Cryptocurrency trading can be a useful way to make money out of rising prices in the digital asset markets. But the volatility of the crypto markets means there is also a high risk of losses as values can fall without warning.
You may be able to set up an automated trading strategy on a cryptocurrency exchange or you could invest in a crypto portfolio manager to do it for you.
This guide will explain everything you need to know about crypto trading strategies, how to decide if it is suitable for you and the best way to get involved.
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Cryptoassets are highly volatile and unregulated. No consumer protection. Tax on profits may apply.
Cryptoassets are highly volatile and still lacking meaningful regulation in the US. No consumer protection. Tax on profits may apply.
What is crypto trading
Crypto trading is a way that investors try to make money out of the value of digital currencies such as Bitcoin and Ethereum.
Professional traders keep an eye on the crypto market through cryptocurrency exchanges to spot the best entry and exit points to buy and sell digital currency and hopefully make a profit.
There are lots of different cryptocurrency trading strategies and it doesn’t just have to be left to professionals.
Retail investors can also trade cryptos but it is important to be aware of the trading risks and market volatility in this sector.
Benefits of crypto trading strategies
Investors can profit from rising cryptocurrency prices using a trading strategy.
The sector is highly volatile so there can be large swings in prices.
This makes trading more suitable for those with a large risk appetite.
But having a trading strategy in place means you can plan for changes in value and benefit as soon as prices move.
Additionally, unlike the stock market, crypto assets can be bought and sold at any time of day so you aren’t restricted to certain opening hours for trading volumes.
Risks of crypto trading
There is also a downside to crypto trading.
The high levels of risk and volatility also means you can, and most likely will, see your portfolio decline in value at some or many points.
It is best to only invest what you can afford to lose.
There are also risks of scams and exchanges being hacked so make sure you are only trading through a crypto platform that is approved by the Securities and Exchange Commission (SEC).
Crypto exchanges operated in the UK have to be approved and registered with the SEC for anti-money laundering rules.
This means they must check the source of funds when users buying and selling crypto investments.
The US Senate recently unveiled new legislation on the promotion of cryptocurrencies that would establish new rules for cryptocurrency, and hand the bulk of their oversight to the Commodity Futures Trading Commission (CFTC).
You can check if a cryptocurrency exchange is regulated on the SEC or CFTC website.
Risk vs reward
As with any investment or trading strategy, the more risk you are prepared to take the higher your potential reward.
But it has to be repeated that cryptocurrencies sit at the highest end of the risk scale.
Crypto assets are unregulated so there is no protection if things go wrong such as if you lose your money to a hack or scam.
You also can’t complain to the Financial Ombudsman Service if you feel you have been mis-sold, which you can do with regulated products.
The main risk is how unpredictable pricing is.
Valuations are ultimately driven by sentiment, which can be hard to predict.
Crypto markets are seen as so volatile that some countries such as India and China have proposed banning them while UK regulators have said they should only be accessed by experienced traders or those who pass appropriateness tests..
Investors have to weigh up the benefits of taking such a big risk in the hope of a larger return.
This assessment may be different for each cryptocurrency so a trader will need to do their own research on each digital currency they plan to invest in to work out if and how it will fit in their portfolio as well as the likely risks and returns.
Volatility is a way of measuring risk.
It measures how much the price of an asset has gone up or down by.
The riskier an asset is, the more volatile it is seen to be.
Volatility can be good when trading crypto as they are very risky, making the potential for returns pretty high.
But it also means there is a high chance of a crypto asset facing large losses.
Some cryptocurrencies can be more volatile than others depending on how new they are and market sentiment towards them but this is an important consideration for a crypto investors when building and trading with a portfolio.
How to choose a cryptocurrency
The crypto market is made up of more than 8,000 digital currencies.
The largest and most established include Bitcoin and Ethereum.
These were two of the first cryptocurrencies to launch but there are now thousands more.
You might like: Learn how to buy and invest in cryptocurrency.
Investors need to consider factors such as the use of a a crypto asset.
Bitcoin is the oldest and best-known cryptocurrency and is accepted as a form of payment in some stores across the world, while El Salvador has even declared it legal tender.
Ethereum is known for its underlying blockchain technology that anyone can access to build decentralised finance apps or launch their own cryptocurrencies.
There are also meme coins such as Dogecoins that are inspired by internet images or jokes.
Active traders need to consider if a cryptocurrency is worth backing, does its underlying blockchain technology offer something new or better and is it likely to be widely adopted?
They also need to be confident that the price will rise and that the value will be sustainable.
Traders use crypto buy or sell signals to spot when it is best to buy into a crypto asset or when it is time to implement an exit strategy.
Similar to day trading, there may be set levels or technical indicators that show where a cryptocurrency has historically gone up or down based on previous trends.
This isn’t always guaranteed though.
There is software that helps traders spot when a crypto is at the best buy and sell price.
These are known as a buy signal or sell signal.
The signals help identify the best time to take action.
Trading tools may include weekly charts or an indicator line that tracks the performance of a particular cryptocurrency so an active trader can decide when is the best time to buy or sell.
It will be determined by factors such as technical analysis, news, legal and regulatory changes and general market sentiment.
What affects cryptocurrency prices
There are a lot of factors that affect cryptocurrency prices and they can go up and down for a range of reasons.
Market sentiment can be swayed up or down by news stories and regulatory crackdowns while values can also be influenced by wider availability and adoption of crypto assets.
The cryptocurrency markets can also be boosted by high-profile backing.
For example, Elon Musk gave the crypto market a boost in 2021 when he said his Tesla company had purchased bitcoin and its electric cars could be bought with the digital asset.
However, the cryptocurrency’s price fell a few weeks later when Musk abandoned plans to take Bitcoin as a form of payment due to environmental concerns from data mining.
This is an example of Bitcoin volatility and the unpredictable market conditions that traders and investors have to consider.
Choosing a crypto trading strategy
There are a range of different trading strategies that aim to take account of the factors that influence crypto market valuations.
Some trading strategies require deeper knowledge than others but you do still need an understanding of what you are investing in so you know the risks and potential for losses.
Techniques include following short term momentum, market conditions or even going in the opposite direction of others by avoiding panic selling.
The best trading strategy for you will depend on your risk appetite as well as knowledge and experience of the sector.
Some of the main strategies are dollar cost averaging, day trading, hedging and taking a long-term view.
I explain more about these below:
Dollar cost averaging
Dollar cost averaging (DCA) is a trading strategy where a trader gradually builds up how much they invest in a digital currency.
Rather than investing a lump sum, an investor could invest smaller amounts in a crypto each week or month.
A DCA strategy helps spread out the effects of market volatility as you benefit from price increases when you buy and if the values drop it could also be cheaper when you next come to trade.
Active traders can sometimes automate a DCA strategy on a crypto exchange or you could set it up yourself using a standing order or direct debit from your bank account.
Day trading is an established activity in traditional markets.
Traders try to make a quick profit by buying and selling assets such as equities within a day.
The same approach can be applied to trading cryptocurrencies.
Day trading cryptocurrency can be extra risky though as prices are so volatile and there is a large risk of loss.
Hedging your bets
Rather than investing directly into a crypto currency, traders may also try to make money out of price movements.
Advanced traders do this using contracts-for-difference (CFD).
These are complex products that essentially bet on the future price of a crypto asset rather than the valuation at the time.
It is known as hedging as you hedge or essential bet on the future price of a crypto currency.
This is also a form of crypto day trading, although some traders may take long term bets.
Either way, CFDs are extremely risky and there is a high chance of losses so should only be used by experienced and sophisticated traders.
The phrase HODL originated from a spelling mistake on a Bitcoin forum but the typo has been adopted when it comes to digital currencies and means “hold on for dear life.”
It can be applied to other markets as it is essentially drawn from traditional investment advice to not panic and to invest for the long-term.
This only works as a trading strategy with cryptos if you are confident in the long-term momentum and valuation of digital assets that you are backing.
It can be hard to monitor the markets manually, especially with such volatile pricing and large amounts of trading volume.
There are software packages or trading platform features that will let you enter your trading instructions and it will automatically respond for you.
For example, a crypto trader could set up a request to buy Bitcoin once it hits a certain level.
These trading bots will use technical algorithms to monitor data such as the average value of a cryptocurrency or when valuations fall into a particular price band and may represent a buy or sell signal.
Rather than researching and running your own trading strategy, there are ways to make money by copying others.
Some trading platforms will let experienced crypto traders setup and run portfolios that other investors can then put money into.
etoro CopytraderTrading platform Iconomi and eToro both offer crypto portfolios with different strategies that investors can put money into.
This lets you benefit from a trader’s time and expertise and earn passive income from any profits while they do all the hard work such as monitoring technical indicators.
They may be using a range of techniques such as day trading crypto or tracking the average price of a digital asset so check which approach you are comfortable with.
There is, of course, a risk that these trading strategies perform badly and the trader loses some or all of your money so you should still keep an eye on what they are doing and make sure you understand their strategy.
The importance of diversification
Whether you use a trading bot, monitor the markets yourself or backing a crypto portfolio, diversification is key.
That means diversifying across different digital assets so you don’t lose all your money if the price of one crypto drops.
It is also important to invest in a range of different assets beyond cryptos.
The crypto sector, particularly day trading cryptocurrencies, is on the most risky end of investing.
Cryptos should only make up a small amount of your overall investment portfolio and it is important to consider assets such as stocks, bonds and cash as well.
It may be worth seeking investment advice if you are not sure how to build a balanced and diversified portfolio.
Only invest what you can afford to lose
The crypto markets are highly risky.
High net worth, sophisticated or professional traders may be able to stomach volatility and large losses.
But if you are trading crypto yourself or backing a professional, you need to be prepared for dips and, as regulators warn, only invest what you can afford to lose.
That may mean only trading small amounts as a portion of your wider portfolio whether you are doing it through dollar cost averaging or just HODL-ing.
Which cryptocurrency is best for crypto trading?
There are more than 8,000 cryptocurrencies so there are plenty for traders to choose from.
The prices of all cryptocurrencies can fluctuate wildly.
The more established cryptos such as Bitcoin and Ethereum have the largest market cap but they may not be the best for trading regularly.
Smaller and newer cryptocurrencies can be more volatile so may have large upward price swings.
That also means their value can drop rapidly.
It is important to research who is behind each cryptocoin, its use and likely adoption to assess its value and growth prospects.
Crypto Trading Strategies FAQs
Which strategy is best for crypto trading?
The best crypto trading strategy will depend on your attitude to risk and how involved you want to be.
You could trade small amounts each month, making use of dollar cost averaging, or invest a sensible lump sum that you are happy risking to see how it performs over the long-term or a defined period.
A cryptocurrency exchange may offer software and tools that automate the trading process and act on certain entry and exit points. Trading isn’t for everyone so you could also outsource this by backing ready-made portfolios.
Is crypto trading profitable?
The volatility in prices means crypto trading can be profitable. But there are also risks of large losses. You need to weigh up the risks and rewards when crypto trading and decide if it is something you can afford and if it is suitable for you.