- Crypto day trading is a short-term trading strategy based on the purchase and sale of crypto assets on the same day.
- Day trading crypto is a high-risk venture made possible by the distinct volatility and liquidity in the cryptocurrency markets.
- While day trading comes from the traditional markets, crypto day trading requires a deeper knowledge of crypto and blockchain technology in order to find consistent success.
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Day trading is an investing strategy that relies on frequent trades of one or more securities throughout the day to turn a profit. While traditional buy-and-hold investors are concerned with the long-term performance of a company, day traders seek to take advantage of more immediate profit-making opportunities.
Successful day traders rely on a number of resources and tools to be successful — such as stock screening or trading simulator software — to capitalize on short-term price movements of stocks, bonds, and other commodities and currencies.
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This process of trying to profit off of price discrepancies and movements within a short window of time can be very difficult, and the risk associated with day trading is high.
Recently, the crypto markets have become an increasingly popular destination for day traders. Unlike the traditional markets, the crypto markets never close. Day trading crypto doesn’t require a subscription to a brokerage or margin account, making the ability to indulge in short-term trades more accessible than the stock markets.
Although crypto is a new and exciting industry, it has its risks for those who are interested in investing in it. And with thousands of new cryptocurrencies emerging on exchanges and trading platforms, anyone who considers investing in a cryptocurrency should also take into account the volatility and speculative nature of the market.
No matter the market, a day trader should have a thorough understanding of crypto as well as trading principles. Only invest what you’re prepared to lose. If you have impeccable risk management skills and nerves of steel, here’s what you need to know to get started day trading crypto.
1. Choose a platform to trade
The first step a day trader has to take is deciding what platform to use. US-based traders can use only domestically regulated crypto-trading platforms, so this is a major factor to consider when researching the right platform.
Exchange liquidity , asset liquidity, and fees are at the top of a trader’s list when choosing the right platform for them to buy and sell crypto. The volatility of the crypto market means the value of digital assets can oscillate wildly. For traders looking to maximize profits in this market, they need to make moves fast.
The first choice isn’t always the best choice when figuring out where to conduct crypto trading. For budding crypto day traders, the options and differences between the many crypto exchanges can be overwhelming.
Here are the major things to consider when shopping around for the right trading platform:
- Years active: The longer an exchange has been in business can be a sign of stability and credibility.
- Supported cryptos: Knowing what cryptocurrencies are available to trade ahead of time can be a valuable tool when weighing which platform to use. Day traders interested in altcoins may find more use out of a smaller exchange with more supported cryptos and trading pairs than a bigger exchange with fewer options.
- Fees: Transaction fees are what exchanges charge when buyers or sellers execute a trade. All cryptocurrency exchanges charge users a transaction fee to monetize their business. The transaction fee structure can vary depending on the exchange’s strategy, like charging no fee for trades over $10,000 to incentivize large-scale trades.
- Deposit methods: similar to a brokerage, users need to finance their exchange account with capital. Many exchanges allow for bank transfers and wires, but fewer allow for credit card funding, PayPal transfers, and even gift card transfers.
- User reviews: Visiting different crypto communities and reading user feedback is one of the best ways to evaluate which exchange to choose.
- Liquidity: The liquidity of an exchange, or exchange liquidity, means both the speed and the ease of access an exchange has in converting one asset into another without affecting its price. The best crypto exchanges are highly liquid, meaning they can buy or sell assets almost immediately and with a minimum difference between the bid price and ask price.
Quick tip: For traders looking for a more detailed comparison of crypto exchanges, Cryptowisser and CoinMarketCap are trusted resources to compare different platforms according to liquidity, trading volume, and cryptos supported.
Exchange liquidity is influenced by a handful of internal factors. High trading volume for the listed crypto assets, the number of active traders on a specific exchange to fulfill orders, low fees that incentivize makers to open positions, and a variety of funding options that bring more traders to the platform.
Another thing prospective traders should keep in mind: They should weigh whether the exchange of their choice makes it affordable and easy (or even possible) to send their assets off-platform to another crypto wallet of their choice. If your day trading gets cut short, your exchange should make it easy to send account funds or assets to off-platform wallets.
2. Choose your investments
Once you’re set up on a platform, it’s time to pick what you’re interested in investing in. For crypto day traders, market volatility is a necessary evil. The same market condition that scares away buy-and-hold investors is the chaos that makes opportunities for day traders to make profit. Volatility and liquidity are two elements the day trader needs to actively participate in the crypto market.
Tally Greenberg, head of business development at Allnodes believes that success as a crypto day trader requires more than reading the charts. “Knowing what the blockchain does, its network size, governance, and protocols will allow you to assess the overall condition of your prospective investment,” Greenberg says. “So, be prepared to learn a lot and follow news on your selected assets’ blockchain updates.”
According to Greenberg, a technical understanding of the technology and team behind an altcoin project gives traders a competitive edge. When asked on how a day trader should decide which coin to trade, Greenberg emphasized careful deliberation. “One common crypto strategy is to invest in the top 15 to 20 coins by market cap . But even here, I would tread with caution,” Greenberg adds. “Not all coins on this list make perfect sense, and you’ll need to research thoroughly to figure it out for yourself. Crypto day trading is a risky activity. Invest [only] 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.”
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When choosing what to invest in, consider asset liquidity, volatility, and trading volume.
Asset liquidity is a measure of how easily an asset can be converted into cash without affecting its price. The price of a crypto asset can change when the trader executes the trade and the exchange fulfills the order. The difference between those prices is slippage, and in the crypto markets, a few minutes can mean the difference between a big profit or a big loss.
A lack of liquidity can be disastrous to the entire crypto market, causing slippage and increasing the risk of a flash crash. Flash crashes happen when a large market sell order clears out the top buy offers in the order book. Traders preemptively try to exit their position as soon as possible, and with no buy orders present, the price of the asset can nosedive. In the past, flash crashes have led to exchanges refunding millions of dollars in losses to affected users.
Understanding and accounting for volatility is a day trader’s best friend. The volatility of a market refers to the unpredictability of crypto price movements. Factors that affect the volatility of markets include the news cycle, economic data, and research reports. In the crypto markets, the same factors have a dramatic impact (or none at all) on certain crypto assets.
Volatility is highest in altcoins with small market caps compared to the more popular and well-known cryptocurrencies like bitcoin or ether.
Trading volume refers to the total number of cryptocurrencies traded over a defined period of time. A crypto’s trading volume is a measurement of overall market interest. A crypto with high trading volume tends to have higher liquidity. In this same vein, a crypto with high liquidity is often accompanied by a higher price. While the crypto market is highly liquid, highly volatile; not all cryptocurrencies are equal. Crypto day traders should look carefully at an asset’s trading volume to gauge whether it can be sold quickly and at a higher price level than purchased.
The crypto market is still in a nascent phase, and the uniqueness of the blockchain technology underpinning cryptocurrencies make for crypto-specific market issues. One example of this is the correlation between the price of bitcoin and every other altcoin. If there is an exodus of Bitcoin miners out of a specific country, for example, the price could tank due to miners dumping coins. When the price of bitcoin dips due to downward pressure, the altcoin market tends to fall with it.
Finding a crypto asset with high liquidity and volatility is a nice start to identifying the right crypto to day trade. Making the decision to enter should be not based on these two conditions alone, but other factors specific to the crypto in question. How is it mined or minted? Is there a lot of buzz on the coin? When should you cut your losses if the coin’s price doesn’t rise by a certain time?
3. Choose a trading strategy
There are many techniques day traders use to make gains on short-term fluctuations in the crypto markets. A crypto day trader should devise a winning strategy backed by research, with well-laid plans for when to enter and exit their positions.
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For prospective day traders, certain websites allow users to track and copy the most successful traders on the platform. Below are some of the most popular trading strategies in the crypto day trading game.
Arbitrage in crypto is when traders buy a cryptocurrency on one exchange and make a profit by selling it immediately on another exchange at a higher price.
Cryptocurrency pairs can facilitate arbitrage opportunities. When the price of a crypto pair consisting of a lesser-known altcoin and Bitcoin varies from one exchange to another, arbitrageurs can make a profit by taking advantage of the value difference. While arbitrage is a complicated financial mechanism usually automated by price-monitoring software, it keeps the digital asset prices stable between different exchanges.
Note: Crypto trading pairs are assets that can be directly traded with one another on an exchange. When the price of a crypto pair consisting of a lesser-known altcoin and Bitcoin varies from one exchange to another, arbitrageurs can make a profit by taking advantage of the value difference. While arbitrage is a complicated financial mechanism usually automated by price-monitoring software, it keeps the digital asset prices stable between different exchanges.
A trading bot is an automated software tool investors use to buy and sell financial instruments at a preconfigured time or when predefined conditions are met to maximize profits. Crypto trading bots are designed to increase profits and reduce losses and risk.
Crypto trading bots can streamline the process of looking at price movements, exchange fees, and opportunities to make short-term profits on trades. For decades, bot trading software has been a staple of brokerages trading on stock exchanges. Traders with an understanding of software programming and APIs should definitely consider using this to their advantage as a day trader.
The long straddle — also known as the buy straddle, option straddle, or just straddle — involves the purchase of both a put and call order. The call and put orders in a long straddle are on the same cryptocurrency, striking price, and expiration date.
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The long straddle is a popular option in crypto trading because of the crypto market’s volatility. A crypto day trader using this strategy is betting on the change of a crypto asset’s price. The day trader earns regardless if the price rises or falls in the long straddle. If the price doesn’t move, the trader will incur a loss.
Note: A strike price is the set price at which a derivative contract can be bought or sold when it’s exercised.
Range trading capitalizes on sideways markets (or non-trending markets) by pinpointing stable high and low prices, represented on charts as resistance and support levels. Day traders using range trading techniques identify a period of time to buy a crypto asset when it is oversold (at a low price) and sell when it is overbought (at a higher price) to make profits.
Crypto day traders can use online screeners to identify the right crypto asset to range trade. Range trading, like the majority of other trading strategies, can work beyond the crypto space and is flexible for other markets. Crypto day traders favor range trading for its clearly defined entry and exit points, which can minimize losses. By making small profits over a short period of time, the range trader minimizes losses incurred by unfavorable news cycles or market conditions.
Recognized as the trading strategy with the fastest turnaround, scalpers leverage large amounts of liquidity to seize on small price movements. This investing strategy can involve buying and selling bitcoin or altcoins over the course of a few hours and cashing out on small percentage gains by the day’s end — or setting up a bot for high-intensity and frequent trades according to signals or technical indicators.
Day traders favor scalping crypto because of its ease of automation for bots, low risk, and potential profitability. Programming trading bots can take the anxiety and stress out of trading. Since the positions are smaller with scalping, traders can evaluate the gains or losses at the end of a day instead of long-term investing. Because of the volatility of the markets, traders can reliably earn small profits over time that can amount to considerable gains in the long run.
Technical analysis (TA) is the study of financial data like historical price and volume data points to identify statistical trends in the markets. TA provides traders with a science to find opportunities to trade and earn profits.
Technical analysts can apply their strategy to any market or security as long as it has historical trading data. In crypto, TA can be used as a guideline to evaluate how past performance can indicate future gains or losses.
The applicability of TA in the crypto markets is a hot topic of debate between traders. Many believe the absence of global regulations and the number of exchanges in crypto make it incompatible with technical analysis. Other traders believe some indicators like the relative strength index (RSI) are worth using. The RSI indicator evaluates the relationship between the price of a crypto and the actual demand for the asset. The RSI identifies whether an asset or security is overbought or oversold, it can be of use to traders plotting entry and exit points based on momentum.
Another important oscillator that technical analysts use in crypto is the Money Flow Index (MFI). The MFI can be used in addition with the RSI to check whether the price of BTC is trending towards a bullish or bearish divergence.
The application of technical analysis in crypto is best used in conjunction with other strategies. Crypto day traders should be aware of TA and have it in their repertoire, but take it into consideration along with the news, fundamental analysis, correlation arbitrage, and other market drivers. The best aspect of technical analysis is the emphasis on determining a complete strategy for when to enter and exit positions.
Pros and cons of day trading cryptocurrency
Any investment in crypto is high risk, high reward. Crypto is a new class of digital assets, and investors should always consider the possibility that their crypto investments are capable of evaporating.
Traders should set time aside to familiarize themselves with the upcoming rules and regulations taxing profits earned from crypto. Crypto is not exempt from short-term capital gains tax, for example. For day traders, the sale of any crypto held for less than a year is taxed as marginal income. Make sure to include your crypto gains when reporting earnings online or with your accounting professional.
- Anyone with access to a crypto exchange can freely trade it. Outside of verifying your identity and funding your exchange account, there are no additional barriers to entry for retail investors or day traders to access, research, and interact with the crypto markets. And for those who want to own bitcoin but cannot make a $60k+ investment can buy and sell a fraction of any crypto.
- The crypto markets are open 24/7 all year around. Traders have the ability to buy and sell without limits as the crypto markets do not close. For the New York Stock Exchange or the Nasdaq, market hours are open to trade from 9:30 a.m. to 4 p.m. ET. An advantage of 24/7 market access is the luxury of being able to trade when it suits you (rather than suiting the market).
- Cryptocurrencies and the blockchain technology that powers them are decentralized and designed to keep users anonymous and capable of processing payments without an intermediary. For day traders on a centralized exchange, the absence of government taxes and fees make the cost of transacting crypto very cheap.
- Because it’s so easy to start trading crypto, a new and inexperienced trader can just as easily incur catastrophic losses as they can gain profits
- The 24/7 market is a double-edged sword. The always-open nature of cryptocurrency means there are fewer patterns in the day where predictable (and profitable) trades are being made. Crypto day traders may find themselves glued to the charts looking for the right time to execute a trade longer than they would have to in the traditional markets. This can make trends much harder to find, and a quick day trading session can turn to night trading sessions.
- While US government watchdogs like FinCEN are steadily ramping up the know-your-client and anti-money laundering requirements for domestic crypto exchanges, the space remains mostly unregulated. The lack of government oversight means no protection for exchanges, institutions, and traders who are hacked or scammed. This means without a private insurance fund, if an exchange shuts down users are unlikely to retrieve their funds.
- When trading cryptocurrencies, you could fall victim to pump-and-dump schemes or wash-sales. This occurs when a group of people coordinate to artificially pump up the price of a specific cryptocurrency to attract unsuspecting traders. The traders then dump the crypto after earning profits, tanking the price.
The financial takeaway
Crypto day trading is a high-risk strategy involving the frequent purchase and sale of cryptos in the pursuit of short-term profit. Anyone who’s interested in day trading crypto should know where they plan on trading, have a detailed day trading strategy, and stick to their entry and exit points.
It’s also important to remember that the large majority of day traders lose profits. Setting time aside to focus solely on your trades, measuring profits and losses, and sticking to a fully-fledged strategy are the key factors that separate crypto day trading from gambling. There are a ton of opportunities to profit in crypto, and day trading is only one avenue to earn profits.
“I’d suggest starting off with what is called paper trading,” says Shaun Heng, VP of operations at CoinMarketCap. “After all, there is a learning curve to crypto trading. Paper trading is offered by most exchanges and is essentially training wheels, or ‘trading wheels’ if you will. You trade as if you were trading with real money, but without depositing any money. This allows you to try your hand and practice without using money to trade that you could lose. This means that you won’t lose or earn money but it will also help you consider the potential risks and rewards.”