Trading digital currencies is becoming an increasingly popular way of generating additional income.
This is primarily due to large potential returns that can be achieved if you know what you are doing, as well as the low barrier to entry to begin trading cryptocurrencies.
The high volatility of digital currencies when compared to traditional assets is what makes the unusually high returns possible. However, it can also result in large losses.
That is why it is important to always have a trading strategy in place.
In this guide, I will walk you through some of the basic crypto strategies that you can use even as a novice traders.
This strategy is for you, if you prefer short-term trading.
One of the popular short-term trading strategies is arbitrage trading.
The strategy is simple and takes advantage of the price discrepancies that typically exist between cryptocurrency exchanges.
For example, a trader is able to buy bitcoin on Coinbase, send it to Binance and sell it for a higher price. This small variation in the price is what traders are able to take advantage of and is the key idea behind arbitrage trading.
To illustrate further, consider that Amy buys one bitcoin on Coinbase which is currently trading at $10,000. The price of one bitcoin is currently $10,100 on Binance. In order to take advantage of this, Amy sends her bitcoin from Coinbase to Binance and sells it for the higher price. The risk Amy takes is that the bitcoin price on Binance might change before she is able to sell.
There are techniques to minimize this risk, such as leaving money on both exchanges to eliminate the need of the transfer. You can also look for more stable arbitrage opportunities between mainstream exchanges and smaller local platforms such as those based in Australia, as long as they are open to international customers.
This strategy is for you, if you prefer long-term trading.
Swing trading attempts to take advantage of the volatility that is rampant in the crypto space.
The idea behind swing trading is to capture the price movement of a cryptocurrency in a particular direction.
With swing trading, you are really trying to get into a position at the exact point a reversal in price occurs. This method of trading is usually most effective using automatic tools such as crypto bots (e.g. Binance bots) and crypto signals (e.g. Binance signals).
The key for being a successful swing trader is to use these tools to help you identify when the price will reverse and will move up or down for an extended period of time.
This strategy is for you, if you prefer investment rather than trading.
Whilst not exactly a trading strategy, fundamental analysis must be used by any serious trader attempting to extract a profit from the crypto market. The legacy market counterpart of crypto fundamental analysis would be stock picking.
The key to this method of investing is to find cryptocurrencies that are undervalued and buying them with the expectation of a price increase in order to make a profit.
This concept has been borrowed from stock trading which uses metrics such as Price to Earnings Ratio and Earnings Per Share Ratio to help value a stock. However, for the crypto markets, these metrics differ.
The most important cryptocurrency value metrics are network activity statistics, transaction counts, active wallet addresses and competence of the development team behind the cryptocurrency and the size of the market it is disrupting.
To conclude, these have been some of the top strategies on how to approach cryptocurrency investing or trading. These three are being used right now to generate attractive returns by traders and investors in the crypto space.
It is critical to find a strategy and style that fits your goals as this will be important in determining how successful you are trading crypto.