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Happy Independence Day!

One of the biggest arguments against crypto currencies is that, rather than actually representing a store of value, they only serve as trading vehicles.

Whether you’re a die-hard HODLer or simply a scalper who would like to get involved in the crypto space, the fact of the matter is that it’s relatively difficult to trade actual crypto currencies.

If you think that you can simply switch between trading stocks and crypto currencies while using one of the major online brokers like Fidelity, TD Ameritrade, or Charles Schwab, think again.

While you can technically buy and sell crypto currencies through some of the lower tier platforms like Robinhood, the variety of coins you can trade is very limited.

 

 

In addition, traders who use lower tier platforms like Robinhood to trade crypto currencies currently face significant restrictions that prevent users from being able to access and withdraw their coins.

While crypto exchanges like Coinbase or Binance do offer a much wider selection of tradable cryptos and easily accessible digital wallets, these platforms demand much higher fees to trade cryptos than traditional online brokers charge for trading in stocks and options.

Oh, then there’s the frequent news stories regarding crypto exchange scams and people losing crypto fortunes because they simply lost the pass code to their digital wallet.

Although these are all very valid concerns that deter many traders from getting involved in trading crypto currencies, there is a way traders can participate in this space via their existing online broker.

I’m about to show you how.

 

Several stocks track closely with the movement in crypto currencies

 

Similar to trading stocks like MSFT and GOOG, which are members of the hugely popular technology sector, anyone with an online brokerage account can trade shares of stocks and ETFs within the crypto industry.

As I will highlight in a bit, some of these stocks come very close to replicating the moves of the underlying crypto currencies (i.e., they have high correlations).

Remember, the purpose of this discussion is not to help you understand how to actually own crypto currencies for the purpose of capital appreciation.

Instead, I’ve compiled a list of crypto stocks with favorable chart setups that you can trade in your low-fee brokerage account.

 

Trade Lesson: Correlation

 

In the investing world, correlation, a statistical term, measures the degree to which two or more instruments (i.e., stocks, ETFs, futures contracts, etc.) move in relation to one another.

Correlation is presented on a scale of 1.0 to -1.0, where a correlation of 1.0 means that the instruments being compared move in perfect relation to one another, a correlation of -1.0 means that the instruments move in a perfect inverse relationship, and a correlation of 0.0 means that there is no relationship at all.

Correlation is a tool many traders and money managers use to diversify their portfolios, especially when there may be an anticipation of increased volatility in certain areas of the market.

For our purposes, we’re going to use correlation to find trading vehicles that closely mimic the price swings of Bitcoin.

The top panel of chart directly below shows a daily chart of Bitcoin, overlayed with 1 stock (MARA) and 1 ETF (BLCN) in the crypto industry.

Just by looking at this top panel it’s easy to identify how closely MARA and BLCN mimic the price action of Bitcoin.

This high-correlation price action is confirmed on the bottom panels, which show the correlations between these trading vehicles and Bitcoin of a rolling 1-year period.

 

Figure 1

 

As noted earlier, two assets that trade with a correlation of 1.0 trade perfectly in line with each other.

Therefore, when we see rolling 1-year correlations of 0.97 and 0.95 between Bitcoin and MARA and between Bitcoin and BLCN, respectively, we know that there has been an almost perfect correlation between these instruments over the past year.

 

What trade setups are we seeing now?

 

I often preach that when a stock shows rotation against its benchmark sector, it’s often a leading indication that a trend change may be near for that sector.

As we see on the right-hand side on the top panel of the chart directly above, both MARA and BLCN have been rotating higher against Bitcoin in recent days, indicating that money is flowing back into the sector.

As the next chart shows, this comes after downside momentum in Bitcoin was slowing before the very recent rally in Bitcoin started to develop.

 

Figure 2

 

Bitcoin needs to close > its 50-DMA and RSI needs to rotate into a bullish regime above 55 for bulls to gain enough escape velocity for a potentially aggressive rally to occur.

For MARA and BLCN, the main development is that a trend transition from down to sideways/higher is in progress.

This can be seen on Figures 3 & 4 below.

 

Figure 3

 

 

Figure 4

 

Short-term, the top-heavy candle formations that occurred earlier this week offered evidence that price had moved a bit too far, too fast, resulting in a temporary long/short stalemate and late-week pullback.

Near-to-long-term, however, the key lies in the fact that a series of higher highs and lows is now developing off the May lows, and it’s the most recent swing lows (see green circles on charts) that traders can now use as stops.

Why?

Because, if a trader is to begin building long positions based on the thesis that a new uptrend is developing as we just discussed, the trader’s thesis would be wrong if MARA and BLCN were to fall back below their most recent pivot lows.

 

Bottom Line

 

If you’re not one of the many market participants that is fanatical about crypto currencies but you like the profit potential that they offer when trends develop within the crypto space, you do not need the headache of dealing with the high fees and restrictions that often come with trading cryptos via specialized crypto exchanges.

Simply keep a watchlist of crypto stocks that trade with a high correlation to popular crypto currencies like Bitcoin and Ethereum and trade them through you low-cost online broker.

Author:
Jason Bond

5 Comments

  1. Great info as a novice to the crypto world, Your explain enation is right on, you’ve really put a bright light on the world of crypto.

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