Is It Possible to Make Money Day Trading Bitcoin and Cryptocurrency?

Is it possible to make money day trading bitcoin and cryptocurrency? The simple answer to this question is that, yes, it is possible, especially when some cryptocurrencies can jump by 10% or even more in the space of a few hours. However (and this is a big ‘however’), the strategy is unlikely to yield positive gains for long, with a high frequency of trades opening traders up to a high frequency of fees, as well as more volatility.

Indeed, research suggests that the vast majority of day traders lose money and end up quitting after a relatively short period of time, with long-term investment being the superior method of reducing risk and maximizing reward.

Day Trading In Crypto

At its simplest, day trading involves trading an asset (such as cryptocurrency) within the span of a single day. The basic idea is to buy a cryptocurrency and profit from sudden rises in price.

Sounds easy, right? Well, most day traders use a variety of methods to increase their chances of profiting, while they also tend to use technical analysis in order to get a sense for likely movements and ranges. This greatly complicates the work involved in day-trading, and makes it much more than simply acting on a gut feeling you might have about a cryptocurrency.

Let’s take a look at some of the more popular day trading methods and strategies.

• Arbitrage: this involves identifying differences in the price of cryptocurrencies from one exchange to another, with traders buying something low on one platform and selling it high on another. Some traders also look for discrepancies from one market to another on a single exchange, meaning certain cryptocurrencies may be worth less with one trading pair and worth more with another. Cryptocurrencies generally need to be bought in large quantities for this method to provide a significant profit.

• Scalping: this is probably the most common form of day trading. It basically involves trying to profit from small price changes, under the assumption that the movement of cryptocurrencies is uncertain once they’ve made an initial jump upwards. In other words, a scalper buys a large quantity of cryptocurrencies just before the market rises, and once it does enjoy a rise they sell up almost immediately, before their holdings really have a chance to fall back down again.

• Range trading: this involves using support and resistance levels to determine the timing of buys and sells. Traders aim to buy once a cryptocurrency hits a support level and sell once it hits a resistance level.

• High-frequency trading: a form of trading that uses algorithms/computer programs to execute a large number of transactions in fractions of a second. The algorithms involved generally execute trades based on predefined market conditions, with many targeting short-term market inefficiencies and spreads.

These are the most common forms of day trading, although you may also encounter news-based day trading. As the name implies, this involves reacting early to news and events and the effects they have on cryptocurrencies. Basically, you need to wake up earlier than anyone else and scan the latest headlines before logging into your exchange.

Almost all forms of day trading involve the use of charts and technical analysis. While a full overview of technical analysis is way beyond the scope of this article, it essentially involves an analysis of price trends, chart patterns, volumes, moving averages, and support/resistance levels, among other things. Put simply, it involves spotting trends before they happen, based on what has happened in the past.

Day traders may also use leverage (borrowing money to make bigger trades) in order to increase their chances of big payoffs. Of course, leverage comes with the risk of even greater losses, while an exchange or broker providing leverage may request additional funds if the underlying cryptocurrency drops in price (or rises in the case of shorts).

Lastly, one other thing day traders may use are bots. A wide-range of bots have been developed for a number of popular exchanges, and while they generally require some degree of coding and/or technical knowledge, they essentially allow you to automate trading strategies. This is perfect if you’re a high-frequency day trader.

Some of the most well-known bots include:

• Pionex

• HodlBot

• Trality

• Cryptohopper

• Quadency

• Bitsgap

• Coinrule

Needless to say, such bots require traders’ have a very clear idea of what they want to do, as well as enough time to devote to customizing or programming them. They also usually incur a subscription fee, so they aren’t necessarily cheap.

How Much Profit Can You Make?

The above provides a good introduction into what day-trading in crypto usually entails. Of course, it begs the question: are you likely to make money day trading? More importantly, are you likely to make money consistently and sustainably?

The answer is: probably not. Yes, we do hear the occasional story of day traders making a fortune (and sometimes losing it). And yes, cryptocurrencies can sometimes rise by anything from 20% to 800% (!) in a single day.

However, the available evidence suggests that most day-by-day traders lose out.

For instance, a comprehensive 2019 study of day-trading in the Brazilian futures market (then the third-biggest in the world) found that 97% of all day-traders who persisted for over 300 days lost money. What’s more, only “1.1% earned more than the Brazilian minimum wage and only 0.5% earned more than the initial salary of a bank teller.”

Similarly, a 2017 study from the University of California and Peking University found that 75% of day traders quit within two years, presumably because they can no longer afford to continue. The survival rate for one year is only 44%, while it drops to 15% after three years.

Again, a 2013 Taiwanese study reached the startling conclusion that “less than 1% of the day trader population is able to predictably and reliably earn positive abnormal returns net of fees.”

As for cryptocurrency, a 2020 study from researchers at the University of Limeric observed that the “volatility incorporated in cryptocurrency prices makes it difficult to earn a profit through day trading. Usually, the best strategy is to buy a cryptocurrency and hold it until the price rises over a long period.”

To be fair, these same authors also noted that certain trading models based on machine learning can outperform a buy-and-hold strategy, although trying different models has “mixed results.” Another 2020 paper, published in Computational Economics, found that while trading bitcoin using an algorithm based on the relative strength index underperformed buying and holding, two other algorithms — based on moving average convergence diversion (MACD) and the pivot reversal (PR) strategies — did manage to outperform simply buying and holding.

However, the above strategies were based around constructing algorithms using particle swarm optimization. And if that term doesn’t mean much to you, then it only underlines the difficulty in finding a strategy/algorithm that will consistently generate positive results.

And because of this difficulty, the vast majority of traders really will be better off simply buying a cryptocurrency with good fundamentals and good future prospects and simply waiting for the long haul, until it becomes widely sought after and used. Not only does this take the stress out of optimizing and re-optimizing methods, but it will also reduce the large fees that are often racked up via day-trading. And ultimately, it will increase your profits, assuming you’ve picked a winner.