Cryptocurrency has been on the rise for the last decade. Popular coins and tokens like Bitcoin, Ethereum, Ripple, and Litecoin have turned small investments into life-changing sums, and increased trust in cryptography and blockchain have alleviated many investors’ fears.
People typically buy crypto as a long-term investment. Though crypto has huge growth potential, it’s usually seen as a volatile asset that is best for portfolio diversification.
However, a growing number of people are discovering that day trading crypto is a potentially lucrative financial option. If you’re interested in taking advantage of that potential, you need to know more about crypto day trading, as well as some of the best strategies to do it.
What Is Day Trading Crypto?
Cryptocurrency is a decentralized commodity that can be used as a digital currency and is backed by a secure digital ledger called a blockchain – though it isn’t traded like gold, oil, or other assets.
Typically, investors can purchase cryptocurrency through Crypto IRAs, cash investments, and Blockchain ETFs. These crypto investment strategies can be placed in hot wallets for quick access or cold wallets for more secure long-term investments. Long-term investments in cryptocurrency generate regular, passive income through “HODling” and “Proof of Stake” — but day trading crypto is different.
When you day trade crypto, you buy and sell the assets you purchase within the same day. Unlike traditional exchanges like the NASDAQ or the New York Stock Exchange, you can buy or sell crypto 24/7, 365 days a year.
Your goal as a day trader is to understand the crypto market and make a profit from smaller movements in the value of cryptocurrencies through arbitrage, bot trading, scalping, or range trading.
Usually, crypto day traders will buy and sell fractions of large coins like Bitcoin, or large amounts of lower-priced coins. This makes entry into crypto day trading easier than day trading on the stock market, as you do not need minimum equity of $25,000.
The freedom and ease of day trading crypto make it enticing but, like any investment, deciding whether or not you should trade crypto is entirely dependent on your risk profile.
Day Trading Risk Profile
A risk profile is traditionally defined as “an individual’s willingness and ability to take [investment] risks.”
However, your risk profile is not decided by how brave you feel on a particular day. Instead, your risk profile is determined through an assessment of your assets and liabilities, savings and income, age, and current investments.
As a day trader, you have to accept the fact that markets can move quickly and result in substantial losses. This is particularly true for crypto day trading, which is more volatile than traditional markets.
The people who will benefit most from day trading crypto are already financially secure, have a deep knowledge of cryptocurrency, and understand how to read crypto charts in advance. This means that, before you start day trading, you need to be financially secure, as well as be willing and able to take on risks.
Benefits of Day Trading Crypto
If you do decide to day trade crypto, you’ll find that many potential benefits come along with it.
The biggest benefit of day trading crypto is that, unlike stock day trading, you do not need minimum equity of $25,000 to start trading. This means that you can get started with day trading crypto sooner than traditional pattern day traders.
Additionally, day trading crypto now gives you vital experience that may be useful in years to come. Unlike other investors who stick to traditional stocks, you will become adept at reading crypto trends. This early experience will be increasingly important and valuable as more traders flock to crypto in the coming years.
Drawbacks of Day Trading Crypto
The fact that you can trade crypto at any time does open up day trading possibilities for folks who can’t operate during normal trading hours.
However, being open for trading 24/7 also means that you will inevitably miss movements in the market and will often wake up to find a dramatically changed crypto landscape. Further, you will never be able to exploit the maximum potential of day trading crypto.
There are also fewer crypto day trading regulations currently, which leads many to dub crypto the Wild West of investing. However, calls for regulation are growing stronger and clearer strategies for day trading crypto are starting to emerge.
Strategies for Day Trading Crypto
Just like traditional day trading, there are several tried and tested crypto strategies that you can choose from:
Arbitrage is when you both buy and sell several coins and profit from the difference in value.
Typically, crypto day traders buy coins in pairs through exchanges. Sometimes, however, these exchanges will value coins differently, allowing you to buy coins from one exchange and then sell them on the other for a higher price.
You can manually view the most active crypto pairs online, but many crypto day traders use bots to capitalize on differences in value that may only last for a few seconds.
Crypto is volatile, and open for business 24 hours per day, seven days per week. This makes it difficult for humans to effectively day trade crypto without assistance.
Fortunately, crypto daytraders can utilize bots to automate the decision-making process. This means that day trading crypto doesn’t require investors’ attention at all hours of the day, as programs like arbitrage bots can handle trades based on historical data and user preferences.
Bot trading makes it easier to day trade crypto, but it’s an imperfect solution. Cryptocurrency bots may not always be effective and still require significant knowledge of digital currency markets; you also need to learn how to use and set them up properly.
Scalping is a short-term trading strategy that requires you to buy in volume and resell for small gains throughout the day.
To find success as a crypto scalper, you need to understand crypto charts and how to read them. This is because scalping requires quick decision-making and a deep understanding of important concepts, such as candlestick charts and ‘Head and Shoulders’ patterns.
Range trading involves predictions based on technical analysis and an understanding of the fear and greed index in crypto.
Just as with range trading stocks, you’ll need to become adept at identifying a crypto’s price range. You’ll then need to be prepared to make a purchase when you feel the commodity is available at a low price and willing to resell when the currency is reaching resistance.