At the end of October 2024, the global cryptocurrency market cap stood at north of $2.5 trillion, with 24h trading volumes in the neighborhood of $130 billion. These numbers are not easy to digest, but they illustrate the gigantic money-making potential thriving in the crypto market – and inspire many to join the party.
Tapping into crypto opportunities might be risky, though, if you come unprepared. Doing your research and applying due diligence is a must. Obviously, good advice and online guides won’t substitute practical knowledge. Still, they help you avoid serious pitfalls and get you on the right track with your initial investment before you become a whale with a diversified investment portfolio.
To get you enlightened, let’s dig into the crypto trading fundamentals and then explore common strategies for trading cryptocurrencies with their advantages and downsides.
What is crypto trading?
Crypto trading refers to the practice of buying and selling various crypto-related digital assets, typically cryptocurrencies, with the aim of making a profit from price fluctuations. The crypto market operates 24/7 and is known for its volatility. This dynamic provides tons of opportunities to earn handsome amounts but also exposes you to the industry’s inherent risks. Price movements, leveraged by crypto investors, are influenced by supply and demand, market sentiment, and external factors, including changing regulations and whimsical financial institutions – all stressful to deal with.
Traders can buy and sell crypto assets on exchanges taking advantage of various crypto trading strategies. They can use either centralized exchanges (CEX), which act as an intermediary, or decentralized ones (DEX), which allow users to trade directly with one another. CEX platforms, such as Binance, Coinbase, and Kraken, use custodial crypto wallets (managed by the CEX) and apply KYC procedures. On the other hand, DEX exchanges, such as Uniswap, SushiSwap, and PancakeSwap, protect user privacy and allow them to use non-custodial (self-controlled) wallets, such as MetaMask or TrustWallet.
A (very) brief history of cryptocurrency trading
Historically, crypto trading dates back to the launch of Bitcoin in 2009 and the first recognized Bitcoin transaction, which occurred on January 12, 2009, between “Satoshi Nakamoto” and Hal Finney. The transfer marked the start of a new digital currency era. However, the cryptocurrency trading as an established way of making money took off for good with the launch of the first cryptocurrency exchange, BitcoinMarket, which commenced operations on March 17, 2010.
Founded by an early Bitcoin adopter Dustin Dollar, it allowed users to buy and sell Bitcoin using US dollars via PayPal. This platform marked a significant development in the crypto landscape, enabling more structured trading activities. Before BitcoinMarket, there were simpler online services for exchanging Bitcoin, such as NewLibertyStandard, which started in October 2009, and, interestingly, priced Bitcoin based on the amount of electricity required to mine it.
Following BitcoinMarket, other exchanges emerged, with Mt. Gox becoming one of the most notable platforms after its launch in July 2010. Initially intended as a trading card exchange, it transitioned to a Bitcoin exchange and eventually handled a large chunk of global BTC transactions before it was hacked in 2014, which brought about its collapse. The space left by Mt. Gox was soon filled by many new players contributing to the ongoing evolution of the crypto trading ecosystem.
Essential assets in crypto trading
Since its inception, the crypto ecosystem has evolved to include numerous crypto assets apart from Bitcoin. An abundance of cryptocurrencies popped up and faded out over the years. The most notable that have survived and continue to prosper include Ethereum, Solana, Tether, XRP, Litecoin, Dogecoin, and many more. The number of existing and historical cryptocurrencies and tokens has already exceeded 15 thousand. This ecosystem expands pretty fast since it’s fairly easy to create new tokens based on available blockchains. On the other hand, it’s virtually impossible to follow all developments in the crypto space. For the sake of simplicity, let’s break down crypto assets into a few essential categories, so you can find it easier to navigate the landscape.
Cryptocurrencies
Cryptocurrency is the general word frequently used to cover all crypto assets. In a stricter sense, the term refers to those digital currencies that operate on their own blockchain networks, such as Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). All cryptocurrencies can be used for transactions, investments, storing value, and, obviously, trading.
Stablecoins
Stablecoins are a subset of cryptocurrencies designed to maintain a stable value by pegging them to traditional assets like fiat currencies or commodities. The main purpose of creating stablecoins is to reduce volatility, which is inherent in unpegged coins like the ones mentioned above. Examples of stablecoins include Tether (USDT) and USD Coin (USDC). In crypto trading, stablecoins are used for hedging against the volatility of other cryptocurrencies, providing liquidity to the market, lending, borrowing, yield farming, and other purposes.
Tokens
Unlike “pure” cryptocurrencies, tokens are built on top of existing blockchains and do not have their own independent blockchain. They often represent various assets or utilities within a specific platform. Typical use cases include:
– utility tokens that provide access to specific products or services within a blockchain ecosystem,
– security tokens that represent ownership of an asset and are typically issued during token sales,
– governance tokens that grant holders the ability to participate in decision-making in a decentralized protocol or organization – and the list goes on.
Crypto asset categories extend beyond the above-described ones and include non-fungible tokens (NFTs), typically associated with ownership rights and digital collectibles, crypto-related funds with investment vehicles like ETFs (exchange-traded funds), gaming tokens dedicated for specific gaming ecosystems, and the infamous Central Bank Digital Currencies (CBDCs) intended to facilitate surveillance and state control over citizens’ financial activity. However, these latter concepts have lesser relevance for trading activities. Now, let’s move on to the core topic and focus on top trading strategies in the crypto market.
Top crypto trading strategies
Engaging in trading cryptocurrency without a clear vision of success may not be worth the effort. To turn a profit from your crypto holdings, you need a proven strategy that will work for you in the long run and deliver lucrative outcomes. Here’s an overview of common trading strategies that will help you make informed decisions and navigate the volatile crypto market.
1. HODLing
HODLing – or hodling, for simplicity – is the ground zero of crypto trading and the most straightforward way to earn passive income from crypto investments. Introduced as a typo and made into an acronym for “Hold On for Dear Life,” hodling denotes the most conservative yet potentially highly effective strategy, where traders buy a cryptocurrency and simply hold onto it, no matter how wild the market swings. Hodling is the ultimate game of faith in the long-term potential of your chosen assets and moon-high price appreciation. Hint: since it’s good not to put all your eggs in one basket, consider portfolio diversification (if it aligns with your investment objectives).
Here you can check why early-bird Bitcoin hodlers are among the luckiest cryptocurrency investors.
Benefits of HODLing
Hodling’s benefits include:
– less stress: you can avoid the daily anxiety of price watching and focus on more important things, like what to invest in next,
– lower costs: frequent trading can lead to hefty fees, while hodling leaves you with more money that you can use for impulse buys or other stuff,
– long-term gains: many cryptocurrencies have historically appreciated significantly, so you might feel like you’re on a rollercoaster now, but patience could lead to a thrilling ride later.
Downsides of HODLing
Of course, hodling has its challenges. The crypto market is volatile, and it takes discipline to stick to your strategy when prices dip. Selling in panic often leads to regrets and severe disappointment. Hodling also limits your ability to adapt to changing market situation and dynamically pursue new opportunities if you keep your funds locked in a particular asset(s). Last but not least, you never really know when it’s the best time to cash out.
2. Day trading
Compared to hodling, intraday trading is like a series of sprints versus a marathon. It focuses on short-term gains through quick trades within a single day, rather than long-term investment. Day trading basically means buying and selling cryptocurrencies within the same day to capitalize on price changes. It requires quick decisions and constantly monitoring the market to identify risks and opportunities, which arrive in a matter of minutes or hours. Intraday trading is for those with a good grasp of technical analysis and a penchant for thrills.
Here you can see the daily dynamics of Cardano.
Benefits of day trading
Day traders’ benefits include:
– quick and frequent profits: intraday trading allows you to make money fast due to rapidly rising prices and market fluctuations,
– flexibility: unlike in hodling, you
can quickly adjust to changing market situation,
– no overnight risk: by closing positions by the end of the day, you avoid risky exposure to overnight market events.
Downsides of day trading
Day trading can be very lucrative but it comes with serious downsides and risks, including:
– high risk of loss: quick decision-making in a volatile environment makes it easier to lose money,
– time–consuming: think of it as a full-time job plus overtime,
– complexity: you really have to dig into it to start earning,
– stress: it can eat away at your brain if you don’t have nerves of steel,
– tax implications: good luck with keeping meticulous records of all your trades for tax purposes.
3. Swing trading
Swing trading combines the leisurely pace of hodling with the thrills of making quick trades, striking a perfect balance between both approaches. It involves holding assets for several days or weeks, with the aim of profiting from market “swings” or short-term price movements. It’s less intense than a daily trader’s adrenaline rush and more active than hodling.
Check out how ETH prices swing within one month.
Benefits of swing trading
The medium-term approach of swing trading comes with the following upsides:
– flexibility: it doesn’t require constant monitoring like day trading, making it easier to manage, and gives you more space for movements than hodling,
– high profit potential: by capitalizing on intermediate-term trends, you can often catch significant price moves,
– less stress: with trades lasting days or weeks, it gives you much less headache and cortisol than day trading,
– time management: you can balance it with other commitments since it doesn’t demand daily attention,
– lower transaction costs: fewer trades mean lower fees compared to day trading.
Downsides of swing trading
Swing trading’s key downsides aren’t unique to this strategy. Like other forms of trading, the medium-term approach involves volatility-related and systemic (changing regulatory environment, etc.) risks. However, unlike both hodlers and day traders, swing traders are exposed to after-hour changes (they don’t concern long-term hodlers as much), due to late-time news that they cannot react to in real time. With limited monitoring, such events can lead to significant losses in case of negative developments. What’s more, unlike a hodler, a swing trader needs to have a solid understanding of technical analysis to identify potential entry and exit points. This learning curve can be steep for beginners.
4. Dollar-cost averaging (DCA)
The dollar-cost averaging strategy involves regularly buying a fixed amount of a specific asset, regardless of its price. This approach nudges you to make consistent purchases over time, which helps smooth out the effects of market volatility. It’s almost like having a subscription to your favorite crypto – you buy a bit every month, rain or shine. You can also think of it as putting some money aside for pension. When your crypto goes to the moon you can cash out and spend the rest of your life in the Bahamas.
Benefits of dollar-cost averaging
The DCA strategy stands out for its stable pace and consistency, here are its main advantages:
– minimized timing risks: with a quasi-subscription approach, you don’t think about market downturns – they all even out in the long run,
– lower stress level: like swing trading, dollar-cost averaging helps you limit the stress of trying to time the market,
– little-to-no emotional factor: assuming you’re strong on consistency, the DCA helps you avoid emotional decision-making,
– simplicity: not much technical analysis involved,
– support for long-term investment goals: simple as it sounds.
Downsides of dollar-cost averaging
The DCA also has some limitations, which include:
– potentially lower returns: DCA may result in lower overall returns compared to lump-sum investing, especially in a rising market, or day trading,
– opportunity cost: by holding cash while waiting to invest, you may miss out on potential returns from other investments,
– discipline required: DCA requires commitment and consistency – not all can handle that,
– not ideal for all markets: in strongly bullish markets, lump-sum investing may outperform DCA significantly since prices are generally rising.
5. Trend Following
Trend following is a pretty intuitive approach – at least on the surface level – involving analyzing market trends with the goal of capitalizing on them. Trend followers keep track of market developments rather than focusing on time spans. Relying on technical analysis tools, chart patterns, and technical indicators, such as moving averages or RSI, they identify the best time to buy (an upward trend or a bull market) and the best time to sell (a downward trend or a bear market). In other words, if the price of a cryptocurrency is rising, you ride the wave of the bull markets, if it’s falling, you short to avoid getting swept away.
Benefits of trend following
Trend following is the crypto game at its best and may work wonders for focused and seasoned crypto investors. Its key benefits include:
– clarity: trend following is pretty straightforward, focusing on identifying market trends based on clear signals,
– potential for high returns: by riding the momentum of strong trends, you can capture big price movements,
– risk management: trend following typically incorporates risk management techniques, such as stop-loss orders, which help protect against significant losses,
– long-term perspective: trend followers often maintain a longer-term view, benefiting from sustained market movements instead than getting caught up in daily volatility,
– adaptability: you can apply trend following across various cryptocurrencies and market conditions, making it a versatile investment strategy.
Downsides of trend following
As any trading strategy, trend following isn’t free from flaws, which include:
– risk of false signals: a false breakout or trend reversal can lead traders to enter or exit positions at an inopportune time,
– market noise: short-term fluctuations can be misleading, creating confusion,
– dependence on technical indicators: trend following often relies heavily on technical analysis tools, which may not always accurately predict future price movements,
– strong discipline necessary: sticking to the strategy can be tough during volatile periods.
To effectively follow trends, you should be proficient in reading charts like this:
6. Range trading
Range trading, aka channel trading, is akin to playing ping-pong with prices. It capitalizes on price movements within a defined horizontal channel (aka trading range), i.e., a situation where an asset’s price oscillates between parallel lines of resistance (upper) and support (lower). Range traders identify a price range where a given crypto oscillates, buying near the support level and selling near the resistance level. This method works best in stable markets with no clear upward or downward trends, allowing traders to profit from predictable price behavior.
Benefits of range trading
Channel trading is a solid strategy with the following benefits:
– predictability: it relies on well-defined support and resistance levels,
– lower risk: buying low and selling high within a range can minimize risk,
– no need for fundamental analysis: it’s based on technical analysis with little need to dig into fundamental factors,
– consistent profit: repeated patterns provide regular trading opportunities,
– simple for beginners: easy to understand and execute, even for beginners,
– adaptability: range trading can be applied across various time frames and market conditions.
Downsides of range trading
While a popular strategy, channel trading has several downsides:
– false breakouts: entering positions based on misleading signals, where the price temporarily breaks through support or resistance levels but quickly returns to the established range, can result in losses,
– limited profit potential: profits are confined to the distance between support and resistance levels, so traders may miss out on larger gains,
– market shifts: range-bound conditions can change abruptly, leading to an unexpected price movement that can catch traders off guard,
– inaccurate range identification: misidentifying support and resistance levels can lead to poor trading decisions, increasing the risk of losses.
7. Scalping
This one is even more challenging than intraday trading – and recommended for experienced traders only. Scalping is a high-intensity approach involving high-frequency trades held for seconds to minutes. Scalp traders target small profits of 1% to 2% per trade, relying on technical analysis and real-time data rather than reacting to a bull market. In comparison, day trading allows for longer holding periods (minutes to hours) with larger profit targets of 5% to 20%, and includes both technical and fundamental analysis. Being an effective scalper requires intense focus and quick decision-making.
Benefits of scalping
Demanding as it is, scalping offers significant advantages, including the following ones:
– quick profits: by taking advantage of small price movements, traders can accumulate gains rapidly,
– high trade volume: frequent trades mean more opportunities to profit throughout the day,
– less exposure to risk: holding positions for only a short time reduces the impact of market volatility,
– consistent income: scalping done right can generate steady, incremental profits
Downsides of scalping
Crypto traders may want to avoid scalping for the following reasons:
– high stress: being constantly on the lookout and having to make quick decisions can be exhausting,
– transaction costs: frequent trades lead to higher fees, which can eat into profits,
– time-consuming:
scalping keeps you glued to the screen,
– risk of small gains: small profits per trade mean one bad trade can offset many good ones,
– advanced skills required: scalping is for advanced traders only, period.
The list of trading strategies and method doesn’t end here. It encompasses a number of other approaches from copy trading to arbitrage, algorithmic high-frequency trading, futures trading, momentum trading, margin trading, short selling, options trading, DeFi trading, CFD trading, flipping NFTs, and many more.
As you do your own research, explore crypto investments more thoroughly, and gain a solid foundation as a trader, you’ll discover new opportunities for generating profit. Perhaps, at some point you’ll be able to create a strategy of your own for others to follow?
This article was originally Posted on Coinpaper.com
