Blog Crypto How to Trade Cryptocurrency: Play the Markets or Sit Back?

How to Trade Cryptocurrency: Play the Markets or Sit Back?

date April 26, 2022 time 5 min read 365 views

If you hear the phrase “crypto trading strategies,” you probably envision young geeks glued to financial charts on their screens all day long, working out the perfect moment to buy and sell their holdings. But in reality, knowing how to trade cryptocurrency doesn’t necessarily mean you’re a genius capable of predicting the markets ahead of time. There are various approaches you can take to trading, and we’ll examine a few of them below.

The art of crypto trading is understanding the fine margins between success and failure. There are some fantastic opportunities for growth in the space, but you also have to know when to step back and cash in. Don’t forget to take into account your risk tolerance. Factors like these will determine how to trade cryptocurrency while following a strategy that’s sustainable and suitable for you.

So, which type of investor do you want to be? One who looks for quick gains (an active trader) or someone who is prepared to sit back and wait for their assets to grow (a passive trader)? If you’re still not sure, don’t worry, because we’re about to give a detailed breakdown of both options.

Active crypto trading

Active trading is what most people probably imagine when they think of crypto trading strategies. It’s a short-term strategy focused on buying a crypto when it’s at a low and selling it when it’s high.

For example, if you saw that solana had dipped 20% over the last few days, you might think it was the perfect opportunity to buy it at a low in the hope of its value increasing significantly over the next few weeks. Then, if you were proven right and SOL increased by 50% a few days later, you can sell it for a profit. This is a simplified example, but you get the gist.

Looking at the graph below, you can see the crypto world is volatile enough for this type of approach to be profitable. If you’d bought SOL in July or August 2021 and sold it a few weeks later when the price started to improve, you’d be laughing all the way to the bank.

Active crypto trading is all about buying the highs and selling the lows.
Active crypto trading is all about buying the highs and selling the lows. (Source: CoinMarketCap)

This can also happen in a much tighter timeframe—in the volatile crypto world, it’s not unheard of for a cryptocurrency to increase or decrease in value significantly over a matter of days (or sometimes even hours). 

Because of all this volatility, active trading is a strategy that involves a significant amount of investment risk. It’s best not to trade more than you can afford to lose, and to prepare yourself ahead of time for how it would feel to lose money when trading. This way, you stand a better chance of keeping a clear head.

How to trade cryptocurrency actively

It’s easy enough to understand how active trading works in theory, but the big question is:

How do you know which assets are going to increase or decrease in value?

Active cryptocurrency trading is intense, but it can also be very profitable.
Active cryptocurrency trading is intense, but it can also be very profitable. (Source: Unsplash)

It often involves technical analysis—traders analyze charts and pricing signals to (attempt to) figure out when the market is about to dip, stabilize, or rise. This is an entire topic itself, but the general idea is spotting trends to try and predict the future.

There are different types of active crypto trading strategies, which follow the same basic logic but differ when it comes to the smaller details. Day trading is one of the most common; as the name suggests, you aim to buy and sell within the same day. Unlike the conventional stock market, the crypto market is open 24/7 rather than just working hours, so the term “day trading” generally means closing and ending positions within 24 hours.

Then there’s swing trading, a more general term that means trading over the course of a few weeks.

Passive cryptocurrency trading 

Although active crypto trading works really well for some people, it also carries a lot of risk. When you’re trying to buy crypto at a low and sell at a high, you run into trouble if you find that the market reacts in a way you weren’t expecting. In many cases, people end up panicking and selling at a loss.

While active cryptocurrencies trading strategies involve a lot of risk, a passive approach is a little more relaxed.
While active cryptocurrencies trading strategies involve a lot of risk, a passive approach is a little more relaxed. (Source: Unsplash)

Meanwhile, passive investing is much less intense. When you buy something, you’re in it for the long run, so you don’t need to worry so much short-term volatility. You could say that active vs passive trading is similar to the difference between trading vs investing.

For beginners or those who don’t want to be exposed to too much financial strain, this route makes more sense.

How to trade cryptocurrency passively

Whereas active crypto trading focuses more on technical analysis, passive trading is more about fundamental analysis. The idea is that you’re aiming to buy the cryptocurrencies with the most fundamental value. For instance, you might think that a crypto project has a game-changing protocol that is destined to take off when it gets noticed.

Investors are less interested in trying to buy and sell something at exactly the right moment, and more interested in buying the exact right asset. So, even if a cryptocurrency increased or decreased rapidly in price after you bought it, you’d continue to “HODL” (the crypto world term for holding a cryptocurrency over the long term).

Passive investors consider factors such as the technology behind crypto projects and its management team much more closely. Returning to the solana example, you’d resist the temptation to sell straightaway when the price increased, and continue to HODL.

However, we should note that things aren’t always this clear-cut—active traders can still consider fundamental factors, and vice versa.

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So, what will it be: Active or passive trading? Both are worthwhile strategies in their own right, depending on the level of involvement you want to have in the markets and the amount of risk you’re prepared to take on.

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George Schooling

George Schooling

Invite friends and you both earn 10 USDT when they first lend stablecoins or make a crypto-backed loan

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