In 2010, BitcoinMarket.com became the first cryptocurrency exchange to begin operations. At the time, Bitcoin went for about $0.003 a piece. Later that year, several more exchanges would open up. The price ended up skyrocketing 9x in just a few days thanks to the handful of people day trading cryptocurrencies and a low liquidity market.

Since then, Bitcoin and other cryptocurrencies have become more popular for day traders. This popularity stemmed from the low barrier to entry in the market and the opportunity for high returns. Although as most traders will admit, the monetary incentive is the biggest reason for being in this market.

Day trading is actually quite difficult, but generally higher volatility is better for higher returns. Understandably, you may find the idea of cryptocurrency day trading attractive. Before you delve in, or even if you’ve already begun, it’s essential to learn the basic ways to lower your risk and avoid major pitfalls.

But even knowing all of the basic cannot guarantee your success. The following tips and strategies are for educational purposes so that you have a foundational base of knowledge. Further research and learning from other traders will also help you on your way if day trading should be the course you choose to take.

Getting Started

To start, you will need to educate yourself on the technical issues regarding trading before anything else.

Security

There isn’t much point in becoming rich with cryptocurrency day trading if your funds can be easily stolen or lost. In some ways, cryptocurrencies are the most secure systems on planet earth. But this security only covers the immutable database or ledger. It’s impossible, practically speaking, to forge or steal cryptocurrency by hacking a blockchain network directly. However, if private keys or access to your wallet isn’t secure, your local security is seriously lacking.

Cryptocurrency relies basically on a password system of private keys. So you have to take a few extra steps to secure your password, such as using a hard wallet. Viruses run keyloggers on your computer to see every letter you type. Everything you copy-paste is not secure and could be sent back to a hacker.

There are also other ways a hacker could gain access and even control your computer remotely. Remote access would potentially give them access to your wallet. With that all said, the weakest point of any security system is usually the people inside of them. The vast majority of online hacks actually come down to social manipulation more so than exploiting bugs or clever programming.

There are also many risks aside from hacks in using exchanges or other online wallet providers. You shouldn’t use them for anything other than a hot wallet when you need to move crypto (this is not where you want to store large amounts). Look no further than the recent and controversial exchange QuadrigaCX. They suddenly announced it was shutting down and declaring bankruptcy on top of losing most of its users funds. Or you could look at the early Bitcoin exchange Mt-GOX, which was in a very similar situation.

Storage

trezor-wallet

Making user errors could lead to the loss of funds when day trading cryptocurrency. So you should use cold storage as much as possible. Only keep what you absolutely have to on an exchange, especially if you have a large amount of funds.

There are various options for cold storage such as paper wallets. However, if you are day trading it will be much more convenient to use a hardware wallet since you might be sending funds from it on a daily basis. Hardware wallets are both secure and convenient. They are generally considered to be secure even if the computer you use them with is compromised.

  1. Trezor – One of the first hard wallets, Trezor, uses the Zero Trust Principle. Even with a compromised system, your funds will still be secure. The digital display on the device with the pin system ensures that you can always verify transactions.
  2. Ledger –  Like Trezor, Ledger wallets are mini computers that keep your funds incredibly secure. The major differences come down to form factor, UI, and supported coins.

There are a few more hardware wallets that can be used but these are the two most popular at this time and they both continue to receive positive reviews. Considering your options for hardware wallets is important. So in addition to the level of security, you should also think about which pairs you will be likely to trade and also the level of convenience each product provides for you.

Funding

Before you can do any cryptocurrency day trading you are obviously going to need to buy some crypto to work with. There are a few different ways you can do this.

Buy Directly From Exchanges

Many of the larger, reputable exchanges are now allowing users to buy cryptocurrency directly with their credit cards. You will have to check the exchanges individually for this but it’s becoming more common. Exchanges like Coinbase used to be one of the few places where you could easily and securely get crypto. While many other exchanges have joined in offering this service, Coinbase itself is still often used as an on-ramp.

Buying directly from exchanges is probably now the most cost effective and efficient way to get your hands on crypto.

Crypto-ATM

Crypto-ATMs have started to become very popular and widespread in major cities around the world. To see if there are any in your area you can go to coinatmradar.com and enter your address.

You should always double check that their mark up isn’t ridiculously high. Lots of them have mark ups of 15%+! So only use this as a last resort.

Local Bitcoins

Local Bitcoins and other similar services allow you to buy directly from people. As a peer-to-peer market, Local Bitcoins enables in-person trades using cash. Be sure to do your trading in a safe and public area when you use this service.

Work For It

Ethlance is just one of the many freelance cryptocurrency job boards. You can find various opportunities to do jobs and earn cryptocurrency directly from the employer. This is a great way to participate in the market more directly and support the ecosystem.

Exchanges

Selecting the right exchanges will be very important for cryptocurrency day trading. Different exchanges support different types of trade orders and provide different levels of security. There are also two main categories of exchanges that you would probably want to consider. Which will work best for you will depend greatly on your personal preferences.

Centralized

When deciding to use centralized exchanges, you should research them extensively to make sure they are reputable. Checking not just their reputation but also their third-party audits and insurance is prudent.

Pros of centralized exchanges

  • Lower fees are one of the biggest advantages of using centralized exchanges. They can provide better rates because they do all of the accounting of funds on centralized servers. This is much more efficient than using a blockchain for transactions but less secure.
  • Customer service is also a big advantage with centralized exchanges. Having people that can help with technical problems is quite nice.
  • Curated trading pairs help to filter out a lot of bad or higher risk coins that might be untrustworthy. Many exchanges like Binance will thoroughly investigate projects before listing them. This may help to lower some of your risks.

Cons

  • Hacks are the biggest risk of using centralized services in the cryptocurrency world. There have been numerous hacks of various exchanges throughout the short history of cryptocurrency and blockchain.
  • Privacy in today’s highly connected and digital world is a huge issue. Many apps and internet services not only collect high amounts of data on their users, but they also sell that data to third parties without user permission. This is particularly egregious behavior in both the cryptocurrency and finance industry. This information can make you a target for criminals and other bad actors. Just recently one of the major cryptocurrency exchanges Coinbase sold its user data to third parties. The cryptocurrency community, filled with many cypherpunks, were not happy about this.
  • Deposit confirmation times can vary a lot from exchange to exchange and are often extra long to be secure. For some smaller blockchains, they can take hours. This can actually be a big issue depending on your exact cryptocurrency day trading strategy.
  • Fake volume is a big issue on a lot of centralized exchanges. Sometimes the exchange will report false volume or contain plenty of wash trading. CoinMarketCap has instituted some updates to help traders tell the difference between reported volume (which exchanges are reporting) and adjusted volume (which uses order book liquidity, unique visitor counts and other metrics to ascertain a more realistic volume).

Top Centralized Exchanges

One of the most popular cryptocurrency tools is CoinMarketCap.com. They list thousands of projects and tons of exchanges. Recently they even implemented a new page called Top 100 Cryptocurrency Exchanges by Adjusted Trade Volume. The adjusted volume is very important because according to a recent report by Bitwise, 95% of cryptocurrency trading volume at the time was fake.

  1. Binance is one of the largest cryptocurrency trading platforms on the planet. Operating in most countries, Binance was originally founded in China. Recently the team behind it announced that they will be moving to Malta where the exchange regulations aren’t as strict.
  2. Coinbase is one of the most well-known cryptocurrency on-ramps and trusted exchanges. The downside is they have a limited number of pairs.
  3. Bittrex was one of the earlier exchanges and is based out of Seattle, Washington. It boasts a very strong reputation.
  4. Kucoin is based out of Hong Kong and is a fairly popular exchange with decent volume. What makes it particularly unique is its Kucoin Shares, which enable holders to receive 50% of the trading fees as a dividend on a daily basis.

Decentralized

Decentralized exchanges are becoming increasingly popular due to their higher levels of security and privacy. One of the biggest centralized exchanges, Binance, is preparing to launch their own decentralized exchange.

Pros

  • Security is much better with decentralized exchanges. This is because they use smart contracts which run on the blockchain making hacks extremely difficult.
  • Privacy is much higher as you can trade anonymously if you follow best practices.
  • More trading pairs is an advantage of decentralized exchanges. Normally it’s just a matter of the developers adding a new contract address to generate a new pair. Lots of decentralized exchanges also allow custom pairs, thus increasing the trade opportunities exponentially.
  • Data tends to be more accurate on decentralized exchanges. This is because there is a higher cost of doing things like wash trading.
  • No KYC is a big benefit of decentralized exchanges. They are inherently open platforms that don’t restrict users based on identity.

Cons

  • Lower liquidity is one of the biggest issues with DEXs but as they gain popularity, this is slowly changing.
  • Fees are often an issue with some decentralized exchanges. Creating each offer requires you to make a transaction on the blockchain. This makes it more difficult to be profitable for day trading.
  • Limited cross blockchain pairs is a problem with DEXs as atomic swap technology is still in fairly early development. Aside from a few anchored tokens here and there, most trading pairs will be native tokens to the blockchain.
  • Slow order execution, depending on the blockchain and DEX you are using.

Some decentralized exchanges like StellarPort.io support both Trezor and Ledger wallets, allowing you to trade directly from your hard wallet. This combination makes it arguably one of the most secure ways to trade.

Top Decentralized Exchanges

Decentralized exchanges are becoming more popular as technology has become increasingly advanced. It is possible that within just a few years decentralized exchanges will be efficient enough to pose a serious threat to their centralized counterparts.

  1. StellarDEX is by far one of the best-decentralized exchanges. StellarDEX is actually hard-coded directly into the Stellar blockchain. There are currently two major front-ends, Stellarterm.com and StellarPort.io. The order books are the same so it’s really just a UI preference. StellarDEX has many anchored tokens allowing you to trade cryptocurrency against fiat currency and major native blockchain currencies like Bitcoin and Ethereum. Another cool feature is you can create custom pairs to any other currency! So there are huge amounts of pairs. This makes it superior to almost all other decentralized exchanges.
  2. DDEX is definitely one of the more established decentralized exchanges on the Ethereum blockchain. They have a decent amount of pairs and liquidity. Of course, they don’t have many anchored tokens outside of USD. It is mostly just Ethereum tokens.
  3. IDEX is a platform that allows for fast trading. However, some might argue its not a truly decentralized exchange as it processes transactions in a centralized way to speed up trading. But the keys are always in your control so you are always technically in control. It mostly means that they can shut down trading at any moment, so it’s not without some risk.
  4. WavesDEX operates very much like StellarDEX and has many anchored tokens from other blockchains as well as tokens built upon their platform. They also provide a decent level of liquidity and low fees.

Cryptocurrency Day Trading Strategy

Cryptocurrency day trading isn’t fundamentally any different than day trading other assets. Day trading is simply buying and selling of an asset multiple times in a day. If the price of the asset increases by the time you exit your position, you profit.

Preparing

Serendipity favors the prepared mind. Day trading is actually one of the riskiest forms of making money in the market. In a study by the University of California, it was found only about 1% of day traders are predictably profitable. And 75% quit within two years. Most of the research indicates very similar numbers. So you should use extreme caution when considering cryptocurrency day trading.

  • Paper Trading is the easiest way to hone your skills. Paper trading is basically just simulating your trading strategy without actually making any orders. This way you can find out if your cryptocurrency day trading strategy is actually profitable or not. Some cryptocurrency exchanges even allow you to create demo accounts to practice.
  • Start Small once you believe you have a profitable strategy. Don’t just throw your entire portfolio into a single trade. Use negligible trade sizes and slowly increase them as you become profitable.
  • Education is important with any skill you are trying to develop. Keep reading books and other resources. It only takes a single piece of knowledge to give you an advantage in the market.
  • Master Your Emotions and take a stoic approach to your trading. You will fail often, but you have to stick to your strategy as much as possible so you’re not relying on your emotions.
  • Collect Trading Data on the trades you make. You can keep this in an excel spreadsheet. It’s a good idea to record every trade with the amount of net profit you make as well as the strategy you used. This way you can do an analysis to see what strategies actually work for you and know if you are profitable or not.

Momentum

A momentum or trend following strategy is placing a buy order when the asset has been trending upwards in price. Large price movements or consistent gains can be used as an indicator for momentum. The main idea is that “buying the winners” works. There are also technical indicators and tools you could use, like moving averages.

Scalping

Scalping is relying on many small price movements to make money. A scalper will usually make many trades throughout a day that potentially add up to a lot of profit. Usually, a scalper will make his trades as fast as possible to reduce market exposure and risk.

Buying The Dip (Pullback)

“Buy the dip” is a bit of a joke in the crypto community, but there is a legitimate strategy called Pullback Trading. Basically, you are following a longer-term upward trend and waiting for a sudden pullback as your entry point. If executed properly, the trend will reverse back in a positive direction allowing you to profit.

Trade The News

There are a few ways you can trade the news. One way to benefit is from waiting for an expected announcement. You can source your information feeds by following a project’s official Twitter and Telegram channel as that is often where news is announced first.

Sometimes there will be rumors or upcoming events listed on websites like coinmarketcal.com. This can help tip you off to good trade opportunities, especially if you are closely following market sentiment on social media. When an announcement is made and it is lackluster, you can place a low buy order. Or if it is better than expected, quickly buy and ride the wave of excitement in the market.

Bot Trading

If you can consistently be profitable with a trading strategy for a long time, you might want to consider creating a bot. Most of the major exchanges (including the decentralized exchanges) have APIs in which you can create custom trading bots.

Advantages of Bot Trading

  • The ease of executing custom and complicated trade types is a huge advantage. Most cryptocurrency exchanges have yet to add advanced trades like trailing stop losses. But by using a bot you could program that yourself.
  • Faster trades is also a nice luxury to have if you are day trading. Speed can be critically important for cryptocurrency day trading.
  • Signaling systems can be connected to your bot to let you know when there are good trade opportunities in the market. You could even implement a machine learning system to gauge sentiment and curate content of new announcements in your news trading strategy.

The biggest problem with creating a bot for cryptocurrency day trading is writing it. Obviously, you will have to learn to code, but this is a really good idea if you want to get an edge in the market.

Things to Avoid

The best thing you can do as an investor or cryptocurrency trader actually isn’t finding some special pattern or technique. The best thing you can do for yourself both in trading and in life is to limit your downside as much as possible. If you do this, you might not get lucky and become rich, but at least you won’t go bust.

Many day traders will develop their own style and also a set of rules to follow that works for them. Here are some of the things that put day traders at risk so that you can be aware of them in developing your strategy.

Lack of Stop-loss Orders

You should virtually always have a stop loss order for any trade. It allows you to set an amount at which the trade is stopped. This should be implemented on the exchange or with a bot if the exchange doesn’t have this order type. But it is crucial to have this set the moment you enter the trade so that you aren’t letting your portfolio bleed.

With traditional low volatility assets, you might have this set really tightly at just a percent or two away from your trade entry point. But since most cryptocurrencies are quite a bit more volatile, you might decide to allow yourself a bit more margin and a wider gap.

Knowing when to end a bad trade is one of the hardest but most important things to master with cryptocurrency day trading.

Not Sticking to Your Strategy

You must stick to your strategy. If you are easily distracted or scared by the market movements, you can fail to be profitable, even with the perfect strategy. Carefully crafting a strategy to know when to enter and exit a trade is critical but useless if you don’t do it in practice. It also makes it more difficult to determine if your strategy is actually profitable if you don’t stick to the same routine. Above that, it ensures you are putting your carefully researched strategy into place and not allowing emotions to rule your day trading decisions.

Lack of Diversity and Overexposure

This is something that is easier said than done in cryptomarkets. Mostly this is due to most assets being highly correlated with the price of Bitcoin and often being homogenous. But crypto-assets seem to be slowly decoupling as time goes on.

Additionally, it’s never wise to go all-in or wager a majority of your portfolio on a single trade. Always keep as much cash or “stable” assets or stablecoins in your portfolio as possible. If a good trade opportunity arises while you are in the middle of another trade, you want to be able to do both simultaneously. Opportunity cost is a very real thing. The market is random and if you are stuck holding too much of the wrong asset, you could miss out on some big opportunities.

But aside from the opportunity risk, there is just the fact that bad and even disastrous trades happen all the time. If you’re overexposed, it can ruin your portfolio.

Overconfidence

Overconfidence is a huge issue with traders involved in any market. It’s easy to mistake a larger market cycle for your own skill. You may have a strategy that only works simply because you are in an uptrend or a larger bubble. When the market reverses or a black swan occurs, it could wipe out all the profit you made in the market.

To avoid this, it’s a good idea to always set aside a portion of your profits that you make, rather than putting it back into your active portfolio. Ideally, you can not only design a robust portfolio but also create an antifragile one as well. This will allow you to benefit from the unexpected.

Summary

There are a lot of things you need to take into account to mitigate the risks inherent with cryptocurrency day trading. These risks range from the more technical, such as cybersecurity, to actual trading techniques.

Always take extreme caution with cryptocurrency day trading and start small. Increasing your trade sizes should happen organically as you become more proficient, more profitable and more confident in your abilities as a crypto day trader.

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