The Risks and Rewards of Trading Cryptocurrencies

MONEYSHOW SPECIAL REPORT
The Risks and Rewards
of Trading Cryptocurrencies

1
The Risks and Rewards of Trading Cryptocurrencies
www.MoneyShow.comFeb. 15, 2018
About the writer
Ryan Wilday has over 17 years experience trading equities, futures and options.
He was introduced to cryptocurrency in 2013 by a programmer friend and began
mining and trading shortly thereafter. Though he read Robert Prechter’s Elliott
Wave Principle in the early 2000s, he didn’t make practical use of the theory until
joining Elliott Wave Trader in 2015. Today he melds his deep knowledge of the
cryptocurrency market with Elliott Wave theory and Fibonacci Pinball.
Introduction
In 2012, with twelve years of trading equities, futures and options behind me,
I had no interest in, nor knowledge of, cryptocurrencies. However, a chat with a
programmer friend about bitcoin piqued my curiosity. I then dug up a chart and,
despite all my years of trading experience, I couldn’t make sense of its sudden
spikes and deep drops.
Since my initial introduction into cryptocurrencies, much has changed in
my life. Today, I am currently leading the Cryptocurrency Trading Service at
ElliottWaveTrader.net (EWT), where I meld my knowledge of the cryptocurrency
market with Elliott Wave theory and Fibonacci Pinball. And, every week, I am
meeting new people online and in person, introducing them to the concepts
surrounding cryptos, and how to trade them.
In this e-book, I share with you everything from the basics of what cryptocurrencies
are and how to open an account to the strategies for charting their directions and
ways to protect yourself from a range of risks. If you’re interested in going beyond
this e-book to learn more, I recommend you visit our free resources page on
cryptocurrency trading at ElliottWaveTrader.net/cryptocurrency.
But, first, what are cryptocurrencies and how do you trade them?
Check out my commentary on MoneyShow.com and join me in New York and
Las Vegas for my workshop on Trading Cyptocurrencies.
Ryan Wilday
ElliottWaveTrader.Net

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Table of Contents
Chapter 1
Getting your feet wet in cryptos �� 3
Chapter 2
Character of the crypto trade�� 5
Chapter 3
Keeping your cryptos safe from crooks�� 8
Chapter 4
Do fundamentals drive bitcoin? Are you kidding me?�� 10
Chapter 5
Trade cryptos without getting slaughtered�� 12

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Chapter 1: Getting your feet wet in cryptos
It’s not all about bitcoin
By now, many people know bitcoin is not the only cryptocurrency. Ethereum, litecoin and Ripple are a
few of the other large ones. In fact, the site coinmarketcap.com tracks over 1100 crypto coins. Yet, few
know that bitcoin or any cryptocurrency is not the real innovation. It is blockchain technology which is
the true breakthrough. Although blockchain is a challenging concept to understand, it is probably the
biggest innovation in the internet since the URL.
Here’s an analogy. Imagine you are collaborating on a Google spreadsheet with a large team. Imagine,
as many have experienced, one of your teammates is making errors that you need to fix constantly.
You might even have a stubborn team member changing things against the team’s will. Unless you cut
that member off from editing the document, errors will continue to be made. Or, perhaps something
happens to the document and a copy disappears from the cloud.
Blockchain, also called distributed ledger, is much like a spreadsheet in the cloud, with a few
differences that prevent these sorts of problems.
First, inputs are the only options. Deletions are not possible. In the case of bitcoin, the input happens
via sending the actual bitcoin. An address where the bitcoin is sent from, the receiving address, plus
the amount of the transaction is what is registered within the single transaction. Once placed on the
ledger, it cannot be removed and is protected by cryptography. Cryptography also prevents anyone but
the holder of the sending address to input the transaction. And, only the receiver can now reverse the
transaction via sending them back with a new transaction.
Furthermore, if any copy of the ledger, which is not centralized across the web, is corrupted, the other
copies fix the errors. This creates a very secure basis for transactions in a currency. The transactions
are secure and immutable. Further, they are decentralized. And, bringing it back to our original analogy,
Google Docs is not decentralized, as it resides on Google’s servers.
Decentralization means that someone doesn’t need to hold an account anywhere. One only needs
a copy of the private keys for their address to open up a bitcoin file (called a wallet) on any machine
anywhere in the world. Their balance is then available to them. This also means that one’s balance
is not controlled by a company or bank, unless, of course, you hold your bitcoin at a business or
exchange, which is what most do when trading.
Cryptocurrency is the first use case for blockchain. These secure, decentralized and incorruptible
ledgers are being explored for many more use cases in the future, both in open source blockchains on
the web, and inside companies across the globe.
So, how do you get started trading this new asset class?

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Getting started
The first step in getting started is signing up on an exchange which will transfer your fiat currency for
cryptocurrency. Not all exchanges interact with the banking system, but we use three in the U.S. that do:
Kraken.com, Gemini.com and Coinbase.com. Coinbase and Gemini will make EFT transfers, Kraken and
Gemini take wires and Coinbase will also take a credit card.
Once you have signed up on an exchange, and purchased your coins, you can manipulate them in many
different ways. You can move them to different addresses on another exchange, you can move them to
an address that resides on a wallet on your computer, or you can even use them to make purchases or
payments.
Learning to send coins gives you the freedom to use them in a myriad of ways, including trading.
To move your assets, you need to find the receiving address from the account you want to send to and
copy and paste it into the send screen where you have the coins. Below is an example for sending coins
from Coinbase to trade on Gemini.
Finding the receiving address in Gemini copied into Coinbase.
To trade the coins, you need to go to an exchange that trades crypto pairs. And, this part should be more
familiar to most. The exchanges based in the U.S. that we have used are Bittrex, Kraken, Gemini, Poloniex
and Coinbase’s GDAX.
Giving a review of each of the exchanges is beyond the purview of this report. I encourage you to read
plenty of reviews on the pros and cons of each of the exchanges, and then open a few accounts to test
them for yourself. CryptoCompare.com and Reddit are some of the sources for reliable reviews. Also note
that some states, like New York, Washington and Hawaii have restrictions on which exchanges you can use.

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Chapter 2: Character of the crypto trade
In the previous chapter, we briefly described, in layman’s terms, the technology underlying cryptocurrency.
Then we described how to get started with your first cryptocurrency purchase. In this article, we want to
characterize the crypto trade so you can begin a journey toward successful trading.
Cryptocurrency is a very volatile asset and perhaps the most volatile asset we have seen. We expect it to
remain this way for some time.
On any given day, we might see certain cryptos move 100% or more. And 10% moves in small-cap coins
are quite pedestrian, with 3-5% daily moves in the larger coins are common. Therefore, the returns, both
positive and negative, outstrip the stock market by many times.
Furthermore, it is a market that never shuts down due to automation, as exchanges trade 24 hours a day,
7 days a week. There is nothing like waking up one morning to find out traders in another country had
pushed the market more than you expected for a gain or a loss.
Contrary to the get rich quick with crypto talk pervading the media, we suggest that most traders put very
little of their overall asset value at risk in this market.
The crypto market’s accelerated pace
We also characterize the crypto market as operating on an accelerated time scale. While using our
Fibonacci Pinball method works quite well through all time frames, it simply moves much faster than any
other market.
To put the speed of this market in context, Coinbase founder Fred Ehrsam gave an interesting perspective
in a recent interview. During the interview, he was asked whether cryptos were in a bubble. In response,
he said he’s seen several boom and bust cycles in only his seven years in the business.
That’s right. Several boom and bust cycles in seven years.
Looking over the chart of bitcoin, which started in 2010, we find two bear market drops of over 90%.
Drops of 30% to 50% over a month or more have been very common.
I got my feet wet trading ether very early in its history. Within months of my first trade in early 2016 it
was three multiples higher. Yet, by December 2016, it lost 60% in a six-month bear market. I exited my
positions at the time after it broke bull market support. I re-entered the market in the $7 to $10 region
after it presented with a new impulsive structure. It is now hovering around $860.
Through the lens of the Elliott Wave Principle we call the current rally underway in ether the third wave,
based upon our Fibonacci Pinball method. We derived the targets as shown in the chart below using
this method.

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Ethereum wave 1, 2 and 3. Wave 3 is still in progress.
Let’s compare the third wave in ethereum, still in progress, to the great bull run of the stock market.
We are comparing 84 years in the SP to just over six months in ether. And, in that six months, as you
can see, ether has outperformed the SP 500 (SPX) by manyfold. This evidences the accelerated return
in time, but one must realize that also means the busts come with similar acceleration.
SP 500 vs. ether: Equal return comparing their two time scales

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How you can succeed
I learned early that the best to way to manage this volatility is to start small. I personally started with
$500 and readily recommend new subscribers to our service consider a similar modest start. If you can
manage the trade well, you can grow that immensely. More is not needed, but you may choose to add
as you develop a comfort with the market.
Elliott Wave and cryptocurrency
The key to trading this market well is to identify points where the market may turn. We use Elliott Wave
analysis to do this in cryptos just as in any other asset.
Sentiment rules all markets and Elliott Wave is the best discerner of market sentiment I have come
across. If you believe there is no fundamental value in cryptocurrencies, then you must believe that
of these markets are purely sentiment driven. Furthermore, the Fibonacci Pinball rules we use have
worked quite well identifying support and resistance levels in cryptocurrency.
Of course, newer assets have little price history to build the most confident count, but we’re tracking
many older large-cap coins with very reliable counts.
Among the smaller-cap coins, I am seeking out the next coin that can enter a massive third wave to rival
that the monstrous climbs of ether and bitcoin. I have identified a few candidates we are tracking in our
service’s small-cap model portfolio. Once the chart is ripe enough for higher confidence, I will consider
writing a public article on the specific coin.
Conclusion
Cryptocurrency is a very volatile asset. Before you jump in with large positions, it is better to get
a feel for trading this asset. You must also understand that we will see boom and bust cycles in
cryptocurrency just as any asset. And, finally, we use the Elliott Wave Principle to guide us through
those cycles, identifying key levels that can turn the market.

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Chapter 3: Keeping your cryptos safe from crooks
Let’s turn now to addressing cryptocurrency security. While I am not a computer security expert,
I have subscribers who are, and they have helped form my thinking.
I suggest using this article to jumpstart the process of getting your digital assets secure. If you are
interested in the crypto space, please make security your top concern. While this chapter is elementary,
it provides some links I have found helpful.
Why so vulnerable?
First, let’s address a myth that still exists regarding blockchain. Using current technology, the blockchain
is not hackable or corruptible. Once a transaction exists on the blockchain, it is immutable.
Today, hacks are not perpetrated against the blockchain. Rather, users or organizations are the
vulnerable ones.
If an account or wallet is accessed by a hacker in such a way that they can create transactions instead
of the owner, coins become completely vulnerable. The decentralized and borderless nature of cryptos,
which is normally a benefit, is also their greatest vulnerability. Hackers may simply move coins to an
address they control, and those coins will never be found again. No one is party to the transaction but
the owner and the hacker, so the owner may be left to fend for themself.
Forms of attack
There are two big categories of attack to watch out for. The inside job is where an exchange is hacked,
usually with the help of an employee. The more common attack is a direct user attack, where a user
is compromised, usually via the stealing of credentials for an online exchange, or exposure of their
private keys.
We hear most about direct user attacks, and two of our subscribers have been hacked, and have lost
their funds.
A common way a user is compromised involves getting a user to enter their credentials and second
factor authentication into a fake website. A bot captures that info and instantly logs into the real site,
disables the two-factor authentication (if they have it), and liquidates the account before the two-factor
authentication expires.
Key logging viruses may also track a user’s credentials when they logon to a legitimate site.This requires
a direct compromise of the user’s computer or device.
Finally, a copy-and-paste virus that infects a computer can convert a crypto address pasted at the time
a user sends cryptos, causing the user to send coin to the attacker’s address.

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Getting secure
Here are the basic musts of good security. If you are diligent with these, you can avoid most direct user hacks:
Keep clean. Given the above noted potential attacks, keep your computer free of viruses,
and you’ll win half the battle. Some users I know, including myself, have a separate machine to
make trades online. Never install any software beyond the browser on that trading computer.
A Chromebook is a good cheap option for $150-$250. If you are a techy person, you might
consider the use of a virtual machine on your computer.
Use difficult and unique passwords for all crypto related sites and software. Many people
use passwords that are quite easy to hack. Consider using over 10 digits, with symbols,
numbers and caps. Consider changing passwords regularly, say every 30 days.
Always use two-factor authentication (2FA) on all crypto trading sites. Always copy the
private keys that exchanges provide when you start 2FA, which allows you to restore your
authenticator on another device. The common 2FA apps are Authy and Google Authenticator.
Do not use your phone number as a recovery source for any email or authentication app tied
to a crypto account. Security at cellular carriers is too lax. The Equifax hack raises the risk that
your private information will allow hackers to take control of your phone number.
When copying and pasting a crypto address for sending assets to other addresses, double
check the address. There are viruses that hijack the copy and paste function so you enter a
crypto address that doesn’t belong to you, sending coins to the hacker.
Once you’ve started an account somewhere, bookmark the site and only go to the site
through that bookmark. Never hit a link in an email, and be careful if hitting a link from a
Google search. Double check the URL.
If you keep custody of funds, such as in a wallet app, always copy down your private keys.
Put them on a thumb drive or on paper and in a secure location. This will allow you to restore
funds if your machine goes down.
Finally, the hardware wallet is a very good approach to security. Trezor and Ledger are the
leading brands. They hold the private keys encrypted in the hardware and can be unplugged
from your device. They are not easy to use, so you might choose to keep your actively traded
funds on an exchange. However, keeping your long-term holdings away from hackers on a
hardware wallet is a good idea.
Conclusion
Trading cryptocurrencies is very rewarding financially, but due to their decentralized and borderless
nature, you have to be the one responsible for your own security. This extra effort does keep the less
tech savvy out of the market.

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Chapter 4: Do fundamentals drive bitcoin? Are you kidding me?
Is bitcoin worth over $8000? Well, that is the price traders were bidding for it when this article was written.
Every MBA student is taught many means of evaluating or valuing securities. Discounted cash flow and
capital asset pricing models are a couple of valuation methods. Moreover, fundamental oriented stock
traders tend to use ratios like price-to-sales, price-to-earnings or price-to-book ratios to value stocks.
Do any of these methods apply to bitcoin or any cryptocurrency for that matter? Well, if you attempt to
apply any of the above-mentioned methods, you are missing values to insert into your formula,
as assets, earnings and cash flow don’t exist. So, basically, you’re out of luck.
What about using a means of valuing traditional currency? Balance of payments, interest rate
differentials and current accounts of sovereigns are all methods we read about. Again, they are all
useless here.
Let’s move to behavioral economics. Does bitcoin have utility -- that somewhat esoteric concept that
gives an asset or good a value? I think so and could give a long talk on the issues blockchain can solve,
but that is subjective.
Therefore, I propose to you that since there are no means by which to value bitcoin, or any
cryptocurrency, it is possibly the most purely sentiment-driven market in existence. While participants
may give subjective reasons for its value, there is no valuation model in wide acceptance. There are
attempts, but even if accepted, would they work? Probably not.
While there are no objective means of valuing cryptocurrency, there is no shortage of bubble calls and
claims that the crypto mania is akin to the tulip mania of 1636-1637. And, likewise, there is no shortage of
calls that bitcoin will one day be astronomical in value, including John MacAfee’s claim it will reach $500K
or he’ll make a violent spectacle of himself on TV. Yet he uses subjective arguments to make this claim.
So, how do you trade something purely sentiment-driven, with no means to valuation? Elliott Wave
analysis, coupled with our Fibonacci Pinball method, provide reliable objective price ranges, targets and
supports for sentiment-driven markets.
Let’s back up a second and look at the history of bitcoin and its already tremendous boom and bust
cycles. We’ve color coded past corrections with red, signifying 80%+ price corrections. Orange signifies
50-79% corrections, and yellow are corrections that are 25-49%.

Therefore, if history is a guide, those calling for bitcoin to see six and seven figures in the future should
expect brutal corrections. In fact, the normal correction in bitcoin makes an equity bear market look
like child’s play. Likewise, those calling for the bitcoin bubble to pop should not assume that if Bitcoin
gets a 90% haircut it is the beginning of its demise.
Conclusion
Booms and busts in any market are normal, but those in crypto are particularly volatile, and you should
expect it to happen again. The question is when? Everyday retail investors would do well to avoid these
large drops, which can sometimes be prolonged. Likewise, they would do well to take profit at times of
high risk to lock in gains.

Chapter 5: Trade cryptos without getting slaughtered
As noted, the crypto market is extremely volatile and working at an accelerated tempo. We don’t blink
an eye at a 5% daily change in cryptos, up or down. And, 20-50% daily moves are also commonplace.
Also as stated, this is a purely sentiment-driven market. While blockchain technology may be the
most compelling innovation on the internet in recent years, there is no real way to value these assets.
Regardless, we trade them with both a short-term and long-term mindset and do quite well.
So, how do you trade these markets without getting slaughtered? How do you trade these markets so
you are on the right side of these amazing moves, with a mind towards risk management?
I will now present to you the basics of my method. However, you will need to study the Fibonacci
Pinball method much further before you can apply it reliably.
Understanding risk vs. reward
With any trade you make there should be a planned stop and target. Any trade that doesn’t offer this
structure puts you at risk, both of loss or not realizing your gains.
Cryptos move in big ranges. And, often the Fibonacci levels we use to structure our trade are spread
out quite wide on a percentile basis. It is not atypical for our trades to risk 30%-50%; however, the
reward potential can be 400% to 1000%, particularly on a long-term trade.
This risk needs to be internalized. It is necessary not only to position yourself correctly in size to handle
such heat financially, and you need to have the emotional fortitude to handle such swings so decisions
are not poorly made. This is also why I often suggest starting with $500 in crypto trading at most. Get
comfortable with the ranges and add as you develop a feel. But, there is no question that appropriately
sizing your trades is the key to success.
Plan … then scale in and out
Using our Fibonacci Pinball method, we identify targets where the market can turn. But regardless of
what method you use, you have should always plan your entries and exits. Exits, of course, may be a
loss or profit. In Fibonacci Pinball, these are a zone which includes ideal levels and extensions.
Scaling into your trade is easy with cryptos since you can trade with several decimal points below a
whole coin. (e.g. .001 bitcoin) These small increments allow infinite scaling even in a small account.
When taking a trade, I suggest scaling in at the ideal target level you’ve planned. However, I suggest
adding your largest position at the stop, if we get it. This prevents you from entering the largest
position they desire and getting stopped out with heavy pain.
But waiting for the stop to hit also puts you at risk of not holding a full position. That’s OK. There’s
another trade around the corner.
If you’re on top of planning the trade, you can internalize the risk of losing the position at the stop, and
size according to the comfort level. We generally say on the EWT site that 1-3% of an account should
be the maximum at risk in one trade. Because cryptos can be traded in small decimals, this can be
accomplished with a small account.

Build a core position
I advise all my subscribers to start by building a long-term core, or base position they are willing and
financially able to hold on to for some time. The stop out they should look at is on the long-term wave count.
My reason for suggesting a core is because we often see a phenomenon in cryptos where the wave one
and two are more shallow in proportion to an extended third wave. Third waves are almost always the
waves that extend in all assets. However, we often see super extensions in cryptos.
Bitcoin is a good example of this phenomenon right now. We recently had a few examples of these
in our portfolio that tripled in less than a week. This means we try to position a little early on daily
supports. We hang onto it until we hit key levels on the daily and weekly charts.
Long-term trades by their nature can take a lot of heat because large degree patterns which govern
long-term positions move in large percentile return, both up and down. So, in the beginning, your core
is naturally small.
In the chart below, I show boxes for the small cap coin lumen. The boxes show where one would take
profit and add to the core position. The chart also shows current targets we’re looking at in the future.
Try your hand short-term
After you’ve built a core, you can try your hand at some short-term trading. I often call this trading
around the core position.
The process of entry and exit is the same. We scale in at key fibs, and we likewise scale out at key
resistance levels. The risk and reward of short-term trade is smaller, as mentioned above, because the
Fibonacci levels are closer together. This offers a tighter risk level to play against, but they are often
more time consuming to manage.
I don’t often day trade, although I do see trades that complete faster than expected. I am often taking
short-term trades that are 5-10 days in duration and are based on an hourly chart.

Weave it together
Once you have the short-term and long-term trading working, you can consider weaving them together
into a larger game plan. See the illustration below for a cycle of short-term trading around the core,
and using that to add to the core when it makes sense. Then, on a larger scale time frame you have to
manage risk to the core by taking at least some profit where the market can turn more long-term.
Conclusion
Cryptocurrency is the most volatile asset class one can trade. Consider bitcoin, which has risen from 3
cents in 2009 to a peak of $19,700 peak in December 2017. Yet it has seen multiple corrections ranging
from 60%-85% since its genesis. Yet, bitcoin is tame compared to the hundreds of new small cap coins
hitting the crypto market. While we believe blockchain technology will change the internet forever,
there is still no method to value cryptocurrency. Therefore, we consider this market purely sentiment
driven. To discern where sentiment will turn this market our team uses the Elliott Wave Theory.
This method has repeatedly given us an edge in this volatility, and helped manage risk.

Appendix: A choice few less known cryptos we’re watching
Name Symbol Use Case Website
STEEM STEEM Reward for posts on Steemit social media site steemit.com
Verge XVG Anonymous payments vergecurrency.com
Redd Coin RDD Social media tipping (versus just liking) reddcoin.com
Bitshares BTS Chief currency on the Bitshares decentralized ex-
change
bitshares .org
Binance
Coin
BNB Alternate currency for trading on Binance binance.com
EOS EOS Decentralized App network (like Ether) EOS.io
Stellar Lu-
men
STR or
XLM
International payments stellar.org
Neo NEO The ‘Ethereum of China’ Neo.org
Ripple XRP Replacing SWIFT for international payments ripple.com
Litecoin LTC Clone of bitcoin but faster cheaper to send litecoin.org
Cardano ADA Smart Contracts Cardanohub.org
Ether Clas-
sic
ETC Original version of Ether before Dao Hack with a
new development team
etherclassic.github.
io

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