Learn about cryptocurrency trading
In recent years, there has been an increasing trend among financial institutions to include cryptocurrencies in their investment portfolios. Asset managers include the first purely digital assets in their portfolios called cryptocurrencies. Although they share characteristics with traditional assets, they have their own unique properties.
The act of buying and selling cryptocurrencies to earn a profit is called cryptocurrency trading. The three elements that make up the definition of cryptocurrency trading are operating mode, object, and trading strategy.
The trade type determines how cryptocurrency trading works in the cryptocurrency market. For example, a cryptocurrency Contract for Difference (CFD) transaction is a contract between a buyer and seller that stipulates that when a position is closed, the buyer will pay the seller the difference between the two. The object of exchange is cryptocurrency, hence a cryptocurrency transaction.
A trading strategy developed by investors in cryptocurrency trading is an algorithm that defines a set of established rules for buying and selling digital assets in the cryptocurrency market.
This article will take an in-depth look at various cryptocurrency trading strategies, such as day trading, futures trading, high-frequency trading (HFT), dollar-cost averaging, and scalping, and discuss the pros and cons of trading cryptocurrencies.
Crypto Trading Strategies
An effective trading strategy can reduce financial risk. It prevents you from making rash and impulsive judgments that could cost you a lot of money. If you are a beginner, you might even consider trading on the Binance Futures testnet to get familiar with the world of highs and lows.
Here are some common strategies popular among cryptocurrency traders:
day trading
Crypto day trading strategies require entering and exiting market positions on the same day during crypto trading hours. It is also called day trading because trading usually starts and ends within a day. So, can you day trade Bitcoin ( BTC )? Yes, day trading BTC is like playing with Bitcoin’s volatility throughout the day.
The whole point of day trading cryptocurrency is to profit from small market movements. Day trading in the crypto market can be very profitable due to the volatile nature of cryptocurrencies. Trading strategies are designed by day traders using technical analysis, but this is a time-consuming and risky strategy that is mainly suitable for advanced traders.
HODL (buy and hold)
HODLing is an investment technique, devised from the misspelling of hold, in which people buy cryptocurrencies and hold them for the long term. This allows investors to profit from increases in asset value. So, how do you make money in cryptocurrencies with a HODL strategy?
HODLing allows investors to profit from long-term value appreciation when investing for the long term. Investors can benefit from a HODL strategy because they are immune to short-term fluctuations and avoid the risk of selling low and buying high.
Because cryptocurrencies have a shorter history compared to commodities like gold and silver or fiat currencies like the U.S. dollar and euro, they are prone to fraudulent activities such as money laundering. Therefore, some countries may not support cryptocurrencies, affecting the value of digital assets.
Crypto Futures Trading
Cryptocurrency futures trading strategies involve entering into a contractual agreement between two parties to buy or sell a specific amount of an underlying cryptocurrency, such as BTC, at a predetermined future price on a predetermined date and time.
Futures trading strategies give you access to multiple cryptocurrencies without the need for you to own any of them. For example, individuals who hold cryptocurrencies can use futures to protect themselves from market fluctuations. So, how do you trade cryptocurrencies using futures contracts?
arbitrage trade
Traders rely on arbitrage opportunities to earn profits through cryptocurrency or Bitcoin trading strategies. Arbitrage is a trading method in which traders buy cryptocurrencies in one market and sell them in another. The spread is the difference between the buying price and the selling price.
Due to differences in liquidity and trading volume, traders may be able to profit. They take advantage of this opportunity by registering accounts on exchanges where there are significant price differences in the cryptocurrencies they trade.
However, traders are required to pay two deposit, withdrawal and trading fees, reducing your take-home profit. Additionally, if you miss the price difference between the two exchanges (as mentioned above), you cannot take advantage of that arbitrage opportunity.
high frequency trading
High-frequency trading strategies require the creation of algorithms and trading bots to help get in and out of crypto assets quickly. The design of such robots requires a thorough understanding of complex market principles and a solid foundation in mathematics and computer science. Therefore, it is more suitable for experienced traders than newbies.
Arbitrage, market making, liquidity detection, and momentum trading are four high-frequency trading strategies. As mentioned earlier, arbitrageurs look for price differences between two identical assets and profit from price differences on different exchanges. HFT can exploit these dislocations that are typically caused by low latency using latency arbitrage.
Quantitative traders utilize high-frequency trading, an algorithmic trading method that uses latency to benefit from the difference between buy and sell prices in microseconds to sell/buy assets. However, short-term price differences can be spotted by trading following a momentum strategy to act on expected reactions to volatile crypto markets.
Liquidity detection systems rely on identifying the market participation of other traders, usually institutional investors. Furthermore, their main purpose is to trade based on the market activity of other traders.
However, please note that algorithms can react to market conditions in real time. As a result, algorithms may significantly widen bid-ask spreads or temporarily halt trading in volatile markets, reducing liquidity and increasing volatility.
Cost Averaging (DCA)
In a DCA strategy, a fixed amount of money is invested at regular intervals, but in smaller increments, allowing traders to profit from rising markets without exposing their holdings to market risk.
Simply choose a fixed amount of money to invest in your preferred cryptocurrency over a set period of time to use the dollar-cost averaging strategy. Then, no matter what the market does, you continue investing until you achieve your goals.
When you use a dollar-cost averaging strategy, you buy at the highs and lows of the market. Additionally, DCA smooths your investment over time to invest in your favorite cryptocurrencies without being affected by extreme highs or lows like if you were to invest a large amount of money at once.
Since this is a long-term strategy, you have to pay more fees when trading crypto assets. Therefore, please do your own research before adopting any trading strategy.
Scalping
Scalpers exploit market inefficiencies to profit. However, scalping trading methods require increased trading volume to be profitable. Scalpers examine historical trends and volume levels before deciding on exit or entry points for the day.
Despite the risks, savvy traders pay attention to margin requirements and other important rules to avoid a bad trading experience. Scalping traders prefer markets with high liquidity because the time to enter or exit the market is very predictable. Whales or large traders often utilize this strategy to trade large positions.
Range trading
Range trading is an active investing style in which investors identify price ranges to buy or sell cryptocurrencies over a short period of time. For example, let’s say BTC is currently trading at $35,000 and you expect it to rise to $40,000 over the next few weeks, you can expect it to trade between $35,000 and $40,000.
You can try range trading by buying BTC at $35,000 and selling when it rises to $40,000. This approach will be repeated until you believe that Bitcoin will no longer trade within this range.
Index investing
A cryptocurrency index fund is an investment vehicle that holds a portfolio of cryptocurrencies, derived from a pool of funds committed by investors. Index investing involves buying exchange-traded funds (ETFs) like Bitcoin futures or spot ETFs, or investing in indices like the decentralized finance (DeFi) Pulse Index to eliminate the risk of investing in individual tokens.
Index holders can vote on governance proposals for the underlying protocol without leaving. This is part of Team Smart Indexing concept, which retains the usefulness provided by direct token ownership.
Because index funds replicate their underlying benchmarks, there is no need for a large team of research experts to assist fund managers in selecting the best crypto assets. Additionally, when funds are invested at index-like percentages, the portfolio is diversified across multiple programs. On the other hand, index funds are still riskier than government bonds or fiat currencies/cash because traders can lose money.
swing trading
Swing traders play with market fluctuations for about a week or a month. They develop strategies using fundamental and technical trading indicators. In swing trading, traders have enough time to track the price of a crypto asset and make investment decisions.
On the other hand, swing trading often requires quick judgment and execution, which is not ideal for novices. Additionally, traders need to be active and evaluate the market every day, even if they are not trading every day, making it a complex and time-consuming strategy.
However, crypto bots and signals are examples of automated techniques that can help you perform swing trades faster. For example, once certain criteria are met, a trading bot will scan the market and buy and sell assets without human intervention.
Trend trading
Trend or position trading involves holding a position for several months to profit from directional signals. Typically, trend traders enter short positions in anticipation of declining traders. However, if they foresee that the market will rise, they will invest for the long term.
Regardless, they must consider trend reversals using indicators such as the Moving Average Convergence Divergence and the Stochastic Oscillator to increase the success rate of their investment strategies.
Since novice traders are concerned about the financial risks involved in crypto investing, trend trading is suitable for them. Nonetheless, whether you are a novice or an advanced trader, you must conduct your due diligence before investing your money.
Advantages of Trading Cryptocurrencies
There are many benefits to trading cryptocurrencies, as mentioned below:
wild price swings
Due to its high volatility, cryptocurrencies easily attract the attention of speculators and investors. For example, intraday price changes can bring huge profits to traders, but they also carry higher risks, such as losses due to sudden price drops.
nearly anonymous
Purchasing goods and services using cryptocurrency is done online and does not require the disclosure of personal information. Additionally, with concerns over privacy and identity theft growing, cryptocurrencies may be able to offer some privacy benefits to users.
In order to identify users or customers, each exchange has its own set of Know Your Customer (KYC) measures. The KYC process used by the exchange allows financial institutions to limit financial risks while maintaining the anonymity of wallet owners.
Programmable smart features
Other benefits for certain cryptocurrency holders include limited ownership and voting rights. Fractional ownership interests in physical objects such as art or real estate may also be included in a cryptocurrency portfolio.
24 hours market
Will the crypto market shut down? No, not because it is a decentralized marketplace. Cryptocurrency markets are open 24 hours a day, 7 days a week and do not physically trade in one location. Instead, individuals can trade cryptocurrencies in different locations around the world.
peer-to-peer trading
One of the most significant advantages of cryptocurrencies is that they do not require the involvement of financial institutions as intermediaries, which can reduce transaction costs. Additionally, people wary of established systems may find this feature attractive.
Disadvantages of Trading Cryptocurrencies
Despite the above benefits, the crypto space is not without risks or drawbacks. Some of them are explained below:
network security issues
Like digital technology, cryptocurrencies are susceptible to cybersecurity breaches and can fall into the hands of hackers, resulting in the cryptocurrency being stolen. Mitigating this issue requires ongoing security infrastructure maintenance and the use of advanced cybersecurity measures that go beyond traditional banking.
Scalability issues
Until technological infrastructure increases significantly, transaction volume and transaction speed cannot compete with traditional currency transactions. For example, in March 2020, scalability issues caused delays in multi-day trading. The backlog hurts traders who want to move cryptocurrencies from their own wallets to exchanges.
regulatory challenges
Cryptocurrency investors have little to no protection in the market as there are currently no legal structures that provide asset protection. However, in the United States, some exchanges comply with regulations from federal and state authorities.
What is the best way to trade cryptocurrencies?
There is no best or worst way to trade cryptocurrency. If you are looking for the best cryptocurrency exchanges for day trading or the best apps for trading cryptocurrencies, you must focus on financial or investment goals first.
Additionally, you need to understand the asset classes you are willing to add to your portfolio, as well as the level of risk you wish to take. Additionally, familiarize yourself with cryptocurrency trading basics, such as order types, and decide which trading indicators you want to employ.
