How to Trade Cryptocurrency Profitably

How to Trade Cryptocurrency Profitably

Trading Cryptocurrency Profitably

Cryptocurrencies have made a resurgence in the headlines of major financial journals following a period of aggressive bullish moves that pushed the Bitcoin market cap above the one trillion-dollar mark. As we see the price of BTC dance around major levels like 50,000 and 60,000, most interested parties sat on the side-line continue to wonder, “is it too late to invest in Bitcoin”, or “how to make money with cryptocurrencies” and “how much higher will the BTC price go up”.

This article will explore some of the techniques traders and investors are using to make money trading cryptocurrencies.

Trading versus investing

Before deciding how to make money trading cryptocurrencies, the first thing to understand is the difference between trading and investing.

Trading is a technique where someone holds short-term positions, frequently buying and selling to profit from the ups and downs of the market. 

Traders use a variety of strategies, such as scalping or swing trading. Trading strategies seek to profit from the volatility of the market, essentially buying low and selling high over a few hours or days. 

What makes trading appealing is the ability to generate higher returns with less capital. Investing is a method where someone buys and holds positions for a longer duration, often years or even decades.[1]

Investing (HODLing)

The simplest and most common approach to profiting from cryptocurrencies is to buy and hold, often referred to as HODLing. 

Investing in cryptocurrencies is merely buying and keeping them, anticipating long-term price appreciation, which is exactly what we’ve seen Bitcoin, Ethereum and other well-known cryptos do.

When investing in cryptocurrencies, your primary concerns are transaction costs and the security of your coins. 

The fees involved in buying crypto are an important consideration, as those costs reduce your profit. Popular cryptocurrency exchanges like Coinbase offer convenient methods, such as credit/debit cards and bank transfers, to buy crypto from almost anywhere in the world.

The downside of buying cryptocurrencies with credit or debit cards is exchanges charge high fees. 

For example, Coinbase charges 3.99% for processing instant cryptocurrency purchases using card transactions. However, if you’re based in the USA, EU or UK, you can transfer funds using ACH, SEPA or Faster Payments for free.[2] In which case, all you need to worry about is paying the 0.5% spread for trades.

Dollar-cost averaging Bitcoin strategy

A highly recommended Bitcoin investing strategy is to use a technique called dollar-cost averaging. 

The strategy is straightforward. Instead of buying all your Bitcoin or cryptocurrencies in a single transaction at one price, you spread the purchase across a number of transactions. 

As the price of BTC appreciates in the long run, when you average the cost price, it should be more favorable. Many investors gradually invest more weekly or monthly, perhaps buying each time they receive their income.[3]

If you’re committed to a long-term cryptocurrency investing strategy, you’re able to benefit from the drops by acquiring more BTC with the same fiat investment. 

As the price increases, you can feel happy your investment is growing.

According to the Bitcoin Dollar Cost Average tool, if you started buying $100 of BTC every week, between the 1st of January 2020 to the 1st of January 2021, you’d have spent a total of $5,300.00 and accumulated 0.53052297 BTC. Supposing the Bitcoin price is $50,000, that’s a return on investment of 400%.

Popular finance apps like Revolut, Cash App and Robinhood allow you to gain exposure to Bitcoin and several other cryptocurrencies while avoiding high exchange fees.[4] 

It’s worth keeping in mind that these apps don’t work the same as exchanges and limit how you can spend or use your cryptocurrencies.

Earn interest on crypto

A few credible decentralized finance products have emerged in recent years, offering high-interest savings accounts to hold crypto. 

If you’re planning to keep your crypto investments for years to come, besides sitting around waiting for it to appreciate, one option is to put that money to work.

Companies like BlockFi, Crypto.com and Binance have launched a variety of savings accounts that pay interest for the cryptocurrency or stablecoins you deposit with them.

BlockFi, for example, pays up to 8.6% APY on deposits in GUSD, with a monthly compounding period. For BTC deposits, the company pays 6% APY.[5] What this means is, if you deposit 1 BTC:

  • After 1-month, you’ll earn 0.00487 BTC
  • After 10-months, you’ll have earned 0.04976 BTC (0.004976 BTC per month)
  • After 100-months, you’ll have earned 0.62511 BTC (0.0062511 BTC per month)

Although the opportunity of earning passive income from your crypto investments, it’s worth keeping in mind that these products are not insured or protected like bank deposits are.

Cryptocurrency scalping & swing trading strategies

There are scalp and swing trading strategies available for those looking to take a more active role in growing their profits from the cryptocurrency market. 

You may have noticed, even in a bull market, the price doesn’t go in one direction; it experiences resistance and pullbacks. 

These trading tactics rely on technical market analysis tools to predict where the price will dip and peak to identify entry and exit points. Essentially, these traders attempt to buy low and sell high.[6]

Active day trading strategies are quite advanced and require a lot of attention to do them right. 

They can also be emotionally exhausting due to the constant self-doubt, wondering if you got in or out of the trade at the best price.

Shorting cryptocurrencies with derivatives

Multiple cryptocurrency derivative contracts have been conceived, allowing traders to speculate on the cryptocurrency markets with high amounts of leverage. 

The most popular crypto derivatives are futures and contracts-for-difference (CFDs). Derivative contracts don’t just allow you to increase your buying power with leverage but also let you short sell. 

Derivatives were initially designed for hedging purposes but became widely used for speculating on prices falling and profiting from bearish movement.[7]

Many crypto exchanges, such as Binance, Kraken and BitMex, offer perpetual futures contracts for speculating on the price of Bitcoin and other cryptos. 

For example, Binance offers leverage as high as 1:125.

Although prohibited in the USA, CFDs are a popular derivative product for speculating on financial markets and are highly regulated in Europe, Australia, South Africa, Singapore, and other developed financial centers. However, in most regions, CFDs for cryptocurrencies offer leverage up to 1:5.[8]

Leverage amplifies your buying power, which makes it appealing, but it also increases potential losses. 

Trading with margin is incredibly risky, as it allows traders to overexpose themselves to the market without considering what happens if the price moves in the opposite direction. 

If a position goes against you and your account balance is not large enough to sustain the unrealized losses, it could result in the liquidation of your account.

The advantage of trading with derivatives is being able to go long and short and profit from the bearish swings alongside the bullish ones.

Summary

Before investing in trading cryptocurrencies, make sure you’re fully aware of the risks involved, as there are many. You have to consider the counterparty risk, the integrity of the underlying asset, the volatility of the market, and the potential risks associated with the instruments you’re trading.