be adept at assessing a project’s business prospects. Research such coins or tokens well and understand the project before making the investment. Experienced traders know that many little-known projects frequently list on exchanges to raise money, but only a few succeed in the long run. 

Beyond deciding on a short-term or long-term approach, also consider these seven factors when venturing into low-volume cryptos:

Individual Profile: In a thinly traded asset where there are few or no marketmakers, consider assuming the marketmaker role. A marketmaker selects one (or two) cryptos and offers buying and selling on these coins by quoting bid and ask price. He facilitates both buying and selling to maintain liquidity. In this role, the trader can take advantage of low liquidity by offering wide bid-ask spreads to the trading counterparts and pocketing the difference. However, be sure to have a backup plan. Take a more limited position rather than piling up huge inventory that you may not be able to offload.

Multibagger potential: Bitcoin (BTC), Ethereum (ETH) and many such projects were once lesser-known assets trading at very low volumes. Investors who managed to pick them young (either through luck or robust analysis) were able to multiply their investments many times—in other words they picked multibaggers. For investors who understand an industry well and do their research, long-term windfall gains are a distinct possibility in low-volume cryptocurrencies.

Benefits from corporate actions: Some coins may trade at low volumes due to their very high price (say above $500 a unit). At the writing of this document, Thorecoin (THR) trade over $1,200 per unit. The average trading volume is only $129,255 (15.91 BTC) per day. Similarly, Maker (MKR) trades at the price of $735 per unit with an average daily volume of 655 BTC ($5,326,321). In such assets, a corporate action, for example a fork or the minting of new coins, can lead to lower prices and higher trading volumes. The result is increased liquidity and higher market participation where returns can be substantial. The challenge remains predicting when corporate actions will occur.

Macroeconomic factors: Low-volume trading can also be a result of local or global macroeconomic factors. A country may be going through a slowdown or recession with high interest rates and inflation. In the case of stocks, such periods often see overall low stock trading activity, while the same period might show increased activity for cryptocurrencies, such is the case in Venezuela. But recessions and slowdowns almost always abate or reverse given enough time. Experienced investors can use excess capital to invest in cherry-picked winners that will perform with high returns in the long run.

Temporary events and phases: The uncertainty around major events such as political upsets, strife, or extreme weather can be an opportunity to benefit from low-volume. In 2004, India’s general election results were accompanied by a major drop in stock prices when a coalition backed by Communist parties was the only available option for government formation. Investors who picked up stocks on the doomsday saw their low-priced purchases triple in less than 4 years. A few of the best performers were little-known, low-volume stocks that saw up to 15-fold returns.

Benefit from overall market rise: As the saying goes, "when markets rise, everyone makes money." Overall market rise may be a result of stable government, easing oil prices, and other local or global developments. In cases of such overall market rise, low-volume assets often stand to benefit the most.

Potential benefit from exchange-driven changes: recently covered a proposal by Bats Global Market Inc., one of the biggest U.S. stock exchanges, to concentrate low-volume stocks on fewer exchanges, thus possibly increasing their liquidity. “An exchange could increase volume by holding midday auctions, changing the price increments or amending market-maker standards,” writes Bloomberg of the Bats Global plan. Such exchange-imposed changes (or initiatives) have the potential to shoot up the returns from thinly traded stocks, offering substantial profit opportunities to risk-favoring investors.

Alongside those factors, it is helpful to consider these strategies, especially when you expect low-volume signals to work.

Technical Break-Out Trade: Low volume tends to coincide with low price volatility. Hence, a break-out trade setup like the Bollinger Squeeze is ideal. Position yourself with stop orders to enter as the market volatility picks up.

Straddle Options Strategy: It is often challenging to guess the break-out direction. What we are more certain of is an increase in volatility. In such cases, the straddle trading strategy is useful. A call option is profitable if the break-out is bullish. A put option is profitable when the market breaks downwards. A straddle includes buying both calls and puts with limited risk. Hence, it is positioned to profit from a break-out in any direction. In this sense, it is a direction-neutral strategy. However, if the break-out is not significant, a straddle strategy suffers on both fronts. 

Fundamental Trade Trigger: Many fundamental traders combine their analysis with technical triggers. If you already have a directional bias for a stock, use a low-volume day as your trigger. A low-volume day can get you in before other traders. As the market pans out according to your analysis, you stand to gain from the early entry.

The Bottom Line
Trading low-volume cryptos is a risky game. Potential benefits are subject to many factors outside the investor’s control. The best bet for an investor is to take a long-term perspective—invest with excess money that you may not need and select assets which have good business potential.  However, the main lesson is to pay attention to the quiet guys. When an asset shows exceptionally low volume, it means something. If you can decipher what it means, it becomes a unique weapon in your trading toolbox.



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