Crypto day trading is a short-term trading method in which crypto assets are bought and sold on the same day. However, unlike traditional markets that have a set time when they open or close, the crypto market is open 24/7. The hope is that the bought stocks will gain or lose value during that short period. They seek higher profits in exchange for a greater risk of loss. In other words, they are hoping for bigger long-term profits by winning small daily gains. Also, to find consistent success in day trading crypto, you should have a deeper understanding of blockchain technology and crypto.
- Day trading crypto is a high-risk endeavor made feasible by the cryptocurrency markets’ unique volatility and liquidity.
- Some strategies for crypto day trading are arbitrage, long straddle, scalping, as well as the usage of technical and fundamental analysis.
- The day trading pros and cons of crypto are connected to its easy access, market time, and decentralization.
Day Trading Cryptocurrency Strategy
There are many strategies day traders utilize to make profits on short-term fluctuations during the day. Some websites also enable their users to track and copy the performance of the most successful ones on our DeFi platform (which you can also do on EGG).
Below are some of the most used day trading cryptocurrency strategies:
Day Trading Crypto 1: Arbitrage
According to this strategy, when traders purchase a cryptocurrency on one exchange, they then immediately sell it on another one at a higher price and make a profit. However, it doesn’t necessarily have to be the same crypto and can instead be used with cryptocurrency pairs. For example, crypto day trading users can benefit by taking advantage of the value difference when the price of a crypto pair that consists of a lesser-known altcoin and Bitcoin is different on various exchanges.
Price-monitoring financial mechanisms typically automate arbitrage, which keeps the values of digital assets consistent across exchanges despite being a complicated mechanism.
Day Trading Crypto 2: Long Straddle
This day trading cryptocurrency strategy is also called “buy straddle” or “option straddle.” Before moving on, let us explain what are the “crypto options” referred to in the latter. An “option” is a derivative contract. It gives the buyer the right to sell or buy an underlying asset at a specific price with a predetermined expiration date. The right to buy the said asset is the “call” option, while the right to sell is the “put” option.
The long straddle strategy involves buying both a call and put orders, which, in this case, are on the same cryptocurrency, expiration date, and striking price. It is popular due to the crypto market’s volatility. The day trader makes money no matter if the price rises or falls. However, if it stays the same, then it will be a loss for the trader.
Day Trading Crypto 3: Scalping
Considered to have the fastest turnaround, traders using this strategy leverage big amounts of liquidity to profit from small price changes. It can involve the purchase and sale of day trading cryptocurrency over a few hours and earning small percentage gains by the end of the day (a bot can also be used).
This day trading cryptocurrency strategy is favored by many due to its low risk, ease of automation for bots, and potential profitability. The smaller positions allow traders to analyze the gains and losses at the end of the day instead of investing long-term. Thanks to the volatility of the markets, traders are able to earn reliable small profits, which may amount to considerable gains over time.
Day Trading Cryptocurrency Technical Analysis
Technical analysis (TA) examines past data, primarily price and volume, in order to predict price moves. As a strategy for day trading crypto, TA can be used as a guideline to assess how past performance indicates future gains or losses. However, there are many who believe that the absence of global regulations and the number of exchanges make TA not applicable for the crypto market. However, there are others who believe that indicators, such as the relative strength index, are helpful tools. You can read more about RSI on our blog.
Crypto day traders should use a day trading technical analysis while also taking into account news, correlation arbitrage, fundamental analysis, and other market drivers. The emphasis on creating a thorough day trading strategy for when to use the day trading entry and exit points is the best feature of technical analysis.
Day Trading Cryptocurrency Fundamental Analysis
As mentioned above, aside from TA, traders also analyze stocks and cryptocurrencies based on their fundamentals, like revenue, industry trends, and valuation. Understanding FA helps with evaluating if a day trading crypto is worth selling or purchasing. It determines an asset’s intrinsic value (it is supposed to be an objective measure of its worth). The underlying information of crypto projects can be used to determine if the coin is undervalued or overvalued as an asset.
Crypto markets are pretty volatile, so even established currencies like Ethereum and Bitcoin can suddenly fluctuate. Due to this, new entrants often think that cryptocurrencies cannot be valued using FA. However, it can still help in forming an educated opinion about an asset’s value and creating strategies that have better odds of profitability.
Day Trading Pros and Cons
Investing in crypto, as in any other stock, is not entirely risk-free. Therefore, investors should always research and keep in mind that their investments can evaporate. Also, knowing the rules and regulations regarding the taxation system of cryptocurrency earnings in your country or state will be beneficial. For example, in some parts of the world, when day traders sell any crypto they have held for less than a year, they are taxed as marginal income.
So let’s take a look at day trading pros and cons.
The Advantages of Day Trading
The first advantage is that the trade is open to anyone with access to a crypto exchange. Also, those who want to try day trading bitcoin, but are not able to make such high investments, can purchase and sell a fraction of any crypto.
Another advantage is that, unlike the stock market, the crypto one is open all year round, 24/7. So day traders do not have a time limit for buying and selling. Lastly, many cryptocurrencies and blockchains are decentralized, keeping the users anonymous and allowing them to process payments with no intermediary. In addition, if day traders are on a centralized exchange, the absence of government fees and taxes enables the cost of transacting the crypto to be very cheap.
The Disadvantages of Day Trading
Its easy access can also be considered a risk since an inexperienced trader can easily gain and lose profit. The same can be said for the unlimited amount of time, as it means fewer patterns in the day where predictable and profitable trades are made. Also, day traders can become glued to the charts monitoring the correct time to execute a trade, and a day session that is often short can become a night session.
Another disadvantage is that since it is decentralized, there may not be much protection for exchanges, institutions, or traders if they get hacked/scammed. And lastly, traders can also become victims of schemes like pump-and-dump or wash-sale. The former happens when a group works together to artificially pump the price of a cryptocurrency and lure naive traders. After profiting, the traders then dump (sell) the cryptocurrency, which causes the price to fall.
To reiterate, day trading is a short-term trading method initially associated with the stock market. Crypto day trading refers to buying and selling crypto assets within the same day, hoping to gain small crypto profits that will accumulate in the long run. Due to its unique features, like the always open crypto market and the volatility of cryptocurrencies, one should understand crypto and blockchains quite well to have consistent success using this method.
Cryptocurrency pairs – assets that can be directly traded with each other on an exchange
Strike price – the set price where a derivative contract can be sold or bought when exercised.
Volatility – the statistical measure of an asset’s deviation from a predefined benchmark or its average performance. In other words, how likely an asset’s price is to have a sudden change.