Trading
Bybit Learn
Bybit Learn
Intermediate
Aug 25, 2022

What Is the Martingale Strategy & How Does It Apply to Crypto?

When you're investing in crypto, you have a lot of different strategies to try. The Martingale strategy is a technique that has its roots in gambling. Though it's not foolproof, this strategy is a great way to account for the unpredictability of the market. Explore this guide to see how you can upgrade your investments by using the Martingale strategy.

What Is the Martingale Strategy?

The Martingale strategy states that betters should double their next bet every time they take a loss. This strategy theoretically works well for investing, but it requires deep pockets and careful decision-making.

When used in crypto investing, the Martingale strategy is very simple: An investor decides whether they think a crypto’s price will go up or down and invests a set sum of money accordingly. If they lose this money, they double the amount they invested and try again.

As probability theory shows, you can recover all your losses as long as you keep betting until a win. When you eventually do win, you make back all the money you lost, plus extra on top. The Martingale strategy works best when the odds of a crypto going up or down are at 50/50, but as long as you keep going, it even works in situations with very imbalanced odds.

The main challenge is simply that you have to have essentially unlimited funds. If you’re not able to constantly place new investments, it can be hard to recover after a series of losses.

History of the Martingale Strategy

This trading strategy gets its name from 18th-century betting games in France. The strategy was initially used for succeeding at a game where a gambler would flip a coin and win if the coin came up heads. It became very popular among gamblers, and eventually, the strategy reached the attention of mathematicians.

In 1934, Paul Pierre Lévy used newfound probability theory concepts to analyze the strategy. Lévy found that with infinite wealth, this strategy would always result in profit for a gambler. Statistician Jean Ville then coined the name "Martingale Strategy" in 1939.

How Does the Martingale Strategy Work?

So how does a probability theory originally used for coin tosses work for crypto? Of course, crypto isn't gambling, because an informed investor has a reasonable certainty as to how their money will work. However, the Martingale trading strategy can still be a useful way of handling money.

It starts with the investor selecting the amount of money they want to invest over a certain period of time. This money functions as your initial bet. At the end of the time period, you analyze your profits and losses. If you gain money, you invest the same amount of funds all over again. If you lose money, you double the amount of money you invest, wait for the same time period and assess your funds.

For it to work, the Martingale strategy involves doubling your investment every time you have a loss, instead of only doubling your initial bet. So if you lost your first $100 investment, you would invest $200, and if you lost that investment, you would double again and invest $400.

The Martingale strategy is useful for a variety of types of crypto investment. Some people use it simply to buy a cryptocurrency, and see how the crypto's value changes. Others use it while day trading, and count an entire series of buys and sells as a single "win" or "loss." You can even use it when trading crypto

Investors also have the choice of using a reverse Martingale. The strategy involves doubling your bet when you gain a profit, and halving your investment each time you take a loss. This system isn't as foolproof as the Martingale strategy, but it works better when trading in a hot market with a limited amount of money.

Benefits of Using the Martingale Strategy

Why is the Martingale strategy so popular even though it requires huge sums of money? The answer lies in the fact that it comes with many advantages for the savvy investor.

Takes Emotion Out of Investing

One of the helpful things about working with a trading strategy is that it keeps your emotions from affecting your investing. In many crypto trading situations, getting scared by a market downturn or jumping on a trend due to fear of missing out (FOMO) can cause financial problems. Sticking with a clear, simple and easy-to-use rule lets you make choices based on logic, not feelings.

Flexible

Unlike other crypto trading techniques, you don't necessarily have to work with a certain exchange or buy a certain type of crypto when using the Martingale strategy. It’s essentially a money management strategy, so it can work in just about every situation: You can apply it to purchasing a meme coin, or you can use it while shorting a crypto with options.

Break Even After Major Losses

The Martingale strategy is one of the most reassuring strategies available. In theory, by repeatedly doubling down on losing bets, you will eventually even out a win. This is because the size of the winning trade will be more than enough to cover the combined losses of all the previous trades. This strategy aims to promote a loss-averse mentality and tries to improve the chances of you breaking even. As long as you have plenty of funds, you can reassure yourself that you'll eventually break even. The strategy performs particularly well in choppy markets because it helps you make back money to cover occasional crypto price drops.

Risks of Using the Martingale Strategy

Though this strategy has promise, it's also classified as high-risk. There are several potential problems associated with using it.

Exponential Losses

The investment amounts used in the Martingale strategy follow an exponential growth pattern. You have to double your investment every time you take a loss, so you quickly end up handling major amounts of money. For example, if you started with $1,000, ten losses in a row would require you to invest $1,024,000 in the following bet. This can result in disastrous losses which usually cause a trader to quit investing before they can make their money back.

Mediocre Profits

The Martingale strategy has a high risk-to-reward ratio: The risk one takes is much higher than the rewards one can get in return. Even when you're investing huge amounts, you'll only turn a small final profit. This happens because your large investments have to cover a past series of high losses. This can be very disappointing for crypto traders who’ve just spent a lot of time and energy on their past investments.

Works Poorly in Certain Markets

Technically, this trading strategy can work in any type of market, but that's under the assumption that a trader has infinite funds. In a real-world situation with limited funds, a losing streak can quickly empty a trader’s bank account. Certain types of market conditions, such as bear markets or crashes, can cause a trader to quickly rack up losses.

Common Mistakes Made When Using the Martingale Strategy

As you can see, the Martingale strategy can be useful. However, things can quickly get out of control if you don't do your research before you start crypto trading. If you plan on using this trading strategy, you need to ensure you avoid making the following mistakes.

Starting Big When You Don't Have Much Capital

Martingale strategies tend to work best when you have a lot of capital to work with. In most cases, you don't want to use this technique unless you have a decent amount of money to start. Otherwise, you can end up losing all your funds because you don't have enough money to make one final investment and recoup your losses.

If you do want to give it a try, but only have limited money, make sure you start very small. Keeping your initial bet low will let you get a feel for working with this trading strategy without getting priced out quickly.

Not Setting a Clear Stopping Point

Probability theory may dictate that you can keep going with a Martingale strategy forever, but in real life, most traders run out of money at some point. People who try to use the Martingale strategy with no clear plans of stopping often end up in a hole of debt, then panic and cash out at the worst possible time. Problems can also occur if you keep winning for too long. In these situations, traders essentially end up repeatedly investing their initial bet and making small, incremental profits. Though this might sound like a good thing, you may be leaving money on the table — because you fail to take into account the fact that you have more funds to work with now.

To make this strategy work for you, it's best to clearly define when you’ll stop before you even start. Think about the maximum amount you can afford to lose, and avoid investing more than that amount. It's also a good idea to set a time limit for your trading, so that you have the chance to occasionally reassess. After a certain amount of time, consider your portfolio and decide whether you want to adjust your investment amounts, or try a different strategy.

Failure to Research Crypto Investing

With the Martingale strategy, it can be tempting to treat investing like betting. Many traders feel like they have a foolproof way of covering their losses — so they just pick something random and toss their funds at it. This might technically keep you from losing money, but it also prevents you from making a profit. The crypto market is less random than a coin toss, and the right research can influence the outcome — making it more likely you’ll end up on a rewarding winning streak.

Just as with any other investment strategy, you need to take the time to consider the crypto market. Look into a currency to see if it’s a sound investment, and pay close attention to market trends. This can make investing success more likely, so instead of having to constantly cover your own losses you can actually turn a profit.

Why Is the Martingale Strategy Popular in the Financial Market?

The Martingale strategy is especially popular in forex trading. The main reason is that currencies usually don't drop to zero as stocks can. Countries almost never go bankrupt as a stock does, so losses are a little lower than usual. This mitigates the doubled loss issue associated with the Martingale strategy, so you can break even a little sooner.

Another perk of working with forex markets is that traders have the ability to earn interest. This allows you to earn income even when you’re losing funds. You can borrow with a low-interest currency and purchase with a high-interest currency to help offset your losses.

Is the Martingale Strategy Effective in Crypto Markets?

The Martingale strategy happens to pair very nicely with standard crypto market movements. You can especially appreciate the strategy's perks when the market is going through one of its choppy phases. When the market suddenly drops, big losses can feel scary. However, when the market recovers, you can make enough money to handle all your losses and turn a tidy profit.

A Martingale strategy can be particularly effective for crypto investing. Traders have some influence over outcomes, since they can select crypto based on promising performance instead of picking based on random chance. Unlike a coin flip, crypto markets aren't a zero-sum game. Even when you don't turn a profit, it's rare for all of your investment to disappear. Instead, even crashing crypto retains some value.

Some investors like to use a modified version of the Martingale strategy. Instead of putting in exactly double their initial bet, they subtract the value of their declining crypto from the newly doubled investment. This lets you use slightly less funds while still following the heart of the strategy.

Is the Martingale Strategy Worth Trying?

Ultimately, the Martingale strategy does have some worthwhile uses. It's simple to follow and it works in a variety of situations. Many new traders like it because it provides reassurance about potential losses, and experienced traders like the mathematical certainty behind the strategy. Since this trading method takes your losses into account, it often makes it a little easier to break even.

Nevertheless, remember that this crypto trading technique works best when you have plenty of funds to work with. Otherwise, a series of losses can quickly wipe out your funds. You'll also benefit from doing your research beforehand — and approaching the technique with caution. To be successful, you need to clearly define your initial bet, your investment time period, the maximum amount you're willing to lose and the point at which you'll stop.

The Bottom Line

The Martingale strategy's method of doubling your investment after each loss ensures that successful investments cover previous losses. This technique has worked so well that it's been used by gamblers for centuries, and in modern times, it works just as well for crypto investors. As long as you approach it logically and have plenty of funds, this strategy can be very useful.