Day trading of digital currencies
If you want to get started in cryptocurrency day trading, here is everything you need to know in order to gain a thorough understanding of the fundamentals of this market.
Spending some time and effort to understand the basics of trading in the digital currency market and see its ins and outs and how it works is a major factor contributing to the success and superiority of traders. The currency market offers the best profit opportunities for exactly these. What’s more, this industry provides investors with a fantastic profit opportunity for day traders and speculators due to the extreme price volatility that is not available in other markets.
Day trading is a speculative process based on the movements and fluctuations in the prices of products and financial assets over one day. Day traders often buy and sell any number of financial instruments within several hours, or less, and profit from speculating on short-term price movements. Day traders must keep abreast of what is moving the markets in the short term and can place hundreds of orders per day to maximize profit.
The digital currency industry
For decades, traders have focused on a few distinct markets that enabled them to take advantage of the profit opportunities it offered. Over the past several years, cryptocurrencies have been seen with increasing liquidity and great trading profit opportunities. A digital currency being a digital asset is secured by consensus algorithms, such as proof-of-work or proof-of-stake, with transaction information stored in a digital ledger. Today there are thousands of digital currencies and this in turn creates more opportunities that day traders can exploit to make gains and grow wealth.
Here are the most important categories of digital currencies:
Bitcoin has become the industry standard in the digital currency world. This digital asset has grown not only in terms of popularity, but in terms of the technology behind it as well. Bitcoin was conceived as a form of decentralized digital currency that can be used around the world without fear of censorship. Bitcoin has a fixed balance of 21 million coins that can ever be mined. It has remained the largest cryptocurrency in the market with a valuation close to $200 billion. Almost half of all trading activity in the industry takes place using bitcoin, with billions of dollars in daily trading volume. Due to the abundance of liquidity, Bitcoin is one of the most approved options for those looking to start trading cryptocurrencies.
Alternative digital currencies:
All digital currencies other than Bitcoin are called altcoins. Cryptocurrencies in this category have different technological variations and uses, from building decentralized applications (dApps) to creating a world of decentralized finance. One of the most popular altcoins is Ethereum, which is an open source programmable blockchain. Many other altcoins also take the form of ERC-20 tokens, which means they are built on the Ethereum protocol. These include EOS and TRON.
Stablecoins are becoming increasingly important to traders and investors. They are digital currencies that are relatively stable in price, as they are backed and pegged to a fiat currency. Tether (USDT) is the largest stablecoin whose price is pegged to the US dollar. For regulatory reasons, many exchanges avoid the US dollar, but listing the coins against Tether allows them to tap into the world’s primary reserve currency without actually touching it directly. Tether being a great trading pair for bitcoin and cryptocurrency traders as it allows them to easily trade within the cryptocurrency space without having to make many transactions.
Structuring the digital currency trading market
The cryptocurrency market is a very broad market, with digital exchanges operating all over the world. In many countries, it is very easy to set up a digital stock exchange. This led to the spread of cryptocurrency trading platforms all over the world. In traditional financial markets, traders often can only access an exchange through a broker who is a member of that exchange. But in the case of the cryptocurrency market, these exchanges not only act as a venue for execution, but also act as a broker.
Each exchange must attract market makers, also known as liquidity providers, to provide negotiations and offers for the exchange order book. These bids and offers affect price and liquidity. Unlike some of the world’s exchanges, where regulations require brokers to execute clients’ trades at the best market rate, there are no similar requirements in the cryptocurrency market. Therefore, small exchanges with low liquidity often offer low prices to their customers.
Since exchanges can vary greatly in terms of liquidity or pricing, for example due to differing supply and demand, there are a lot of opportunities for traders to take advantage of and many risks that they will have to deal with.
Cryptocurrency exchanges have a wide international client base, as they can be accessed all over the world. They are generally unregulated and therefore open 24 hours a day, 7 days a week. Day cryptocurrency traders can place orders at any time of the day or night. Exchanges are also working continuously to provide easy access to its users. Although, in practice, exchanges may stop periodically for maintenance or system update purposes.
Traditional currencies vs stablecoins
Transactions in US dollars, euros or other fiat currencies bring a significant regulatory burden. Exchanges such as Coinbase, Kraken and Bitstamp, which have large customer bases in the US and Europe, are willing to accept this regulatory burden and invest in effective anti-money laundering programs and ensure reliability in their relationship with clients. As such, exchanges that list traditional currency pairs are more selective in the digital currencies they offer to their clients.
Many digital exchanges, especially those based in Asia and outside the US, such as Binance, Huobi, and OKEx, do not deal in US dollars, and only deal in stablecoins or other digital currencies. Due to the lower regulatory requirements, traders can often find a much larger selection of digital currencies at prices compared to stablecoins. Dealing in digital currencies allows users to completely bypass the traditional financial system.
Finance in the currency market
Capitalization in the day trading digital currency exchanges
Today’s cryptocurrency traders have a variety of options when it comes to funding their trading accounts. Almost all exchanges support bank accounts and wire transfers, and debit card payments are also very common. Other payment methods such as credit card and PayPal accounts are less popular, but are also accepted by some exchanges. Some of these alternative financing options can cost high fees, so be sure to read the fine print. For traders who are already in the game, it is often the best option to fund the account directly from the digital wallet.
Lack of leverage and short selling
In general, day traders always choose to take advantage of leverage in order to maximize their returns. Leverage is the process of using a small amount of capital to open positions much larger than the available capital. This can amplify trade returns without risking large capital upfront, although this can also amplify losses. Unfortunately for cryptocurrency traders, there is a lack of leverage on most cryptocurrency exchanges, but this has started to change recently. Regulated exchanges are slowly starting to open leveraged trading to clients, and recently, Coinbase Pro has started offering leverage to its clients. This can be an excellent option for those interested in cryptocurrency day trading.
In addition to the lack of leverage, it is difficult to find ways to short sell cryptocurrencies directly. Short selling, or betting on an asset, is the most direct way to profit from a decline in the price of an asset. For cryptocurrencies, there is no real option for shorting these assets on regulated exchanges.
degree of protection
When it comes to security and degree of protection, cryptocurrency exchanges as a whole have a diverse and proven track record. There have been many exchanges that have been hacked, and as a result, the money and coins of the traders have been stolen. However, in recent years, the security of most exchanges has improved dramatically and hacks are becoming increasingly rare. But the element of security is still one of the biggest considerations when an investor chooses the exchange where he will trade his digital currencies. A digital exchange is good the greater the degree of protection it provides to its customers. Traders should choose exchanges that can guarantee the security and protection of all funds on their system
only basic. Most of the more well-known exchanges, especially those operating in well-regulated jurisdictions, have very good track records.
Data and analysis of the digital currency market
The exchange’s order book displays a real-time list of requests for pending orders from traders to buy or sell cryptocurrencies. The order book is organized by price, but also displays the order quantity as well. The difference between the highest buy order and the lowest sell order is known as the spread. Spreads on cryptocurrency exchanges are often wider than spreads on other cryptocurrencies, due to their unregulated nature, sharper currency price fluctuations, as well as relatively higher fees.
Almost all exchanges provide a brief history of the most recent trades made on the exchange. Users can find the transaction size, price and time the transaction was made. This data can be particularly useful for cryptocurrency day trading purposes as it will help traders get a good indication of the cryptocurrency’s short-term price movement.
Digital and discount exchanges
Since the digital exchanges are not linked to each other, there can be variances in the prices of the same asset across the exchanges. This causes one digital currency to sell at a high or low price on an exchange compared to another. These discrepancies can be much greater on cryptocurrency exchanges than they are on other asset exchanges. Being able to take advantage of these spreads is an excellent way to profit when day trading cryptocurrency.
Executing orders in the day trading digital currency exchanges
Fees and levels
Cryptocurrency exchanges differ in terms of their fee structures. Most exchanges charge a fee per trade, with a fixed percentage or cash fee. These fees vary depending on your position in the trade i.e. either as a maker or as a trader, and the makers’ fees are often lower in order to incentivize them to add liquidity to the market, which in turn can attract new traders to the market. Fees are often reduced based on trading levels centered around the 30-day trading volume. The fees paid by traders at the top tiers can be a small fraction of the fees paid by traders in the entry level tier.
You may also have to pay fees for deposits and withdrawals depending on the exchange. The cost of this fee can vary, but can be as high as 5% of deposit or withdrawal requests on some exchanges.
Market maker vs order taker
In any market, there are two parties trading assets with each other, the market maker party who places a limit order in the market and the executing party who initiates the transaction. Many of the orders in the order book come from professional market makers, who provide liquidity to the market as they update their prices based on market activity in each period. A group of makers usually consists of professionals who rely on computer algorithms to update and manage orders, operating at a higher level of sophistication than the average day traders. But many limit orders are market sellers hoping to get a better price or pay lower fees.
On the other hand, the other side is a day trader who is looking for liquidity and executing a trade quickly. Market buyers also want to get the best possible price for the trade.
Types of market orders
A market order is a basic order type that immediately executes a trade based on the current available price. As for the limit order, it is executed when the trader determines the price at which he wants to buy or sell. The order is executed once the previously specified price is reached. Traders can often set different limit orders such as buy limit, take profit, buy stop and sell stop orders.
Stop-loss orders are also an important tool that every day trader should make use of. A stop-loss order limits the losses of any trade by automatically selling the digital currency as soon as it drops below the specified price.
Arbitrage in the day trading digital currency market
While we like to think that the markets are 100% efficient, in fact they are not. As a result, there are ample opportunities to take advantage of price discrepancies across different financial markets and products as a way of reaping profits. Arbitrage is a method of trading in which day traders profit from price differences and profits from short-term trades between markets or products.
Since cryptocurrencies are a fragmented and relatively undeveloped asset class, there is still a large amount of arbitrage opportunities for cryptocurrency traders that can be taken advantage of.
Arbitrage through stock exchanges
Pricing across various cryptocurrency exchanges is rarely consistent. And unlike a regulated stock market, cryptocurrency exchanges are not directly linked to each other, and thus prices are determined by supply and demand levels on a particular exchange. Thus, these prices can fluctuate based on the exchange, its user base, and more.
Arbitrage in digital currencies
There is also the opportunity to arbitrage across various cryptocurrencies on the same exchange. Traders can identify price differences from one trading pair to another, and see the opportunity to profit by taking advantage of dips in the prices of the same cryptocurrencies on the same exchange. This often requires trading in and out of various digital currencies in order to take advantage of arbitrage across existing digital products.
Cryptocurrency day traders may rely on the more sophisticated strategies of “statistical arbitrage,” where price relationships are modeled on historical data and then traded on divergence.
Spot trading vs derivatives trading
Spot trades are made with physical asset exchanges, while derivatives are financial instruments whose values are derived from and dependent on spot prices.
Futures contracts are the most traded derivatives and they reflect a standardized agreement to trade an asset at a future date. With the growth of the cryptocurrency industry, exchanges are starting to provide more futures trading opportunities that did not exist before. Exchanges such as CME and Bakkt offer their clients Bitcoin futures trading opportunities instead of spot trading opportunities. The difference in price between futures and spot trading can come from the cost of holding as well as the differences between the bid and ask levels. The cost of holding a purely financial instrument like Bitcoin is determined by the risk-free rate of return over the holding period.
Other derivatives such as perpetual swaps and options have become increasingly popular in recent years, but they also carry with them more complexity that a trader should make sure they understand well before starting to trade them.
Technical analysis of the digital currency intraday market
Cryptocurrency charts can be read in the same way a day trader would read the charts of any other asset. Technical analysis takes into account the asset’s price history and its key indicators to predict future price movement. Many exchanges have advanced charting tools like trend lines and moving averages, which are very useful while doing technical analysis.
Regulations of the digital currency day trading market
Regulation plays a major role in maintaining the security and integrity of the cryptocurrency trading market. As discussed earlier, security is one of the major considerations that traders make while choosing a suitable exchange to place their funds on.
Regulations of the digital currency market in the United States and abroad:
Digital currency regulations in the US are not well established, but both regulators and market participants are constantly improving clarity. With the federal government failing to provide adequate regulation, each individual state in the country introduced a raft of legislation aimed at regulating all firms in the industry. Many market participants want to avoid the need to register as brokers and dealers because this carries a significant legal and regulatory burden, so they are always careful not to engage in transactions that would expose them to securities law or get involved with products that fail the “Howey” test. Rating of many Some of the most popular cryptocurrencies, such as Bitcoin and Ethereum, are classified as commodities rather than securities. Large US-based exchanges such as Coinbase have done their due diligence to deal with this.
There are certain regulations that all cryptocurrency exchanges around the world adhere to – including anti-money laundering (AML) and customer wellness programs – which aim to confirm the identity of their customers and ensure that anyone involved in illegal activity is prevented from participating in the market.
There are varying degrees of regulation of digital assets around the world that vary by country. For example, cryptocurrency-friendly countries like Switzerland regulate initial coin offerings, trading operations, and other currency-related businesses. While some few countries such as Morocco, Bolivia and Vietnam have banned the use of all digital currencies, regardless of their function.
An exchange’s ability to execute trades quickly and at fair prices is all about the quality of execution. While the speed of trade execution can be measured fairly objectively, price quality is difficult to measure. Tight spreads between bid and ask levels, high volume in the order book, and prices compatible with other exchanges’ prices will all lead to high execution quality along with the price. Execution quality is a critical factor when determining whether one can be successful in cryptocurrency trading.
Tax implications in the digital currency market
There has been a lot of controversy about how digital currencies should be treated in the eyes of the IRS. In 2014, the IRS recognized that Bitcoin and other cryptocurrencies are considered “intangible property” and not currency. Cryptocurrency trading is currently subject to capital gains tax similar to stocks. Thus, day traders in the cryptocurrency market will be subject to a short-term capital gains tax on their trades.
Here are some cryptocurrency day trading tips and steps that you can follow
Don’t risk more than you can afford to lose
When starting to day trade cryptocurrencies, traders should never risk more capital than they can afford to lose. Doing so will definitely put you under some financial stress. When evaluating trading opportunities, day traders should keep in mind the 1% rule, which states that no more than 1% of trading capital should be risked on a single trade. This helps spread the capital across several deals and reduces the risk in the event that one deal goes badly.
No matter how ready a trader is to start day trading cryptocurrency, he should tread lightly and carefully. This new asset class is full of potential, but it can also be fraught with risk and unpredictability. It is important for day traders to start slowly, taking only small trades at first before they can fully understand the market. As the trader becomes more experienced, he can increase his trading volume and start adopting more complex strategies.
Invest in yourself
Learning how the cryptocurrency markets work takes a lot of discipline and commitment. Digital currency assets differ in terms of their uses and functions, which is what makes them very different from stocks. A trader can do everything in their power to learn all they can about this market, but there is no substitute for the applied learning that comes from practice and exposure to the field. So try to get a demo account to be able to practice what you learned here without risking any real capital.
As a relatively new market, cryptocurrencies are still in uncharted territory for all the growth and prosperity. The entire industry is still figuring out how to deal with government regulation, trading leverage, and security, among many other things. This means that day trading cryptocurrency brings with it a great deal of uncertainty, but also a great opportunity for traders who know where to look and what to do.
This market is fragmented with dozens of different exchanges. Prices and fees can vary greatly from one exchange to another. Trading takes place in the spot and derivatives markets, against fiat currencies, stablecoins, or other digital currencies, and across various countries around the world. Traders who have the right tools and understanding can take advantage of this.
Not everyone can trade cryptocurrencies and it can definitely lead to financial losses if they do not have the necessary understanding and knowledge. But for those who take the time to educate themselves about the basics of this market, they can make very high gains and returns.
Disclaimer: The content of this article is for informational purposes only. The information provided should absolutely not be considered as investment advice or a recommendation. No warranty is made, express or implied, as to the accuracy of the information or data contained herein. Users of this article agree that Money Secrets does not accept responsibility for any of their investment decisions. Not every investment or trading strategy is suitable for anyone. See the risk warning statement.