Day Trading Cryptocurrency Strategy Guide

Day trading cryptocurrency opens the potential for those who understand how the market works. The crypto world is a new industry and represents a great addition to traditional day trading of stocks, options and futures. The cryptocurrency market is volatile and full of high momentum. Taking the proper steps unfolds a new world of day trading opportunities.

What Is Day Trading?

Day trading is the process of speculative buying and selling of assets during one trading day. Various financial instruments can be bought and sold within hours, minutes, seconds or even fractions of a second. The ideal trade is profitable during this short time span. Automated algorithms take things a step further and can place hundreds of trades throughout a day.

Cryptocurrency Trading

The traditional markets for day trading are stocks, forex and futures markets since those markets are highly liquid, have plenty of assets, and price swings can be used to make short-term profits. In the last decade, cryptocurrencies grew significantly, with hundreds of cryptos listed these days. The liquidity is high, and more and more companies start investing in cryptocurrency, leading to even more popularity, momentum, and volatility. Cryptocurrencies can be traded using an online brokerage account or the traditional way by storing it on a hardware or software crypto wallet.

Bitcoin

You can argue in whatever way you want, but in the end, Bitcoin is still the industry standard and is the cryptocurrency that led to the popularity of crypto trading we are in right now. The decentralized digital currency is designed to supply a maximum of 21 million that can be mined. Once every Bitcoin is mined, the entire market exposure is reached. It is like having a fixed number of shares tradable for classic security. Every day, billions of dollars are traded, which is not surprising, with one Bitcoin being worth more than $60,000.

Alt Coins

Alternative coins, the so-called Altcoins, represent everything different from Bitcoin. The most popular alt con is Etherum, a programmable open-source blockchain with its own programming language called Solidity, which has the second-highest market capitalization. Etherum was created by Vitalik Buterin in 2013 and is currently available for about $2,000. Chainlink, Uniswap, and Stellar Lumens are some of the less known but popular altcoins.

Stablecoins

Stable coins are the connection between fiat currencies and cryptocurrencies. Tether, listed with the symbol USDT, is the largest stable coin, and its price is pegged to the US Dollar. No matter where the fiat currency USD goes, USDT has the same value. But there is also another stable con called True USD (TUSD) which also mirrors the US Dollar 1:1, similar to Paxos Standard (PAX), USD Coin (USDC) and Binance USD (BUSD). Those stable coins are often used for trading cryptocurrencies with lower fees on cryptocurrency exchanges.

Market Structure

Crypto Exchanges

Cryptocurrency trading is a bit different from trading stocks. Normally, a trader opens a cryptocurrency brokerage account and places orders on stock exchanges like NASDAQ or NYSE or trades futures contracts on the Chicago Merchantile Exchange. So typically, the trader uses a broker as the middle-man to buy and sell securities. The crypto market is more fragmented, and dozens of exchanges exist worldwide in different jurisdictions and regulative authority regions. This makes it even more important to choose the best crypto exchange before investing in cryptocurrencies or day trading cryptos. Often, a crypto exchange is also the broker, and the middle-man is not there. One platform ensures liquidity, trade execution, order matching, order rouging, user management, support and everything from one side. While the price of a cryptocurrency would basically everywhere the same, in fact, it is not. Each exchange can determine the price based on client orders and fee structure, and liquidity. At the beginning of cryptocurrencies, such price discrepancies have been used by traders to buy crypto cheap at one exchange and sell it for a higher price on another exchange for arbitrage profits. These days, this tactic does not efficiently work since crypto bots and the natural supply and demand determine the price relatively equal to any exchange. However, it is still important to ensure to use liquid exchanges with low fees to keep profits as high as possible.

Market Access

Crypto exchanges are open 24 hours a day and 7 days a week. There is no limit like regular market hours for US stocks from 8:30 AM EST to 4:00 PM EST. Cryptocurrencies can be traded all time long at any time, everywhere in the world. However, everywhere is not exact. Some countries prohibit market access to cryptocurrencies. Therefore it is important to check if your jurisdiction allows trading cryptos before start day trading cryptocurrencies.

Stable coins vs. Fiat currencies

Higher regulated crypto brokers and exchanges invest in Anti Money Laundering and Know Your Customer processes. Higher regulation often leads to more freedom in terms of using fiat currencies as a baseline to trade cryptos. Investors who want to stay anonymous may prefer less-regulated exchanges that allow investing and trading of cryptocurrencies without identification processes. The less-regulated a venue is, the higher the risk for the money invested but the higher the anonymity level.

Crypto Trading Accounts

Nearly all crypto exchanges and brokerages support funding via traditional wire transfers and electronic bank-to-bank money transfers by using the ACH method. Additional funding via credit card and PayPal are often supported, but not that frequently. That's mainly caused by transaction fees related to the funding methods. If you already own cryptos, you may consider connecting your crypto wallet to your new exchange or account. It is important to read the fine print of your favorite exchange to ensure transparency of any fees related to the funding process before taking action.

Trading on Margin

Day traders often use the leverage effect to participate in price movements over proportionally. The broker makes this possible by permitting day trading on margin. When day trading stocks, a buying power of 4:1 is typical. With $1,000 in an account, a position worth $4,000 can be traded intraday. Day trading forex often comes with leverages up to 200:1. Coinbase temporarily offered margin trading, but for regulatory purposes, they stopped offering it on November 25, 2020.

Short Selling

Short-sellers aim to sell a security for a high price and to buy it back later once the price declined for a lower price to make a profit. The list of shortable stocks on NASDAQ and NYSE often includes up to 4,000 easy-to-borrow stocks. With cryptos, this is entirely different since there is no direct way to participate in declining prices. There is a 3x short Bitcoin token called BEAR being traded at 0.000907 right now. This token was above $90 on March 13, 2020, but now it is nearly worthless. Coinbase does not support this token, but other exchanges may allow trading it.

Security Standards

How secure is it to trade cryptocurrencies? The security of cryptos is the most significant potential issue caused by mainly two main security problems. First of all, most cryptocurrency exchanges are not regulated at all. They are in jurisdictions where no regulation takes place or where authorities do not require any regulation. As expressed in the guide best way to store cryptocurrency, storing cryptos in hot wallets of such exchanges is a high risk since various things can happen. The exchange can disappear overnight, employees may do things you do not want them to do with your cryptos, or you may lose access to your account and all your money is gone. Therefore it is important to focus on regulated exchanges with high security standards, even if their fee structure is a bit more of a disadvantage.

The second potential problem is access to your wallet. No matter if you store your money in a software wallet, on a hardware token or within a crypto exchange, it often happens that people lose passwords or simply forget them. Some media reports talked about up to 20% of Bitcoin owners who lost access one way or the other. Keep that in mind and store your coins securely and make sure that you keep access.

Cryptocurrency Trading

Market Data Vendors

Each cryptocurrency has its own prices for every cryptocurrency. There is no global market dealer. The prices vary from exchange to exchange, but supply and demand on those exchanges ensure that the prices are similar even if they are not precisely the same. It is kind of having various ECNs and market makes similar to the stock exchanges. The higher the trading volume goes, the higher the chances that the price differences decline.

Order Book

The order book is the central element of every trading platform. Here you exactly see the orders of all buyers and sellers that offer their coins for a particular price. If you want to buy a cryptocurrency and place a limit order, your order will join the bid side of the order book. If you place a sell limit order, your order will become part of the ask column of the order book. If you place a market order, your order will be executed immediately on the best ask for buy orders and best bid for sell orders. The price difference between the bid and ask is called the spread. The wider the spread, the more disadvantage for the trader. High-liquid exchanges are favorable in this case.

Times and Sales

The list of all trades is called times and sales. All historical trades are listed with the exact timestamp, traded number of cryptocurrencies, and price of execution in the times and sales list.

Arbitrage

Arbitrage is used to make profits without risk by trading the same underlying cryptocurrency on different crypto exchanges. The idea of this concept is to buy the cryptocurrency at one exchange for a low price and to sell it on another for a high price immediately. For example, if the asking price on one exchange is lower than the bid price on the other exchange, you can immediately trade this cryptocurrency for a profit since you buy low on the ask and sell high on the bid price. This type of arbitrage is called cross-exchange arbitrage. An alternative arbitrage strategy is a cross-product arbitrage where price discrepancies between more than one cryptocurrency are used to make a profit. The complexity of cross-product arbitrage is higher and requires proprietary algorithms and automated trading systems to be appropriately executed. Keep in mind that short-selling limitations with cryptos along with high fees make this concept kind of worthless. You would need high liquidity and price discrepancies to make this cryptocurrency trading strategy profitable.

Trading Fees

The fee structure varies depending on the cryptocurrency exchange used, and those fees can make a massive difference for the trading profits. Typically crypto exchanges charge a base fee, representing a fixed amount for each trade plus variable fees. The fixed amount can be based on the total amount traded, for example, $2.99 for each transaction over $50. This trading fee model has similarities to the good old stock trading fee structure before payment for order flow changed everything. This fee alone would be kind of fair, but most exchanges also widen the spread for each cryptocurrency offered. So the crypto exchange starts acting as a market maker, taking control of the order book. In this case, the difference between the bid and ask maybe always 0.5%, even if the limit order prices are tighter together. This type of compensation model is typical for forex brokers, and it is kind of a hidden fee. At first, you may conclude that it is better to choose a crypto exchange without spread-related fees. But this is not always the best way since a crypto exchange with ultra-high liquidity can still have the better bid and ask prices compared to another exchange where the spreads are wider due to lower traded volume. Unfortunately, there is not much you can do here. Comparing the fee structure of the most secure exchanges with high liquidity makes sense, while considering unregulated exchanges is usually not a good idea just to save some fees. Security first is the way to think.

Order Types

Most exchanges support the typical order types that are available with any retail broker. Crypto investors who want to execute the order immediately at the best price possible for the full order size chose the market order, which immediately gets executed. More price-sensitive traders chose the limit order instead and patiently waited to see if the order was executed on the price level selected. While limit orders come with the guarantee to be executed at the limit price, they have significant disadvantages. If the price never gets down to the limit price, the limit order does never get executed. Let's say you place an order to buy 1 Bitcoin with the limit of $49.999. The market stays above $49.999 and has its low at $50.000. After that, the market runs up to $100.000 per Bitcoin. In this case, the price has doubled, and you missed the entry by $1.

If you place an order, you also define how long the orders should be valid. This can be, for example, good until canceled or good until date. There are also some special order types like fill-or-kill or immediate-or-cancel.

Once a position is opened, you may want to protect the investment in some way. For this purpose, a stop-loss order can be is used. This stop order can be placed at a specific price, for example, 10% below the entry price. If the price falls 10% or more, your position gets closed when using such an order. Some people also use trail-stops. Such orders trail the stop at a chosen level. For example, a 10% trail stop moves the stop price always 10% below the highest price reached after the entry. If the trailing stop gets hit, the position gets closed.

Trading Tools

Day traders primarily use technical analysis to evaluate if it is worth it to invest or not. Technical analysis requires visualization tools like candlestick charts or line charts with drawing tool functionalities. Nearly all exchanges and crypto brokers offer charting to ensure that the user base has the tools they are looking for. A chart visualizes the historical trading prices in a specific time frame and time interval. For example, you can visualize Bitcoin prices for the past 36 months and on the daily time frame. In this case, you see the price for the past 36 months and the price per day. The line chart only shows the closing price of each day, while the candlestick chart shows the open, high, low and closing price of each day. Drawing tools like trendlines help to analyze the market behavior.

Regulation and Jurisdiction

Year by year, the cryptocurrency market undergoes more heavy regulations. The more popular this type of trading becomes, the more authorities require to act based on specific laws and guidelines. But this is somehow against the spirit of cryptocurrencies. One of the ideas of cryptocurrencies is to trade anonymously and independently without fiat currencies. But the more regulated a financial product becomes, the more transparency is involved. Registering on a highly regulated exchange or with a highly regulated cryptocurrency broker requires you to reveal your personal details like name, address, birthday, social security number etc., fully before you can start investing. In exchange, you have a higher layer of security. Using an unregulated broker makes it possible to invest anonymously in cryptocurrencies, but your money can be at risk. Depending on your jurisdiction, your country may ban cryptocurrencies overnight, and you may lose access to everything in a matter of minutes. It is important to keep such things in mind. Cryptocurrencies are still speculative, and also day trading cryptos involves risk.

Taxes

The type of taxes paid on crypto-trading profits also relies on your specific region where you live. In the United States, crypto-related gains are similar to equities subject to capital gain taxes. In other areas like Europe, holding periods play a central role in taxes. Simultaneously, in different regions around the world, it may not necessarily pay any taxes on crypto-trading profits. It is essential to consult a tax advisor or lawyer in your region to evaluate tax implications before starting to invest or day trade cryptocurrencies.

Tips and Tricks

Goal

Sure, the main goal when trading cryptocurrencies is making money. But how exactly do you want to make money? Are you an investor or day trader? Do you aim for short-term or long-term profits? Do you want to invest anonymously or not? What is important to you? The right crypto exchange can only be found if you answer all those questions before you get started.

Security

No matter how much you want to invest, the security of existing capital is the number one priority. It doesn't help you at all if your investment doubled or tripels, and then your money gets stolen. It is important always to be aware of the additional risk involved.

Risk Capital

Investing 100% of liquid assets in cryptocurrencies was a good idea in retrospect. Sure, if you would have invested 100% of your money in 2005 in Bitcoin, well, things would be well. But there are thousands of cryptos out there. Many of them already disappeared. What would be if you would have invested 100% in one of those currencies? The point is, you just never know, and you should never invest more than you can afford to lose. And most importantly, never invest with borrowed money!

Trading Education

This day trading cryptocurrency strategy guide already covers the major aspects of crypto trading and hopefully provided comprehensive insights that help you evaluate whether you start investing in cryptocurrencies. Investors act differently, but like in any other area of life, it is helpful to be well educated to ensure that you know what you are doing. If you want to start day trading cryptocurrencies, it might be beneficial to invest more time and maybe even some money in high-class education programs. But keep in mind, the crypto space is still full of questionable offers and products. If someone is offering the ultimate 1,000% per day trading strategy, well, guess what...

Day Trading Crypto Wrap Up

Day trading cryptocurrency is not suitable for anyone. Most day traders lose money trading intraday. Broker statistics confirm that a minimum of 80% of investors loses money in the long term. There are no specific statistics available for day trading, but due to high leverage, and short-term decision making, the chances are that even more people fail. There are even more challenges in crypto-trading since the fee structure is unfavorable, and the liquidity is not that high, which leads to high spreads and bad fills. The main argument for day trading cryptocurrencies is still the volatility and momentum.

Some brokers already offer trading cryptocurrencies without trading the original crypto asset. Instead, you trade a product that is based on the price of the underlying crypto asset. For day traders, it can make sense to chose such a broker instead of paying high trading fees using a cryptocurrency exchange.

Investors research for the best cryptocurrency to invest in and use tools like the best crypto portfolio tracker and the best cryptocurrency apps to manage the accounts and portfolio positions.

FAQ

How to make money day trading cryptocurrency?

Investors make money day trading cryptocurrency if the chosen cryptocurrency can be bought for a low price and sold for a higher price within the same trading day.

What is day trading cryptocurrency?

Day trading cryptocurrency refers to trading practices where traders buy and sell cryptocurrencies within one trading day.

How to start day trading cryptocurrency?

Investors need a crypto brokerage account or a crypto wallet attached to one of the crypto exchanges to start day trading cryptocurrency.

Cryptocurrency how to do day trading?

Day trading cryptocurrency is similar to trading stocks. One of the main differentiators is that shorting cryptocurrencies is almost impossible, while the easy-to-borrow short sale list for stocks usually includes 4,000 stocks.

When does the cryptocurrency trading day end?

Each crypto exchange defines the hours of trading for each cryptocurrency. Most exchanges are open 24 hours a day.

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