How to Trade Cryptocurrencies

Adam Lemon

Cryptocurrencies are a highly volatile new asset class. Learn how to harness the power of crypto and build profitable cryptocurrency trading strategies.

If you are ready to take more concrete steps to profit from cryptocurrencies, it’s time to consider in more detail how to trade crypto. Many people invest in the right assets at the right time, yet still end up losing money because they either don’t plan or, if they do, they don’t stick to it. There are three things you must decide to get started:

  1. How much should I risk on cryptocurrencies?

  2. What is my time horizon (i.e. should I invest for the long term or trade in the short term)?

  3. Which cryptocurrencies should I deal in?

You answer to one question might affect your answer to another, but let’s consider them one by one.

How Much Should I Risk?

Cryptocurrencies are an extremely risky investment. So risky that in fact, you should be prepared for the possibility that the value of ANY cryptocurrency could fall to zero or effectively zero before you would have a chance to liquidate your investment and get out. 

Profit from Cryptocurrencies

This does not mean that you should not try to profit from cryptocurrencies. In fact, investments that carry the most risk often carry enormous potential upside in excessive positive returns. All that means is that you should be aware of what you are getting into. You should also be aware that there is little point in anticipating a maximum potential loss of X% - your entire stake could go up in flames. In truth, you must be prepared to lose every penny you invest in cryptocurrencies in a worst-case scenario. So, the question “How Much Should I Risk?” becomes “How Much Can I Afford to Lose?”.

How Does Investing in Cryptocurrency Work?

Savvy investors typically dedicate a certain portion of their liquid, investible wealth to risky investments and the remaining portion to safer investments. For example, you could park 85% to 90% of your liquid wealth in an extremely safe investment such as an interest-bearing account at a major insured bank, or ideally U.S. Treasuries, and dedicate the remaining 15% to 10% to riskier investments and use fractional money management in position sizing. Due to the exceptionally volatile nature of cryptocurrencies, you may want to ensure you don’t put all your “risky” investment fund into cryptocurrencies, just to be on the safe side.

There are two methods you can use to make your operation less risky:

  1. If you choose to invest, you can invest in more than one cryptocurrency. This diversification should reduce your overall risk.

  2. If you choose to trade, you might use a broker offering guaranteed stop losses, and trade such small quantities that you are effectively not leveraged or even de-leveraged.

What is My Time Horizon? Should I Invest or Trade?

You need to decide how long you are prepared to wait for potential profits, and how much of your time you are able and willing to devote to your operations. The answers to these questions will decide whether you should be a “trader” or an “investor”. If your timeframe for an in-and-out deal is minutes, hours, or a few days, you are probably better off trading cryptocurrencies through a brokerage, and considering yourself a trader rather than an investor, if you can cope with trading. If you are prepared to stay in the deal for weeks, months, or even years, then you are an investor. There are advantages and disadvantages to being either a trader or investor which you should consider before deciding which path is right for you:




Available Currencies


8itcoin, Ethereum. Ripple

Time Frame

Long Term

Short Term

Profit Targets



Transaction Fees



Ruin Risk



Labour intensive?




None or Low






Long Only


In some situations, these differences are a little unclear, so it is useful to look at a couple of real-life examples.The pros and cons of investing in cryptocurrencies are clear. They are very risky so you can make huge profit but the risk of substantial losses within only a few days is obvious. Investors can expect wild rides over the long-term so much be emotionally prepared for that. If you can cope with that, one of the pros is that an investment is not time-intensive, unlike trading, and involves low transaction costs. A major issue with investing is that there are still few alternatives to direct investment, meaning that investors need to find a way to store their digital ownership securely by using a good wallet. Yet even with a good wallet, security risks remain.

Cryptocurrency Investing for Dummies

In Case A, Mr. Investor decides that he wants to benefit from a potential long-term rise in price of several cryptocurrencies: Bitcoin, Ethereum, Ripple, Litecoin, and Monero. He invests equally in all of them, with a total investment of $5,000, while understanding that it is a very risky investment, and that he might lose all or almost all that amount. He opens an account with a cryptocurrency exchange where all these currencies can be bought and sold, deposits $5,000, and then purchases $1,000 worth of each of the currencies at their current market value. He pays a commission of 5% on these purchases to the exchange, which he accepts as the cost of doing business. He plans to cash out his entire investment in 2 years no matter its value and will cash out the investment in any single currency which rises in value by 1,000% before the 2-year time limit is reached. He checks his portfolio on a weekly basis and tries not to think or it or worry about it, accepting its value will fluctuate strongly.

Mr. Investor does not want to be a trader, for several reasons: he wants to deal in Monero, which is not offered by any major brokerages now. He also has a long-term time frame and does not want to spend much time managing his investment. A few minutes each week is all he will need to be a long-term investor.

How to Trade Cryptocurrency and Make Profit

In Case B, Ms. Trader likes to check the market four times each day to decide whether to buy or sell various assets – she is a swing trader. She sees that the larger cryptocurrencies such as Bitcoin and Ethereum are attracting a lot of interest, and moving in strong, volatile trends, and thinks that these are markets she wishes to be involved in. She opens an account with a broker offering trading in Bitcoin and Ethereum, and deposits $1,000, a small fraction of her liquid wealth. Using her own analysis as a discretionary filter on top of a complete trading strategy, she buys and sells Bitcoin and Ethereum when she thinks they are more likely to go up or down over the next day or so. She risks only 1% of her account value per trade and uses hard stop losses which are wide enough to accommodate the high volatility of these instruments. She tries to take profit on winning trades when they are in profit by at least 3 times the amount or the risk of the trade, and sometimes leaves part of winning trades open in the hope of riding very strong trends for even greater profits. She can profit from correctly anticipating decreases in value, as well as price increases, as brokerages allow short selling, as well as long trades. She pays a commission to the broker in the form of spread differentials when she enters and exits each trade. She also pays a fee on each open trade every night, which encourages her to close most trades within only a few days from their open. She hopes to double her initial deposit within 6 months to 1 year, but she accepts that using non-guaranteed stop losses means that in the event of a price crash, she could lose most of her account in a matter of seconds. For this reason, she is very interested in the possibility of buying options on Bitcoin and Ethereum

Ms. Trader does not want to be an investor, as she feels that as a skilled trader who is already spending time monitoring markets every few hours during each day, she may as well add the major cryptocurrencies to her list of assets to watch. She also believes she can make more profit in a shorter amount of time than she could by making a long-term investment.

These cases should hopefully give you an idea of whether investing or trading is likely to suit you better. Which type of strategy and lifestyle do you relate to better? It is almost certainly true that if you have not traded already, it is better to become a long-term investor. If you are not already a competent trader in other assets, you are extremely unlikely to make more money trading the major cryptocurrencies than you would by investing in them. As investing is likely to be the way to go for most, the next section will explain the “how” of investing in cryptocurrencies, and the section after that will do the same concerning trading cryptocurrencies.

There are different ways to profit from cryptocurrencies and the best investment vehicle will depend on your specific financial goals. Get started by following the steps below:

  1. Determine which cryptocurrencies you want to invest in and how much you are prepared to risk.

  2. Determine a maximum time frame for cashing out the investment, and targets for cashing out that will be acted upon if they are reached before the maximum time frame. The length of the maximum time frame is a personal decision, but something between 9 months to 2 years is probably optimal. You can always decide to invest again when the time is up. Deciding the targets at which you will take profit before the time limit is up is also a personal decision, but as a rule, it should be at least 300%. This is because targets should be exponentially greater than risk, and the risk is effectively 100%. Additionally, we have seen price rises in cryptocurrencies by this amount or more within the past 6 to 9 months or so, and it makes sense to have targets that match prevailing conditions of volatility.

  3. Determine how you will invest: whether by direct ownership, or indirectly by purchasing shares in a cryptocurrency fund. By late 2017, a third option should exist- the possibility to buy options on the major cryptocurrencies. Remember that if you want to be involved in the smaller cryptocurrencies, you will probably have no alternative except buying them directly, as few funds offering shares will be investing in them.

How to Day Trade Cryptocurrency

Day trading cryptocurrency can be extremely challenging due to the relatively highly volatile price movements of most cryptos, and due to relatively high spreads. I would not advise any beginner to day trade cryptocurrencies as it will take skill and strong emotional control to be profitable day trading cryptocurrencies.

Anyone wanting to day trade crypto will need to open an account with one of the best crypto brokers or alternatively with a cryptocurrency exchange. The typical spreads offered at the alternatives considered should be carefully noted at the times of day you typically want to trade and factored into a back test of your trading strategy to ensure it has a record of appropriate profitability under the trading conditions provided.

The final elements required to successfully day trade cryptocurrency is deciding on your trading strategy or strategies and which cryptocurrencies to trade. Concerning which currencies, the two most liquid and largest cryptocurrencies Bitcoin and Ethereum are worth focusing on. If a more minor cryptocurrency is in the news and moving with strong directional momentum, it may be worth trading that also on a temporary basis.

Any cryptocurrency day trading strategy should be based upon what is happening on higher time frames. As a rule, it is best to only look for long trades if the price is higher than it was 1 and 3 months ago, or short trades if lower than both. If the price is in between, it will be a good idea not to trade.

Now you know which cryptocurrencies you should be trading and the higher-level trading strategy you should use, you only have to find pinpoint entries and exits during your day trading session accordingly, using any technical strategy you like.

Another good tip is to pull up an hourly price chart of Ethereum and Bitcoin and draw horizontal lines which have recently acted as both clear support and resistance from both sides. These major cryptocurrencies tend to respect technical price levels, so when you see a reversal from one of these levels on a short time frame back into the direction of the higher time frame trend, these can be great opportunities for high reward to risk day trade entries.

Remember that the best day trades usually keep running into more and more profit as the trading session goes on, so do not be in a hurry to exit from a winning trade.

Direct Purchase of Cryptocurrencies

For most investors today, the cheapest method once transaction fees are considered, is simply to buy cryptocurrency directly and store it. This leaves you, the investor, with the legal ownership of the asset as well as the responsibility of storing and protecting it. The worry is in protecting the code, as the proof of ownership of most cryptocurrencies is like a bearer share: anyone with access to the code can “spend” the cryptocurrency. Remember that even if you have the code on a piece of paper, and receive and store it by email, it is just as vulnerable to hacking as your email is. An alternative storage and protection method is to use a digital wallet and/or vault. These can be a third party’s server, a smartphone app, or a program you store on your computer or on a flash drive. You can download them all for free. All these methods have obvious advantages and potential risks. There is always some risk of hacking or physical damage resulting in a total loss of the investment.

As for making the actual purchase, there are two main methods:

  1. Using an online cryptocurrency exchange, such as Coinbase. They typically charge fees of at least 5% of the transaction value.

  2. There are ATMs in some cities which accept cash, debit and credit cards in exchange for cryptocurrency. A fee of up to 18% will be charged on a transaction, and you must have a wallet set up before you can make the purchase. Many ATMs offer only Bitcoin, but some can also be used to buy Ethereum, Litecoin, Dash, and Dogecoin.

Don’t forget that ATMs only allow the purchase of cryptocurrencies, and not sales. This means that if you own cryptocurrency and want to cash in your investment later, you will have to open an account with a cryptocurrency exchange to make the sale. Of course, at some point in the future, there may be a wider range of ways to spend cryptocurrencies or otherwise cash them in, so your options are likely to be better than they are now. 


Although the cheapest possible method of direct purchase is usually through online exchanges, it can take a while to open an account and fund it, by providing ID and other required proofs, and making the bank or credit card transfer. It is also true that many exchanges do not yet accept deposits from residents in many countries. This means that if your country has an ATM where cryptocurrency can be purchased, this may be your only option, even though the fees are higher.

The usual method is as follows:

  1. Download a wallet application onto your smartphone which can store your desired currency.

  2. Obtain the amount of cash you wish to invest. At the ATM, select your purchase and feed in the required cash. The ATM then allows you to scan your smartphone, and deposits your cryptocurrency into your smartphone’s wallet. You now have the proof of ownership stored in your phone.

  3. The wallet may not show you the cryptocurrency’s current value in the fiat national currency you want to value your investment in, so you will need to make a note of the price at which you made the purchase and judge its fluctuations from there.

For this reason alone, online exchanges are easier to operate and monitor, and they can be funded by bank transfer, credit cards and other methods instead of cash.

Cryptocurrency Funds

Another option which might be useful if you want to be highly diversified and invest in a range of different cryptocurrencies, is to buy shares in a cryptocurrency fund. The fund will buy and sell substantial amounts of cryptocurrencies, according either to fixed rules which are known to you, or to its own discretionary and active management. You buy a share of the fund, hoping that at some point in the future, the fund’s investments will have increased in value, and you will be able to sell your shares at a profit.

An example of a fund with fixed rules would be a fund that works as an index tracker. Imagine a fund that aims to track the performance of a major stock index like the S&P 500, which is composed of the 500 largest publicly quoted companies in the U.S.A. in terms of market capitalization, in weights in proportion to the capitalization sizes. In the same way, a fund might exist that invests in the 10 largest cryptocurrencies, periodically rebalancing as capitalizations fluctuate and as new cryptocurrencies occasionally replace older ones within the top 10. You might be interested in buying shares in one of these “tracker” funds. Other funds might offer a more discretionary and active investment style, choosing to invest or even trade the larger cryptocurrencies actively. Others still will specialize in long-term investments in small cryptocurrencies, where they expect to see long-term growth. Generally, cryptocurrency funds will be “long only”, and are an emerging area, where we can expect to see more choice as time goes by.

The major advantage of investing in cryptocurrency funds is that is offers an easy and sophisticated service. However, there is often a serious drawback in these funds: they usually trade at a high premium above the net asset value, or in plain English, are seriously overvalued beyond the assets they own. This means that unless you are getting active investment management or a very accurate tracker of the entire market, you are likely to have to pay much more than you should for the shares, making it an uneconomical option. Things may improve in the future as the market matures.

An alternative method for building something similar to a Fund approach is to use the broker eToro, which at the time of writing offers a “CryptoCurrencies Copy-Fund”. Buying or selling units in the Fund allows the trader to automatically copy eToro’s top traders’ operations in Bitcoin and Ethereum, weighted according to the currencies’ respective market capitalization.

Cryptocurrency Options & Futures

Options and futures are derivatives contracts which allow the investor or trader the chance to profit exponentially when they are right, while limiting their potential loss when they are wrong to a defined and relatively small amount. At the time of writing, there are a few online exchanges which offer such instruments based upon Bitcoin; however, deposits must be made in Bitcoin itself. This is expected to begin to change by the end of 2017, but for now, here is an example of how such an investment could work:

You believe that the price of Bitcoin will rise strongly over the coming weeks, and three months from now will be valued well over $6000.00 per coin. Say it is presently valued at $4000.00 per coin. You are prepared to risk $800 on this transaction. You could simply buy $8800 worth of Bitcoin, or you could buy the Bitcoin and deposit it with a Bitcoin options & futures exchange and buy an option for $800.

If you buy $500 of Bitcoin, and after three months the price has risen from $4000.00 to $6000.00, you could sell your one eighth of a Bitcoin for $750, collecting a profit of 50% ($250).

Alternatively, say you buy an option to purchase Bitcoin at $4000 per coin in three months. The price of the option is $800, and after three months, the price of Bitcoin has risen from $4000 to $6000. As the option gives the right to buy 1 Bitcoin at a $2000 discount, it will be worth (just under) $2000, generating a profit of $1,200 ($2000 minus the purchase price of $800), equal to a return of 150% (ignoring any financing costs).

Such an option would expire worthless if the market price is less than $4000, and would produce a net loss if the market price is less than $4800 (the cost of the option plus the exercise price).

Futures contracts are a little different: instead of giving you an option to buy or sell at a particular price at a future date, they are a commitment to do so. The logic of profit and loss is effectively the same as outlined above for options trading.

At the end of 2017, the Chicago Board of Exchange hopes to begin offering futures in Bitcoin, which could be purchased directly with fiat currency, and may expand later to other, larger cryptocurrencies, and to options as well as futures.

It should be noted that online cryptocurrency exchanges are currently only offering options and futures in Bitcoin. As these options and futures can be bought and sold on a secondary market within the exchanges and do not have to be held until maturity, they can also be a suitable vehicle for anyone wishing to trade Bitcoin instead of investing. Trading cryptocurrency is covered in the next section of this guide.

Key point for investors: many investors lose money because they hold onto their investment too long and fail to take profits in a timely way. Another common mistake is getting too excited by floating profit (profit on the table) and cashing out too early, when the best thing to do is sit tight. As mentioned earlier, the best chance to avoid these mistakes is to decide a future date when you will cash out no matter what, and to make sure you cash out in advance if your investment reaches a certain return, which should be at least 300%. If your investment is rising strongly when it reaches the profit target, it may be wise to wait until it stops rising – using this technique, you have a good chance of picking up some extra profit.


Is crypto trading profitable?

Cryptocurrencies are extremely volatile which means they can offer tremendous opportunities to traders, who make profit from price movement. Cryptocurrencies also tend to follow technical piece levels as they are so highly speculative, which can make them easier to trade than assets with less speculative demand.

Which platform is best for trading cryptocurrency?

Many Forex / CFD brokers now offer accessible trading in cryptocurrencies, notably eToro. Crypto exchanges are another alternative but may be less secure and regulated than Forex / CFD brokers.

How much money do you need to start trading cryptocurrency?

The minimum trade size for cryptocurrencies tends to be about $25, so assuming a worst-case losing streak of 20 trades, you should always start with more than $500. The higher your deposit the better trading terms you are likely to be able to get, but it is important always to only trade with money you can afford to lose.

How do you successfully trade cryptocurrency?

You can successfully trade cryptocurrency by trading strong multi-month breakouts, or by entering early after reversals at counter-trend extremes, such as 1 or 2-day highs or lows or other obvious technical support or resistance levels, using price action to determine the likely strength of the reversal. Use of a trailing stop is recommended.

How should beginners trade cryptocurrency?

Beginners are likely to have most success by starting with a rules-based technical trading strategy on only the top two major cryptocurrencies by market capitalization.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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