Day Trading Cryptocurrencies – Profit from the Volatility of Bitcoin, Ether & Co.

cryptocurrency trading

Turn 500 USD into over 10,000 USD within a week? Sounds frivolous? It usually is, but with cryptocurrencies everything is possible. Bitcoin and especially smaller cryptocurrencies have extremely high fluctuations. If you trade them leveraged, the potential is almost limitless.

But first an important risk note: Leveraged trading with cryptocurrencies is very risky. There is the possibility of losing all your invested capital. You should always only trade with capital that you have left! Day trading is usually not a way to get rich quickly and even if you can make your first trade within minutes, it often takes several months or even years until you master, especially the mental challenges.

If the risk is ok for you, I will introduce you today to the basics of cryptotrading, i.e. short-term trading with cryptocurrencies. This is a completely different approach than long-term investing in cryptocurrencies, because we can’t care about the quality of the individual currencies and their long-term value stability or development. Furthermore, we can profit from both rising and falling exchange rates! So even if the media say the Bitcoin is dead again, you can profit this way.

I will not go into the basics of day trading any further. You can find them in books about Daytrading for beginners or in video courses.

What are cryptocurrencies?

A cryptocurrency is a form of digital money, which is based on the blockchain technology with a few exceptions. Another basis is cryptography, from where the name cryptocurrency is derived. Cryptography prevents transactions from being manipulated or money from being spent twice.

Already today besides cash there is also so-called book money, which is also entirely digital. Book money is used everywhere where cashless payments are made in the form of credit cards, cheques, transfers etc. Despite its widespread use, book money is not legal tender in Germany, for instance. It is created by depositing cash in a bank account or by granting a loan.

Cryptocurrencies are a form of book money, but no banks are necessary. They can be generated decentrally by anyone using cryptographic calculation processes. Just like book money, they represent a claim for cash, but are currently not legal tender in Germany, unlike in other countries such as Japan or Australia. It is precisely this independence that some established banks and government bodies are naturally concerned about.

In crypto-currencies, a distinction is made between Bitcoin and all other so-called alternative coins, or Altcoins. On you will find a comprehensive overview of the most important cryptocurrencies with their market capitalization. There are currently already well over 2000 different Altcoins and more are added regularly. However, the performance of these Altcoins is currently always very much dependent on Bitcoin as the “digital reserve currency”.

Crypto currencies are divided into tokens, often called coins or digital coins, which can be further divided depending on the currency.

A Bitcoin, for example, can be divided into 100 million parts. This hundred millionth part of a Bitcoin is named after the pseudonym of its inventor Satoshi. So just like a USD is divided into 100 cents, a crypto currency is further divided and can be bought in even the smallest parts. So even if the Bitcoin just costs 5,000 USD, you can simply buy 0.01 Bitcoin for only 50 USD. This 50 USD investment alone would have become many thousands of USD if you had bought at the right time.

As a daytrader you do not have to deal with the technical basics, the block chain and the cryptography behind it. Therefore I will leave it at this short introduction to the topic cryptocurrencies.

Where does the value of cryptocurrencies come from?

The concept of crypto-currencies sounds to many at first like a money printing machine that everyone can put up at home and a little bit it is. But strictly speaking, governments and banks are doing nothing else, especially with the current financial policies in the EU and the US creating masses of money without any real value to buy government bonds and postpone the consequences of the financial crisis.

The value of a crypto-currency, like almost any other means of payment, is created solely by the fact that people believe in its value. Behind government money are banks, countries, governments or alliances of states such as the European Monetary Union. These generate a certain trust in means of payment such as the USD.

It is similar with crypto currencies. Millions of people and institutions worldwide have agreed to believe in the value of crypto-currencies. The value (exchange rate) of the respective currency is then derived from the usual market processes of supply and demand, which we will look at in detail later.

The fact that Bitcoins have no real equivalent value is one of the most common counter-arguments used against crypto currencies. But what real value does a 50 USD note have in its pocket? What is the real value of a painting by Picasso? The answer is easier than expected: It’s always exactly what someone is willing to give for it.

If someone gives you 1,000 USD for a Bitcoin, it is worth 1,000 USD, and if someone gives you 100,000 USD for a Bitcoin, it is worth 100,000 USD. As crypto-currencies and the technology behind them become more widespread, the value of some of these crypto-currencies will increase many times over in the next few years.

Crypto currencies are often much more than just currencies or means of payment. Many represent shares and rights in technological projects and companies and are more comparable to shares, especially because some also have fixed dividends analogous to shares. The value of these crypto-currencies thus also results from the companies and projects behind them.

The good thing is, in day trading we don’t care if a crypto currency rises or falls. We always profit. It is only important to understand the market mechanisms behind it and we will look at them in detail later.

The requirements for day trading with cryptocurrencies

First of all, the good news: In order to trade crypto-currencies at short notice, the same conditions as for “normal” day trading with stocks or other financial products have to be fulfilled. I have again compiled a short checklist for you here:

You have understood the necessary theory of price formation and trading on the stock exchange (You can learn the basics in a video course).
You have the necessary hardware for trading, like a good computer and fast and stable internet connection, maybe also a mobile phone with a Bitcoin trading app when on the go.
You have opened a trading account and installed the Metatrader trading software ( Open a trading account / Video instructions Account opening and Metatrader installation ).

The good thing is: The broker AvaTrade recommended on the site supports also the leveraged trading with the most important crypto currencies.
You have either decided for a demo account or you have deposited the necessary starting capital (details about the necessary starting capital you can find here)
You have prepared your trading diary (details on how to create the trading diary can be found here)

Note: Please make sure that you have completed all points. Especially trading plan and trading diary should be prepared! Trading is apparently so easy because you can earn money with a few clicks, but in the long run I guarantee you, it is not always easy and without a reasonable plan and a control possibility, your chances of success are very low!

The two ways to trade cryptocurrencies (CFDs and Exchanges)

You can buy crypto-currencies directly on the one hand, which is successful with so-called Exchanges. These work like the good old exchange office and simply exchange your money from USD into the respective cryptocurrency. This whole process is a bit more complicated at the moment and since you have no leverage here, I will not discuss it further in this article.

The second option is trading CFDs (Contract for Difference) or futures, as is possible with the broker AvaTrade, for example. The good thing is, you don’t have to deal with all the basics. The buy/sell is done comfortably by mouse click as with normal shares or currencies as well.

The exciting thing about CFDs and Futures is that you can easily profit from falling prices and trade leveraged positions. Especially for day traders and very short holding periods this is a very interesting possibility. CFDs are well suited for beginners, as they require a lower starting capital. We will not look at futures any further here for the time being.

Contract for Differences (CFDs) are a derivative and a leverage product. If the Bitcoin is worth 3,000 USD, the CFD on the Bitcoin is also worth 3,000 USD. The CFD therefore always exactly reflects the value of the respective crypto currency. It is just a simplification of trading, as CFDs can be bought and sold normally through your broker, without delays or complicated transactions.

The advantages of trading cryptocurrencies via CFDs

The brokers offer you an infrastructure with professional trading programs, which has been established for many years, and therefore mostly the easier trading, because no additional accounts are needed and the exchange into “real money” currencies is done automatically.

The brokers are so-called market makers, which means that you do not trade with other market participants, but directly with the broker. There is therefore always sufficient liquidity available.

The recommended brokers are all state-regulated and regulated by various financial supervisory authorities and offer deposit protection.

Contract for Differences (CFDs) are a derivative and a leveraged product. So if the Bitcoin is worth 3,000 USD, the CFD on the Bitcoin is also worth 3,000 USD.

Which cryptocurrencies are suitable for short-term trading?

You should pay attention to two characteristics:

High liquidity: That means that the currency is traded a lot.
A high volatility: The price fluctuations, which is almost always the case with crypto currencies.

In the following, I will name a number of crypto-currencies with which you can start:

  • Bitcoin (BTC)
  • Litecoin (LTC)
  • Ethereum (ETH)
  • EOS (EOS)
  • Ripple (XRP)
  • Stellar (XLM)
  • Bitcoin Cash (BCC/BCH)
  • DigitalCash (DASH)
  • ZCash (ZEC)
  • NEO (NEO)
  • Cardano (ADA)
  • Tron (TRX)
  • Monero (XMR)
  • Bitcoin Gold (BTG)
  • NEM (XEM)

The first Trade

Once you have opened the trading account and downloaded the Metatrader trading software, you can start trading practically. The video below shows the opening and installation.

After that you will find in the list of trading symbols the different crypto currencies with their respective abbreviations as shown above.