Day Trading Crypto: A Strategy for Harnessing Volatility
We’re a long way off from those heady days of all-time highs in the crypto space. But that doesn’t mean there isn’t money to be made. Day trading crypto in these sideways markets can be a way to take advantage of a 5% dip here and a 5% jump there. This can be the perfect recipe for some quick cash. That is if you have the stomach for it… And are prepared for the possibility of a quick loss as well.
Before we get into the different strategies, first we’ll explain the basics of day trading. This is an approach that involves frequent trading – usually a buy and sell happens in the same day. Obviously, this is a very different method than the traditional buy-and-hold (or hodl, if you will) style of investing.
Now, day trading crypto isn’t much different than day trading in the stock market. There’s plenty of risk in both. And there’s the possibility of just as much reward.
However crypto traders have one advantage on their side: crypto markets don’t close. This gives crypto day traders an advantage… Mainly because the window of opportunity to profit off of discrepancies in price is larger.
Additionally, day trading crypto doesn’t require a brokerage account… Or a margin account for that matter. These two factors also make it easier to capitalize off of short-term trades. But it’s not all puppy dogs and rainbows for crypto traders. There is one glaring drawback.
A Drawback of Day Trading Crypto
Love it or hate it, Robinhood revolutionized the investment game. Before it came onto the scene, just about every trade came with commission fees. After Robinhood showed up and helped get the younger generation involved, nearly every discount brokerage firm followed its lead. And suddenly brokerage fees were a thing of the past. Investing in stocks and options contracts only cost as much as the asset itself is worth.
For crypto day traders, things aren’t quite as cheap…
Let’s say you like to use Coinbase to purchase your cryptocurrency. Nothing wrong with that. We’re big fans too. It makes trading cryptos exceedingly simple. However, it does have a complicated fee structure.
Any transaction $10 or less will cost you $0.99. Transactions of more than $50, but less than $200 incur a transaction fee of $2.99. On top of this, if you want to pay for some crypto with a bank account transfer, the conversion fee is 1.49%. Want to use your debt card? Well, the Coinbase fee is 3.99%. And as you can imagine this can all add up quick. One way to reduce fees it to sign up for Coinbase Pro. It has a cheaper – and slightly more simple – fee structure.
But, suffice to say, no matter where you want to start day trading crypto, there will be fees associated with your transactions. That’s the case whether you use crypto.com, Bittrex, Kraken or Gemini. The same goes for decentralized exchanges as well. Even if you choose to use Uniswap, PancakeSwap, SushiSwap or TraderJoe, there will be fees to account for. And these will cut into your gains. So keep this in mind when choosing your crypto platform of choice.
Once You’ve Picked Your Platform…
Now it’s time to pick your target. This might sound obvious, but keep in mind there are thousands of cryptos out there. And some make more sense for day trading crypto than others.
You want to start by picking out a few tokens that you understand the use case of. This is especially important if you’re trying to trade on the upswing of its price. For instance, let’s say you’ve targeted Ethereum as a potential token to day trade. There’s a lot to like about its smart contracts. And its applications in finance, gaming, advertising and NFT markets makes it one of the most important tokens out there.
That being said, its value has been wobbly. Ethereum’s price chart resembles the Fitz Roy traverse in Patagonia. Lots of downs. But lots of ups too. If you can spot one of those downs near the trough, then it’s likely to be just a matter of time until it bounces back up to a craggy peak. But here is where an exit strategy is crucial.
What kind of gains are you looking for? And how long are you willing to hold until that happens? One of key factor in day trading crypto is to know when to both cut your losses and when to collect your profits.
Let’s say Ethereum is trading at $2,500 a token. And you think that’s near its bottom. So you buy a token for that price based on the expectation that it should soon spike by 5%. If it does, great. You cash out at and pocket $125 – minus those pesky fees of course. Do that every day, and you’ll have an impressive side gig as a crypto day trader. But we know that’s just not possible every day. At least not with the same token.
There Are Plenty of Other Strategies Out the Too
What’s described above is basically daily pivoting. It boils down to looking at price points and speculating on upcoming movements by analyzing movements from the previous day. There are all sorts of screeners you can use to find this data. CoinMarketCap, the Yahoo! Finance heatmap and TradingView app are all helpful for this. However, one of our favorites is Cryptowatch.
If the token’s price doesn’t follow the trajectory you anticipate, how will you react? Do you simply hold until the price elevates to where you want it? You never know how long that could take. And in the process, you risk having your capital locked up and unable to be used for another trade.
Since there are so many different exchanges out there, another popular way to day trade crypto is via arbitrage.
Let’s say you see that a specific token is trading cheaper on one exchange than another. An arbitrage trade would be when you buy a token on one exchange and then immediately sell it on another exchange at a higher price. Usually price monitoring software keeps the price of tokens similar among various exchanges. So this makes arbitrage difficult.
For instance, the price of Bitcoin alone rarely differs from one exchange to the next. But crypto pairs can. A crypto pair is a pair of tokens that can be traded in tandem for another asset. For instance, you buy Bitcoin and Basic Attention Coin (BAT) as a pair on one exchange and sell it on another for a quick profit. Because the price of pairs isn’t monitored quite as closely, there is more opportunity for arbitrage this way.
Day Trading Crypto by Scalping
Another popular method for day trading crypto is using the scalping technique. This style of day trading poses slightly less risk than the others. However, speed is the name of the game here. Day traders that use the scalping technique need to keep a laser focus on the markets at all times they have an open position. Because the goal here is to exit a position as quickly as possible once it turns profitable.
There’s no sitting around and waiting until prices go sky high. This tactic is about small price changes. So volume is the key here. To be a successful scalper usually requires a good amount of capital.
Let’s say you put $10,000 into Ethereum. If the price goes up 1%? Great. Cash out your $100 and do it again – most likely with another token. In the fast-moving world of crypto, this can be a rewarding technique. But again, an exit strategy here is huge. If you have 100 successful trades in a day, those gains can be wiped away by one bad one. You can learn a bit more about exit strategies here.
The Bottom Line on Day Trading Crypto
Before getting started, you need to ask yourself if it’s worth the risk. Furthermore, do you have the time to be glued to several exchanges and screeners while doing so. Day trading crypto is just as (if not more so) demanding as day trading in the stock market.
There are scores of variables to assess. And as we’ve seen time and time again, one sour news story can spoil the entire market. So beyond what’s going on in the markets, you need to keep your eyes on as many news sources as possible. Russia bans crypto? Boom. Your investment can go south in the blink of an eye. A network gets hacked? You won’t have much time to get out before your investment sinks below the Mendoza line.
Make no bones about it, day trading crypto can be a full-time job. And while the rewards are there, so too are the pitfalls. And don’t forget about the implications when it comes to tax season.
The IRS treats crypto gains the same way it does any sort of capital gains. You could have to pay up to 37% for assets held for less than a full year. That could be a hefty portion of your winnings throughout the year… And again, keep in mind this is on top of those trading fees mentioned earlier.
If you live the excitement and are prepared to take on the risk, just be careful to not start day trading crypto with any more than you can afford to lose. And before you start giving any of the strategies mentioned above a shot (or any other strategy), it could be useful to paper trade first. This offers the ability to try out any strategy you like… Without the financial risk. Then, once you think you’ve got your strategy down pat, have at it. We wish you luck!
If you need a little motivation to get stated, check out our crypto calculator to help visualize your potential gains!
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.