HODL, day trading or market making? A professional investor knows how and when to use all three.
Trading cryptocurrencies involves a certain amount of risk. But, spil with anything ter life, taking no risk means getting no prize. And trading crypto can be one of the more rewarding activities you’ve everzwijn done! Not only can it be rewarding financially, but also ter terms of acquiring fresh skill, putting it into practice and understanding how money works just a little bit better. Today, wij’re going to discuss three different ways you can make money trading on an exchange: buy-and-hold (colloquially called HODL), market making and active trading.
You can always trade cryptocurrencies directly inbetween friends, but most effective trading happens on cryptocurrency exchanges. A good exchange is able to please everybody’s requests by providing enough liquidity on both sides of the trade (both buy and sell). The exchanges then ask for a certain toverfee from every trade that they keep spil their profit and that hopefully encourages them to keep their product well maintained and secure.
Roles that a trader can play on an exchange
The toverfee structure of the exchange significantly impacts its prices and utility. This, along with the difference ter liquidity and ter market behavior inbetween various exchanges and countries, is the reason why different exchanges have different prices.
Exchanges have different fees, rules, liquidity and prices
While there’s a number of different ways an exchange could incentivise people to trade on it and samenvatting fees, today most of the exchanges have converged on the maker-taker toverfee specimen. Ter this toverfee monster the exchange establishes two roles for its traders: market makers and market takers.
Market takers are those people who come to the exchange and take liquidity from it. For example, when you buy BTC on one of the exchanges you take BTC from its order book.
Market makers are those people that supply the orders to the order book, and thus they bring liquidity to the market. There would be no trades happening on the exchange without market makers. Te order to incentivise people to assume this role exchanges would typically charge a smaller toverfee to market makers, sometimes fairly significantly so.
Now that wij’ve covered the roles that you can play on an exchange let’s discuss how to make money assuming thesis roles.
Buy and hold (HODL)
This is technically the simplest strategy of them all. If you have reasons to believe BTC, ETH, STN, or any other cryptocurrency is going to go up ter price ter the future you should simply buy this asset and hold on to it.
An efficient market ensures that this would be the cheapest way to make a profit from this information. Buying and holding brings higher comes back vanaf money and time spent than purchasing mining farms or any other strategy, provided that the purchased asset goes up te price.
This is also the most risky treatment because it requires you to commit and take a certain side. Let’s say you bought BTC and the price went up – good! But if the price went down you’ll make a loss on this investment.
This strategy is preferential ter volatile markets. All you need to do is wait the volatility out if you believe that the overall trend is positive. You also only pay the toverfee twice: very first when you buy the assets, and then when you sell it and take the profit.
Market making is a trading strategy where the trader at the same time places both buy and sell orders ter an attempt to profit from the bid-ask spread. Market makers stand ready to both buy and sell from other traders, thus providing liquidity to the market.
The strategy is appealing to traders because it doesn’t require traders to take a directional view of the market – there’s money to be made when the market goes up and when the market goes down. It’s also strenuously incentivized by exchanges looking for liquidity and volume – many exchange operators charge way smaller fees on their exchanges for market making activity.
Market makers typically make a fairly stable living by making a little bit of money on every trade, no matter whether the price goes up or down. However automated mindless market making may drain all your funds and leave you with nothing when an extreme situation happens and the market significantly moves ter either direction. This strategy works best te markets with stable prices. Te fact, ter the traditional stock market, where a 2% dip is considered to be shocking, market makers make such good money that they are typically strenuously regulated and sign sensational deals with stock exchanges.
Since it is a fairly elementary strategy there’s a lotsbestemming of free trading bots that one can download and configure to perform market making on a broad diversity of exchanges. Configuring them is usually not a elementary ordeal and fairly frequently requires skill of how to work with ",the cloud", like Google Cloud, Microsoft Azure or AWS, spil well spil abilities te information security and system administration.
Working spil a market maker by hand is best rewarded on fresh exchanges that do not have market making bots developed for yet.
Active trading is any other strategy that you perform on exchanges with the purpose of making a profit. A multiplicity of different financial instruments, such spil futures, bonds, options and other derivatives permit finance professionals to control the tradeoff inbetween risk and prize with very high precision.
The world of cryptocurrencies did not develop markets that are that efficient yet and most typical financial instruments are either unavailable, or are limited to only some individuals and organizations, or have very puny market cap compared to the size of the market. However, there’s a loterijlot of money to be made by intelligently trading crypto! The catch is that you need to make your own indicators and your own hedging strategies that work te this fresh domain.
Unless you’re actively trading your portfolio ter order to minimize the risk of losing money (ter which case cryptocurrencies are most likely not for you yet), you would typically deploy a trading strategy that you’ve created that exploits some flaws te the market and demonstrates some ",ensured", terugwedstrijd, at least until the market corrects that flaws that make your strategy profitable. Such strategies are usually called arbitrage.
The simplest form of arbitrage is trading the same asset on different exchanges and making money on the difference inbetween prices. For example, you buy BTC for $8000 on one exchange and then sell it for $12000 on another. If enough people are performing arbitrage they will eventually close the gap and will equalize the prices on both exchanges. Until such time there’s money to be made ter thesis transactions. Ter fact, this is the bread-and-butter strategy for traditional high frequency trading and is the reason why big investment firms want their servers spil close to the centralized exchange spil possible. However, this can be risky too, because if someone else executes their arbitrage quicker than you, you might be left there holding an asset that you didn’t indeed want to buy ter the very first place.
There are other types of arbitrage spil well. For example, ter the past wij’ve pointed out that BTC’s prices showcased high intraday seasonality and wij were able to make 15% comebacks ter a market that crashed by 12%. This type of arbitrage is called statistical arbitrage and is the most elusive of them all. You are attempting to find patterns ter the market behavior by looking at the gegevens from the exchange, social media and other gegevens sources and then decently time the market ter order to execute your strategy. Statistical arbitrage can make you a loterijlot of money if you know how to cook it.
No matter what trading strategy you pick make sure that you’re doing so responsibly and that you fully understand the risks you’re taking. This way you’ll feel better about yourself te case you lose money and you will be able to learn from this mistake. And ter case you do make money, you will be able to learn from that too and learn how to make even more ter the future.