How to Day Trade Crypto
Posted by Frank Gogol
Updated on April 26, 2022
Day trading is a set of techniques used to take advantage of short-term changes in the prices of a commodity. As the name implies, the goal of a day trader is to end any given trading day with their holdings having a higher value than they started with.
Crypto day trading is no different. However, crypto day trading is an even higher-risk, high reward activity. With an effective trading strategy, you can be on your way to crypto riches in no time! But you first need to understand in-depth how to day trade crypto so you don’t make unnecessary losses.
In this article, we’ll unpack the details of how to day trade crypto and take a look at some of the most effective day trading strategies.
Table of Contents
How to Day Trade Cryptocurrency
The main starting point for trading cryptocurrencies is to own some amount of your chosen currency (for example Bitcoin) and to have the means to exchange that currency.
The simplest way for you to get started is to open an account with one of the leading centralized crypto exchanges (e.g. Coinbase or Kraken), fund your account with fiat currency, and buy your chosen currency.
From there, you can use one of the below day trading strategies to start day trading crypto.
Crypto Day Trading Strategies
The difference between gambling and trading is an effective strategy. A good strategy can be the difference between one or two lucky streaks and consistent long-term returns. You can apply different trading strategies in different situations, depending on the nature of the market and your competencies. It is up to you to understand the market and decide when it is appropriate to apply a given strategy.
Here are a few crypto trading strategies you could use to understand how to day trade crypto in more detail.
High-Frequency Trading (HFT)
High-frequency trading is a technique where you take advantage of price changes that occur on the order of seconds or fractions thereof. The frequency in question is routinely on the order of dozens of trades per second—far beyond the capability of a human trader.
The only way to engage in High-frequency trading is using a piece of software known as a trading bot. The bot monitors the market and, based on the given trading logic, executes trades continuously for as long as it is connected to the exchange. By instituting specific trading logic, High-frequency trading can be combined with many other strategies.
Scalping is a strategy for making a small profit from a large number of trades, which adds up to a larger profit. Scalping uses large amounts of liquidity (currency) to take advantage of small price changes over a short period. The time horizon is generally a few minutes but can be as short as seconds or as long as hours.
Range trading is based on the assumption that crypto prices will normally —over a given period— only fluctuate within a certain range. Price movement outside of that range is assumed to indicate that a price is about to undergo abnormal change. For example, if the price dips below the lower bound of the range, that could suggest it is time to sell—under the assumption that it is the beginning of a significant downward swing.
Technical analysis is a statistical trading strategy. By performing various statistical calculations on historical price data, you attempt to uncover trends in the market. Technical trading is based on the belief that past prices have some effect on what future prices will be.
News and Sentiment Analysis
News and sentiment analysis is similar to technical analysis, with one crucial difference: it is based on predicting human actions and reactions, rather than price trends. With news and sentiment analysis, you try to predict whether demand will fall or rise for a given cryptocurrency by analyzing different information sources. By analyzing the sources you try to understand the social consensus on that currency and predict what actions people will take. The sources of this data are industry and mainstream news outlets, as well as social media posts.
What Experts Say About Day Trading Crypto
Before you quit your job and start day trading cryptocurrencies, let’s take a look at what some experts say about doing it.
Tyrone Ross, CEO of Onramp Invest, a crypto asset-management technology for financial advisors, says that most people should not be investing in crypto at all:
“The everyday individual is looking at crypto assets as an investment or opportunity to build wealth, but the majority of people should not be investing in them.”
When explaining why this was his stance, Ross said, “It can work for the right person, but there are so many things that are important before you get there, like having an emergency savings, paying down debt, and setting your financial goals. If you haven’t done that, you shouldn’t be trading crypto.”
Taylor Greenberg, head of business development at Allnodes, doesn’t say to avoid day trading crypto completely, but only recommends doing it if you have a full understanding of the assets and their underlying technologies:
“Knowing what the blockchain does, its network size, governance, and protocols will allow you to assess the overall condition of your prospective investment.”
Greenberg continued that she thinks most people that do this will be profitable: “Crypto day trading is a risky activity. Invest what you can afford to lose. But when you approach day trading with the same respect as any serious job and learn everything about the craft and the assets you are trading, you’ll be profitable.”
Crypto Day Trading FAQ
Below are some frequently asked questions about day trading crypto that you might find useful.
Which Cryptocurrency is Best for Day Trading?
The highly volatile, highly changeable nature of crypto means that any general pronouncements of ‘best’ and ‘worst’ are likely to be outdated within a few months. However, a simple way to decide whether a given cryptocurrency is a good day trading candidate is to find out whether it has high liquidity (lots of fiat currency associated with it, often expressed as ‘market cap=-≥ ) and high trading volume (lots of people trading it). Generally, these numbers should both be in the region of several hundred million USD or more.
What Is the Tax Rate of Crypto Day Trading?
Governments around the world are scrambling to create regulatory frameworks for cryptocurrency. In the United States, the legal classification of cryptocurrency as securities, commodities, currency, or property remains somewhat ambiguous. However, the Internal Revenue Service (IRS) does already recognize gains in the value of cryptocurrency as taxable. Visit their website here or contact the agency directly for more information.
What Are the Downsides of Day Trading Crypto?
Many fortunes have been made in cryptocurrency, but it is important to always keep in mind that many, many more have been lost. The flip side of unprecedented price surges of several hundred percent is sudden drops. The very high volatility of crypto prices is a double-edged sword, and you need to keep this in mind. Making a loss is a matter of when not if. A good strategy will determine whether that loss is ruinous or merely unfortunate.
In addition to price risks, the cryptocurrency space also presents some unique security risks that are not present in traditional financial markets. Security breaches at centralized cryptocurrency exchanges are risks that you should understand.
Finally, trading fees can be quite high, especially for strategies that employ a very high frequency of transactions. It is important to understand the costs of actually using a trading platform before investing in it.
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- How Does Cryptocurrency Gain Value?
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Day trading can be a lucrative activity. However, it is essential to keep in mind it is also by far one of the most high-risk ways to interact with cryptocurrencies. Understanding the details of how to day trade crypto is very important if you want to see long-term gains.
The best way to manage this risk is to thoroughly understand the cryptocurrency market, then develop and stick to an appropriate strategy. With these precautions, you too can become a successful crypto day trader.
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