It is safe to say that cryptocurrencies are the first 100% digital financial assets chosen by asset managers to be part of investment portfolios. Even though they appear similar to traditional assets they have certain unique characteristics. There are three key pointers that define cryptocurrency trading, namely the operating mode, the object, and the trading strategy.
Trading strategies that are formulated by investors are essentially algorithms that outline rules and regulations regarding the sale and purchase of digital assets in a cryptocurrency marketplace.
Let’s dive into different strategies
Without an effective trading strategy, crypto trading can lead to great losses. A good strategy is your friend when it comes to earning profit through crypto trading. It helps you mitigate losses and also prevents hasty decisions.
Similar to trading stocks, day trading also known as intraday trading entails the opening and closing of a trade position within a day. Typically, traders enter a market position and close it before the market closes. If you’re day trading Bitcoin, you essentially try to cash on its volatility. This could end up being very rewarding as small movements in crypto trading can bring great results. However, using this strategy would require you to spend a lot of time in the market and understand the nuances of technical analysis. Thus, this strategy should be reserved for seasoned players.
HODLing in crypto trading is the equivalent of the time-tested strategy of buying and holding on to the assets until they seem profitable. A misspelling of ‘hold’ as a result of the intoxicated ramblings of an investor online, HODL stands for “Hold On for Dear Life”. Through this strategy, an investor can earn more profit over a certain investment if they take a long position for it. This is also a good risk-protected strategy where short-term volatility would have little impact on the investment. Do note that crypto trading may not be encouraged in all countries as the chances of fraudulent activities are much higher with crypto.
Crypto futures trading
In a crypto futures trading strategy, two different parties enter into a contract to exchange a certain amount of the cryptocurrency such as BTC. The date and the rate of this exchange is usually set sometime in the future. The advantage of this type of trading is that you can bet on many different cryptocurrencies without actually buying any.
Arbitrage trading involves buying cryptocurrency from one market/exchange and selling it in another that offers better prices. Here, a trader earns a profit by making the most of the price difference in the two markets. Arbitrage opportunities can be plenty especially when the trade volume is high. Do bear in mind that even with arbitrage trading, traders will have to incur costs such as trading fees along with deposit and withdrawal charges. This may impact the final profit. Making a profit in arbitrage trading is all about the timing. To be successful, you should be able to capitalize on the price difference you get via different crypto exchanges.
High-frequency trading or HFT is all about entering and exiting the market quickly as well as frequently. It is done by creating high-end algorithms and trading bots that operate with a kind of speed that is beyond human capacity. Often, these bots are structured in a manner that they’re able to process and respond to complex market principles. They’re also capable of solving sophisticated mathematical problems in a short span of time. To be able to utilize the bots to their full potential, it is important to have a thorough knowledge of the market and its functions. Thus, this is a tool that is best suited to seasoned players. Arbitrage, market-making, liquidity detection, and momentum trading are some examples of HFT strategies.
Dollar-cost averaging (DCA)
The dollar-cost averaging or the DCA strategy requires recurrent but small investments over a period of time. A certain amount of money is set aside to be invested consistently over several intervals. The key advantage of this process is that traders can boost their profit without actually putting a lot of their holdings at stake by exposing them to market risk.
The trick here is to keep investing the capital you’ve set aside until you reach your goal without getting affected by the market’s moods. You would discover that using the DCA strategy, you’re purchasing crypto assets when the market is high or low. Over time, your investments are smoothened irrespective of how the market performed since you take a more consistent approach. It is helpful to take into consideration the fact that DCA is a long-term strategy and hence, the fees you pay for your crypto assets are much more.
Scalp traders deal with a large volume of trades to be able to earn profit. Basically, the trick is to take advantage of the market’s inefficiencies by carefully studying market patterns and assessing the past performance of the asset and the market. Following this, scalpers decide whether to enter or exit the market during the day. Scalping is generally a trading strategy that whales or large traders use to earn profit for big positions. Also, this strategy tends to bring better results in highly volatile markets.
Range trading refers to speculating the broad range of price movements and the range to trade crypto in the short term. Let’s say for instance BTC presently trades at $35000, and you speculate that the price will rise to $40000 within a few weeks. Hence, the expected trade range would be between $35000 and $40000.
A cryptocurrency index fund usually has a large portfolio of different cryptocurrencies which is obtained from a pool of investors’ funds. Buying exchange-traded funds (ETFs) like Bitcoin Futures or spot ETFs minimizes the risk associated with investing in single crypto coins.
Swing trading is an experienced player’s strategy that involves using fundamental and technical trading indicators. Traders dabble with the market’s volatile nature for some time such as a week or perhaps a month before taking any action. It is a matter of quick decision making and execution which can be fairly time-consuming as it involves trading actively.