Earning from Trading
What you'll learn
- Allocating trading capital
- The importance of time preference
- Difference types of crypto trading strategy
Earning crypto requires a trade-off between risk, effort and expectation. Trading crypto has the potential for significant returns but it requires a significant amount of both risk and effort.
Many people will make the mistake of simply opening an account with a cryptocurrency exchange, depositing funds and placing trades, without thinking about the interplay of those three elements.
What it takes to earn crypto from trading
It may seem like an obvious question, but if you are considering starting to trade crypto, the first thing you need is a clear objective. That objective will be a function of:
- the amount of capital & your expectation for it
- your risk tolerance
- time you can commit to learning & managing your trades/investments
Allocating Trading Capital
The amount of money that you can commit to trading crypto should be determined by what is known as discretionary income, which is what is left after you’ve paid all your regular living expenses and taxes.
If your intention is to grow your discretionary income then the general advice is invest the majority in low risk financial opportunities (pension, index funds, bonds etc) and a small proportion to anything with higher risk - such as trading crypto - which is right near the end of that spectrum.
The proportion is down to you, but a sensible amount might be 5%. You should avoid at all costs trading with money you cannot afford to lose or borrowing on credit cards, loans or by remortgaging.
Whatever the amount of discretionary income you are prepared to risk, it should be with the clear understanding that this is money you are prepared to lose.
Having an idea of the capital you have at your disposal provides a crucial parameter against which you can then set a success objective.
For anyone lucky enough to have six figure sums they want to generate a return on, they have the luxury of using low risk approaches which will make sense with large sums:
- interest bearing crypto banking aka CEFI
- low risk trading strategies using leverage
- stomach high gas fees and gaining high APY from DEFI
The majority of newcomers to crypto trading don’t have the luxury of a large bank to play with, but nevertheless start with high expectations which pushes them further up the risk spectrum.
Time Preference
If you are looking to generate significant returns from a small investment, you have no option to assume risk, but how much risk and the type of trading activity, will come down to your time preference.
In the context of trading crypto, investing is the low time preference approach - also known as hodling. You’ll need to commit time to research the cryptocurrencies and tokens you think have long term potential; this is known as fundamental analysis.
The more time you commit to your research, the greater your conviction will be. Time spent on Learn Crypto will be helpful will further learning of recommended crypto books and podcasts.
Once you’ve reached a conclusion you place a single entry trade and are done. Bitcoin has historically rewarded those with a low time preference.
Alternatively, you can stagger your investment with small recurring increments - known as Cost Averaging - which is still a low time preference, passive approach, but has the benefit of average some of the price volatility. It is very good practice to record all DCA activity in a spreadsheet.
With hodling and DCA you're playing the long game, passively waiting for significant upside down the road.
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Cost Averaging & Trading
The cost averaging, passive approach, can become an entry into full blown active trading, by adjusting the regular recurring investments based on an assessment of market conditions. If your research tells you that price will increase in the long term, your aim is to buy the dips on the way, making your entry points as efficient as possible.
With DCA you stick to regular recurring buying points, but you can start adjusting how much you buy each week/month based on an assessment of whether the market is oversold or overbought at that fixed point.
Thinking in terms of oversold or overbought conditions - essentially whether the market has become overly optimistic or pessimistic - is the first step toward technical analysis, which is a key part of trading crypto and an alternative perspective to the investment philosophy of fundamental analysis.
You can refer to indicators or models to guide your decision, but the more you research market conditions, the more time you’ll need to commit. If you want to unpack technical analysis further and move into active crypto trading, you’ll need to commit even more time.
Time will essentially be a limiting factor in the style of active trading that you should employ. Here is a summary of some of the most common, which are discussed in our section dedicated to all aspects of trading crypto.
News/Information Based Crypto Trading
Most cryptocurrencies have no fundamentals to analyse - such as revenue streams - so their value is based on perception of future value. Perceptions shift on news so the crypto market is heavily influenced by information as it emerges and is interpreted.
There is no simple way to be on the right side of this kind of news. As the saying goes ‘those who know are telling and those who tell don’t know.’ You can, however, put yourself in the best position to receive news as it breaks by following people on social media with reliable track records of breaking early news.
In your own way you need to curate valuable sources of news and put yourself in the best position to react before others. The most effective approach to news/information based trading for someone just getting started is to specialise in a few niche cryptocurrencies.
Dogecoin is a great example. Its price doesn’t really reflect normal fundamental factors - development team, product pipeline - but it’s hugely responsive to celebrity endorsement especially Elon Musk. His appearance on Saturday Live in May alone led to a huge rally, with the assumption he would mention Dogecoin. This also underlined the policy of buying the rumour and selling the news.
All the upside was in the phase leading up to Musk's appearance, speculating on what he might say/do. His actual appearance, and mention of Dogecoin triggered the sell-off.
Get to know the people behind specific projects, find their social accounts and pay close attention to what they post. You may just pick up some nuggets of information with enough lead time to trade that news, but make sure you know how and where to trade the coin, and that there is enough liquidity.
Pros
- Finding news doesn’t require technical knowledge
- No specific barriers to entry
- Isn’t necessarily time intensive
- Allows specialisation
Cons
- Distinguishing genuine news from rumour is difficult
- Markets react instantly so timing is very difficult
- It still requires a technical assessment of how much a piece of news will move a market
Momentum/Position Trading
Another crypto trading strategy that is suitable for someone who is just getting started, and may lack the technical understanding and time commitment is Momentum Trading also known as Position Trading.
Momentum Trading is essentially a more sophisticated version of hodling. A hodler will buy and hold - that is it. Momentum or Position Trading will be looking for entry points based on significant points of momentum change in the market. This might mean identifying the start/end of specific cycles.
The most obvious are bull/bear cycle or halving periods, but can include calendar based cycles - such as the significance of March and the end of the financial year - or anything from political cycles (due to elections), weather and its impact on hydro-electric mining.
Ark are a good example of an investment firm that are specifically focused on taking positions within emerging technologies.
Pros
- Potential for significant Return on Investment (ROI)
- Passive/Not time sensitive
- Fundamental analysis ore intuitive than Technical Analysis based strategies
Cons
- Requires funds to be locked up for long periods
- Risk of significant losses as doesn’t suit a Stop-loss approach
Day/Swing Trading
Within traditional stock markets Day Trading relates to trading within the specific hours that markets open and close. Of course crypto markets never close, they trade 24/7/365, so the concept of Day Trading really means someone who is actively trading the markets on a day-to-day basis, opening short term positions, based on Technical Analysis of price movement. The aim is to capitalise on small swings in price that don’t reflect fundamental changes in the underlying market, rather movement within trends.
Swing Trading requires a good grasp of technical indicators, very clear trading plans and the discipline to wait for the right opportunities, rather than simply trading what is in front of you.
Pros
- Doesn’t require continual commitment so can suit hobby traders
- Focuses on small gains/loses so you are less likely to get rekt
Cons
- Requires a grasp of technical indicators and how to recognise them
- Needs a lot of discipline
- Not going to provide sexy returns
Having €1,000 worth of Bitcoin in your Hard Wallet doesn’t really need a spreadsheet, but as the frequency of your trading increases and the time which your trades are open for decreases, you need to put a lot more effort into planning and documenting what you do.
As your trading becomes more sophisticated this should mean keeping a Trading Journal.
What is a Trading Journal?
A Trading Journal is both an objective record of your trading decisions (numbers & dates) as well as a subjective record of why you made them and how they panned out.
If you are serious about cryptocurrency trading you must be willing to keep a Trading Journal that is entirely honest. It is too easy to simply screen out the failures and just hang on to successes, but that is a guaranteed way to get rekt.
Keeping a Trading Journal requires a systematic approach to each trade that you make, split between Objective and Subjective categories. The objective elements are suited to a spreadsheet format, while the Subjective are more like annotations.
Objective Elements of a Trading Journal
- What currency pair you are trading
- Your entry price & date/time
- Your exit price & date/time
- Your target exit price & the difference with Exit
- Trade duration
- The type of trade - spot or limit; long or short
- Trade size & proportion of your capital
- Profit/loss from trade
- A clear logic for making the trade
- A measure/index of risk & a confidence level/index for the trade
Subjective Elements of a Trading Journal
The subjective analysis of your trades can be in an annotation form, and record things like how you well feeling, and how much sleep you got the previous night, to notes about things you feel you got wrong and trading skills you should spend time learning about or improving.
When you are at the point of maintaining a trading journal you are showing that you have the discipline to take cryptocurrency trading seriously and are prepared to keep yourself honest. There is no point just recording your successes. If you aren’t willing to record your losses, then active crypto trading isn’t for you.
Most newcomers make the mistake of thinking trading crypto is a matter of getting set up and choosing from the massive menu of available cryptocurrencies. Without applying any process to trading, you run a huge risk of relying on your gut, chasing pump and dump plays, reacting to ‘experts’ on Youtube, Tiktok or Twitter or just trading based on your mood.
Trading without risk management is just gambling, and with gambling the house always wins. Match a trading activity to the funds you have to play with, the amount of time you can commit and a realistic objective.