Event-Driven Trading: Profiting Off Major Crypto Events

Event-driven trading strategies have long been employed by private equity traders and hedge funds as they conduct in-depth research on upcoming corporate events, calculating the rate of success and whether the payoff is worth undertaking the risk. From mergers and earnings announcements to share offerings and executive resignations, such instances often cause huge volatility as short-term traders buy and sell according to existing sentiment. 

In the case of cryptocurrencies, while the general strategy remains the same, traders instead pay attention to key crypto-related events like blockchain upgrades, strategic partnerships and regulatory changes. Read on to find out how this event-driven trading strategy plays out in an actual scenario.

Key Takeaways:

• Event-driven trading seeks to exploit pricing inefficiencies that may occur before or after key crypto events, such as blockchain upgrades, mergers, strategic partnerships and regulation changes.
• It’s possible to generate consistent returns from event-driven trading with proper risk management and execution. 

What Is Event-Driven Trading?

Event-driven trading is a strategy that seeks to exploit pricing inefficiencies, which may occur before or after a key event. In the context of crypto, these events include blockchain upgrades, mergers, acquisitions, strategic partnerships, central bank data announcements and regulation changes.

There are generally two types of events that event-driven trading strategies target: pre-event and post-event. Trading the pre-event hype involves planning, so traders can take advantage of the upcoming volatility that they know usually accompanies such a key event. Post-event trading involves careful analysis of existing demand and supply zones so traders can leverage upon increased trading volume caused by fear-of-missing-out (FOMO) buyers and panic sellers.

How Does Event-Driven Trading Work?

Event-driven trading involves several steps. First, traders identify upcoming events that have the potential to greatly impact an underlying crypto's price. Examples range from the Ethereum Shanghai Upgrade to regulators potentially stepping in to start a lawsuit against Coinbase. 

Once the event is identified, traders then analyze how the market will react to the news, and whether there's any validity to the sudden volatility. This involves comprehensive research to ensure all scenarios and potential happenings are taken into account before deciding whether or not the traders want to take a position in anticipation of the event. 

If so, they then decide what type of order to place — either a buy or sell limit order — at which point they can set up their trade. For more advanced crypto traders who have experience in crypto derivatives, futures and options can be deployed, with crypto options in particular being especially handy since the increased volatility will bump up the implied volatility of the option. This will ultimately make writing the option contract that much more profitable.

One key strategy is to be disciplined with existing capital, and to understand the potential risks involved when it comes to the event’s impact. Take-profit levels should be placed, so traders can lock in their profits despite ongoing volatility. If the market moves unexpectedly, planned stop-loss orders should be executed to protect trading capital, and to keep account balances from being wiped out with a single trade.

Event-Driven Trading Example: Ethereum Merge

Hyped up as the biggest crypto event of 2022, the crypto space was filled with buzz for the Ethereum Merge prior to its completion in September 2022. As a result, speculation was at all-time highs as event-driven traders began to theorize and plan for the upcoming volatility. 

From optimists expecting FOMO buyers to cause ETH prices to skyrocket, to bearish traders asserting that the Merge could be potentially delayed, there were various schools of thought when it came to the notion of profiting from the Ethereum Merge. 

After it officially took place, ETH prices tumbled by close to 4% that day, as traders were quick to buy the rumor and sell the news. Like most telegraphed events and catalysts, the Merge was already priced into Ethereum’s fundamentals, and failed to cause a larger move than expected. This ultimately allowed both bearish ETH traders and those who wrote ETH contracts to profit from the volatility.

Benefits of Event-Driven Trading

Event-driven trading does offer several benefits, particularly when it comes to crypto. Here are a couple to take note of.

Planning for Events Encourages Increased Risk Management

If you don’t plan to succeed, you’re planning to fail. This well-known adage holds extra weight when trading and speculating on the impact of upcoming events and catalysts. Cyclical events, like earnings calls and U.S. Federal Reserve meetings, can often be backtested to gauge their impact on specific assets. Traders can then gauge a rough understanding of the assets’ price movements. As traders plan ahead, they’ll be more aware of risk-to-reward ratios before diving into a trade, which can contribute to their overall risk management as they decide when to take profit or cut losses.

No Need for Continuous Monitoring

Event-driven trading also gives traders a way to earn potential profits without having to continuously monitor the market or day trade. By conducting personal due diligence on upcoming catalysts, and planning for trades, limit orders can be set up before an event occurs. This allows traders to stay on top of markets without being glued to their charts all day long, and can prove beneficial for those who don't have the time to day trade or constantly track candlestick movements for their chosen asset. 

Risks of Event-Driven Trading

While event-driven trading can be a lucrative strategy when done properly, it carries certain dangers that traders should be aware of before diving in.

Lack of Volatility

One of the central risks is that events may not unfold as expected, or may even result in a big price movement that could lead to losses for traders who dabble in crypto options and are expecting a huge move in either direction. As an example, we’ll use the case of traders purchasing option contracts ahead of a hotly anticipated blockchain upgrade. If the market fails to react with as much volatility as expected, those trades may end up being unprofitable as implied volatility falls, immediately crushing the premiums of the purchased option contracts.

Risk of Manipulation

Another risk is that event-driven traders can be susceptible to manipulation. Since traders are reacting to news and events, they may be exploited by market makers or large institutions that have the capital advantage over retail investors. Such whales can easily change market sentiment with their large-volume buys and sells. This may result in greater-than-expected losses if traders are caught on the opposite end of their trades. Therefore, it’s key for traders to take these potential risks into account, respond quickly enough to cut their losses and protect their existing capital where possible.

Tips on How to Profit From Major Crypto Events

When it comes to successful event-driven trading, there are several important tips for all traders to take into account.

Not Getting the Short End of the Bid-Ask Spread

Inexperienced traders may fall prey to emotional trading when trying to get their entry or exit orders filled. This can result in the immediate use of market orders. While this gets the job done, it can result in a bad average entry or exit price when the bid-ask spread is too wide. Thus, we recommend using predefined limit orders to take advantage of price movements, without having to constantly check the markets. This provides more flexibility and control over trades, letting you capture quick profits while avoiding large losses in case of an unexpected market move.

Do Your Due Diligence

The central tenet of due diligence cannot be overstated. For event-driven trading, traders must be aware of the impact of an event and how it can impact the fundamentals of a specific coin or token. That’s why it’s key to do your research and stay up-to-date on all news and events related to a project. Knowing what upcoming events may cause a price movement or have an impact on market sentiment can be immensely beneficial when formulating an event-driven strategy. To form the basis of your due diligence process, we recommend following relevant crypto media to get the latest updates, and reading relevant white papers.

Manage Your Risk

As with all forms of active trading, risk management is key for successful event-driven trading. It allows traders to protect their investments, especially if events don’t unfold as anticipated. Manage the risk of your entries and exits by setting reasonable stop losses in case things don’t go according to plan. It’s also important to make use of position sizing, which involves limiting the size of each trade per your overall risk appetite and capital allocation.

Is Event-Driven Trading Worth Trying?

Whether you’re a beginning or experienced trader, event-driven trading can definitely be a useful strategy if you want to take a more active role when speculating. By taking advantage of price movements that result from key events related to a specific coin or token, well-informed traders can stay ahead of the curve and make use of the ensuing volatility to profit. 

While there are certain risks that come with this type of trading, it allows those actively involved in the market to plan ahead, and avoid making trades based on their emotions. As previously mentioned, doing your research enables you to manage risk within your means. In addition, using limit orders instead of market orders can help you make use of event-driven strategies to potentially snap up quick profits while limiting losses in case things don’t go as expected.

The Bottom Line

In conclusion, event-driven trading can be a lucrative strategy for those who have done their research and are prepared to respond quickly to the markets when news and events take place. With proper risk management and execution, it’s possible to generate consistent returns from event-driven trading. However, there are also risks involved with event-driven trading, so traders must remain vigilant about potential pitfalls that may arise when things don’t go according to plan, and stay calm in order to keep trading losses to a minimum when using this strategy.

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