People have been trading financial markets for nearly as long as they have existed. Whether it’s the vast liquidity of the foreign exchange (forex), shares of companies like Coca-Cola, or government bonds, people have long used trading platforms to make money off of market volatility, price action, the subjective values of market participants, and many other things.
The crypto market is no different. Cryptocurrencies burst onto the scene with the emergence of Bitcoin (BTC) in 2008, and since then, the crypto market has grown at a staggering rate. Naturally, this has also meant that traders have worked out various crypto trading strategies aimed at profiting from these remarkable digital assets. Today, we’re going to talk about what these strategies look like.
(Disclaimer: Nothing in this article is intended as investment advice but merely to demonstrate various examples of trading strategies as a foil to explain trading concepts.)
The crypto space consists of fully digital currencies that are almost always associated with an underlying blockchain. The best-known examples are Bitcoin and Ethereum (ETH), but there are also a variety of altcoins that are of interest to those trading cryptocurrency.
Though it won’t be our focus, it’s worth saying just a little bit about blockchains. In most cases, blockchains are distributed public ledgers that track transactions in their associated digital asset. The Bitcoin blockchain, for example, is essentially a giant spreadsheet tabulating all the exchanges of Bitcoin that have ever occurred, going all the way back to the very first genesis block.
This is worth understanding for the same reason it’s worth understanding any company’s technology: It can inform your investment decisions.
We should also try to disambiguate the term “altcoins.” There’s no agreed-upon definition of what an altcoin is, but most people consider it either “any coin other than Bitcoin” or “any coin except Bitcoin and Ethereum.” This is because the majority of existing crypto projects are forks of Bitcoin or Ethereum, or are otherwise based on them.
What Are the Biggest Crypto Exchanges?
Before we get into the weeds of trading cryptocurrency, let’s talk about simply buying crypto assets in the first place. By far the easiest way of doing this is with cryptocurrency exchanges, which specialize in making it as straightforward as possible to buy and hold crypto.
There are many, many cryptocurrency exchanges, but the biggest include Binance, Coinbase, Kraken, and Huobi.
Picking a cryptocurrency exchange is not trivial and involves a number of factors. Not all exchanges offer services to people living in the United States, not all of them will allow you to trade the digital asset you’re interested in, and they vary in terms of how decentralized they are.
What Are the Main Crypto Trading Strategies?
As with most other kinds of assets, there are two basic cryptocurrency trading strategies. The first is to find a project that you believe has long-term potential, then buy and hold it. In the crypto space, this is generally referred to as HODL (or HODLing). HODL stands for “hold on for dear life.”
As cryptocurrency has become a more well-known asset class, people have devised various ways of HODLing. More and more people are using dollar-cost averaging, for example, which refers to simply purchasing a set amount of an asset over time. Dollar-cost averaging is a common way of investing long term in many assets, like exchange-traded funds (ETFs) or Bitcoin.
The second basic strategy is day-trading cryptocurrency, and we have a dedicated section below on the specific strategies investors use under the day-trading umbrella.
As you may have guessed, day trading refers to making short-term, intraday trades for a given stock or asset. Rather than HODLing an asset like a stock for the long-term, you’ll be buying and selling it very quickly, sometimes more than once per day.
Day trading often boils down to using technical indicators to predict price action (which is traderspeak for “price changes”) to try and make a profit. If your Fibonacci retracement analysis indicates that the price of Bitcoin is going to drop a few percentage points, for example, you can enter a quick short trade on it and make money when it does.
You may have heard the term swing trading, which is similar to day trading, except it usually involves slightly longer time periods of a few days or weeks.
What Are the Crypto Day-Trading Strategies?
It is very important for crypto traders looking to investigate bitcoin trading or trading of other kinds of crypto assets to have a working knowledge of technical analysis, a term that refers to a constellation of techniques for discovering the statistical properties of a crypto asset. Armed with this knowledge, it’s possible for day traders to use various kinds of technical indicators, trend lines, or chart patterns (ideally) to predict fluctuations in Bitcoin price and to make their trades accordingly.
There are many concepts in technical analysis, which vary from the fairly simple to the staggeringly complex. Let’s walk through a few examples and how they relate to forming crypto trading strategies.
On the simple side, there are moving average indicators. As their name implies, moving average indicators calculate some average for a crypto asset — usually its trading volume, returns, or price movements — over a particular window of time. Moving averages are usually calculated for 30 days or 200 days, though this isn’t a hard-and-fast rule.
You could trade an asset like Ethereum by looking at its 200-day moving average and then shorting it if its price dips below that figure.
Similarly, you can also chart trend lines, like support and resistance indicators, which give you an idea of how high or low an crypto asset’s price movements are likely to go. If you notice a divergence, such as a breakout, you can base stop-loss or similar kinds of orders around these lines, profiting if you get the direction right. When done over short periods of time, this forms part of range trading.
A somewhat more complex technical indicator is the relative strength index (RSI), which quantifies the strength and speed of a given crypto asset’s recent price movements. The RSI is sometimes used to evaluate whether a digital currency is underbought or overbought and, for this reason, can also be used to try and calculate when a pullback might be imminent.
You may notice, for example, that there’s been a flurry of activity driving up the price of Bitcoin because a famous crypto-entrepreneur has recently gone to jail and place a few stop orders on the hypothesis that it will return to a more sensible long-term price in the next few weeks.
You can also profit off of small price discrepancies, which is known as arbitrage. In the crypto space, there can be situations in which the price of ACME coin is, say, $41,000 on exchange A but $40,500 on exchange B. If you happen to stumble upon such a mismatch, you can buy ACME coin on exchange B and sell it on exchange A, pocketing the difference.
These days there’s enough trading volume that you’re less likely to find an arbitrage opportunity than you would’ve a decade ago, but arbitrage is a pretty basic financial concept, so it’s still worth understanding.
If waiting three hours for a trade to execute seems far too slow-paced, you might be interested in the world of high-frequency trading (HFT). HFT refers to the growing use of algorithms or trading bots to execute trades in a few seconds, or sometimes even faster than that.
Because high-frequency trading is so difficult to do well, it’s predominantly used by extremely sophisticated investors, such as those from proprietary trading firms or institutions.
Still, it has a growing presence in the crypto space and can be used to structure high-volume trades profiting off crypto price movements.
Risk Management Considerations
When trading, it’s always important to manage your risks, and that’s true in crypto just like it is in TradFi.
The simplest way to do this is to never use money that you can’t lose. Traders tend to get in the most trouble when they make bets they can’t realistically cover, and if you don’t fall victim to that tendency, your losses will likely be manageable.
Another problem with crypto trading strategies is known as “fear of missing out,” or “FOMO” for short. This refers to the habit of crypto traders becoming caught up in excitement around a new crypto asset (or a bunch of activity in an established one) and rushing in without carefully researching the asset. This is a good way to lose your shirt (or your house).
Beyond this, there’s a whole science to managing trading risk, which involves using various kinds of hedging strategies to cap your downside. If you’re bullish on Bitcoin but bearish on Zcash, for example, you can buy a call option on Bitcoin and a put option on Zcash. This means that if both assets decline in price, your losses on incorrectly forecasting Bitcoin will be offset by your gains on correctly forecasting Zcash.
Fuel Your Crypto Trading Strategies with Good Data
In this piece, we discussed the crypto asset class in broad terms, spent some time discussing technical indicators, and then turned to discussing crypto trading strategies directly.
One thing to remember about all of this, however, is that it’s really only as good as the data you use. For all the talk about the glories of artificial intelligence and machine learning, at root these technologies are just algorithms, and no amount of algorithmic power is going to overcome having bad financial data.
That’s where Tiingo comes in. We’re a premier provider of financial data, and we take pride in carefully gathering, cleaning, and validating all our data before it makes it to our end users.
If you want to execute a crypto trading strategy, you’ll need to have the best information possible, so sign up for a Tiingo account today!