Now that you know what type of altcoins there are, let’s talk about the altcoin investment strategy and how to buy altcoins. Trading cryptocurrencies refers to the exchange of one coin for another in crypto exchange platforms. Usually, such platforms also give extensive market statistics on their listed cryptocurrency pairings in order to assist customers in making better trading decisions. There are two primary strategies when trading altcoins: short-term trading and long-term trading.
Advantages and Drawbacks of Short-Term Altcoin Trading
Let’s first understand how to daytrade altcoins. For the short-term strategy, traders buy altcoins and hold on to them for a few minutes, days, weeks, and, at most, a few months, and then sell them at a higher price. In other words, they keep them for a short amount of time, which makes it somewhat similar to Day Trading.
Some of the pros of this method include:
- The opportunity to make high returns since cryptocurrencies can go through significant swings in a short period of time.
- You can trade any amount of altcoins as many times as you want. In other words, despite its similarity to day trading, it does not follow the Pattern Day Trading rule.
However, it also has its cons. Firstly, since the price of the coin can swing quite fast, you would need a considerable amount of time to analyze the market to make a profit. In addition, to acquire significant returns, traders would need to make large investments, which is usually difficult for newcomers.
Advantages and Drawbacks of Long-Term Altcoin Trading
If for the short-term strategy, the most amount of time you would hold the coins would be a few months, it would need to be at least a year for the long-term strategy. An example of this strategy is a person that bought Bitcoin in 2009 for about $1 and sold it in 2017 (the price was more than $19,000).
Like the short-term strategy, this one also has its pros and cons. Since all a trader would need to do is hold a crypto coin for a long time, its main advantage is that it is relatively simple and requires a limited amount of time. Another one is that, unlike Day trading (where you need to be more attentive to price changes), you can simply check the price movement in your free time. In addition, unlike the short-term strategy, you do not need to spend a lot of money on trading the coins.
However, despite its many advantages, the main disadvantage of this strategy is that you may miss out on opportunities to make quick gains if prices go up and down in a short amount of time.
What Does Shorting Altcoins Mean and How It Works?
Typically, when we think of trading, it is usually through the method of buying at a lower and selling at a higher one. However, it is also possible to profit even if the market is falling. This is when “shorting” comes in. But how to short altcoins? First, you would need to borrow cryptocurrencies and sell them on an exchange platform at the current price. Next, you buy the cryptocurrency later and repay the amount you borrowed. If the price becomes lower when it is time for you to repay the borrowed amount, you can profit from the difference. To illustrate this better, let’s take a look at this example.
Crypto Shorting Example
Imagine that the current market price of a single X cryptocurrency is $7,000, and you want to short 10 of them. To make the trade, you borrow 10 coins from a broker at the current market price. The market moves as expected, and a single X coin price falls to $6,000. Now you sell these coins for $60,000 and return the funds to the broker. Since the price fell, you were able to gain a profit of $10,000 (previous market price (7,000) – current price (6,000)).
To reiterate, when using this method, the trade entry should be as close as possible to the current price peak of the crypto coin. On the other hand, the trade exit should be below it in order to provide substantial profit. So timing is an important aspect of shorting.
In essence, altcoin trading is the process of exchanging, transacting, and shorting all the cryptos except for Bitcoin. There can be two types of altcoin trading; short and long-term, and it’s up to you to decide the strategy.