Why cryptocurrency day traders should trade to accumulate shares, not money

The current market

Over the past four months, cryptocurrencies have been skyrocketing in price. This volatility has allured many new investors and created tremendous levels of wealth for early adopters. New cryptocurrencies are created daily, and more companies continue to adopt and invest their efforts into the blockchain. As these investors continue to pour into the market, and more companies adopt the blockchain and smart contract possibilities, the price is set to continue to rise. Eventually, we will enter a massive bubble and the market will take a major hit, but in the near future I am making investment decisions with the ideology that we have not yet reached that point. 

Assuming that the price will continue to rise, an investor can make a great deal of wealth simply from appreciation, or holding investments. Others however, like myself, are fueled by the possibility for even greater success through day trading. The current state of the cryptocurrency market makes it a prime environment for day trading.

Day trading

Day trading is basically the process of getting in and out of positions within a short period of time to take advantage of irregularities in price and momentum. The most important aspect of a prosperous day trading environment is volatility and liquidity. Without volatility and liquidity, day traders would not be able to get in and out of transactions and would not be able to capitalize on their expertise. With the influx of new investors, volatility and liquidity in the cryptocurrency market is at an all time high creating the perfect environment for day traders.

Day trading in the cryptocurrency market however is much different than day trading in the regular market. In the regular market, you are trading your local currency (USD for example) in exchange for stock of a company. Then, when you sell that stock you receive USD in return. In the cryptocurrency world there are still those transactions, but the majority of them involve trading one currency for another. 

Why day traders should trade for currency appreciation

This process creates a unique opportunity to lose money in the market, but still gain an overall profit for the day. I'll say that in another way - this process creates a unique opportunity to make money in the market, but still lose profit on the day. I believe that the best way to explain this idea is through an illustration. Let's take three popular cryptocurrencies - Bitcoin, Golem, and Stratis. I have attempted to include images of the graphs that I used to evaluate the prices, but unfortunately I was unable to do so for some reason. Today, a $1,000 investment in those investments would have created the following dollar returns:

• Bitcoin - $36.10

• Stratis - $221.60

• Golem - $122.10

Not bad for a day of doing nothing! However, what if we day traded? If we were watching the market and timed the market we could have made roughly the following daily returns:

• Bitcoin - $157.12
• Stratis - $326.00
• Golem - $251.72

Here we can see that through active management, we can generate even higher returns. However, there is one roadblock we encounter in our trading. Most coins have to be converted into Bitcoin in order to be able to be converted into USD. So, while Stratis might have gone up by say 10% at one point, Bitcoin might have gone up more than 10%, and in essence you would have lost the opportunity to make more money! The same thing happens with Golem or any other currency. Since they're pegged on the Bitcoin, or in a few cases Ether, your returns are influenced by the price fluctuations in that currency as well. This is the exact reason why a day trader should trade based on the currency/currency relationship, rather than on the currency/dollar relationship.

The incredible opportunity in the market

While this situation may seem like it is detrimental, and creates added risk, it actually creates an even more incredible opportunity. You may be wondering how I calculated the day trading return above. I calculated this by trading the peaks and lows of one currency compared to another and then assuming that at the end of the day we converted our money into Bitcoin and then USD. If you traded the relationship between Stratis and Bitcoin perfectly for example, you would have achieved a 29% increase in your amount of Bitcoin. However, since Bitcoin appreciated by 3.6%, you would in essence receive a total return of 32.6% (which is where we get the $326.00). What if Bitcoin decreased in value? Well, you would have lost value when converting to USD from Bitcoin, but you still would have made 29% more of a return than you would have by sitting in Bitcoin!

Yesterday I wrote a post about the power of compounding interest. I utilized this same concept to create my goals for utilizing this strategy. My current goal is this - to make 3% more bitcoin every day. It's a very simple goal, but let's see what it can become starting with my initial day trading investment of .05 bitcoin. Using the formula from yesterday we can set up this equation as FV = .05 * (1+.03)^365. If I was to achieve this goal, and never take out my Bitcoin along the way, one year from my start date I would end up with 2,424.136 bitcoin, or the equivalent of roughly $6,666,374.62 based on current market prices. 

Along the way I will be taking out Bitcoin for a few reason. First, there is not enough volume to fill an order for $2,424.136 bitcoin. Perhaps we will one day be able to do that, but in the current market that is far too high. Second, I'd like to realize some of my profits along the way so that I can be less exposed if there is a bubble and crash, and am also able to reinvest my money if that does happen. My current plan is to maintain roughly 1-5 bitcoin for active trading depending on market volume, and put the rest into Ether/cash.

What initially drew me to this market was being able to day trade at all times in the day. That being said, day trading is certainly not for everyone. Day trading is a risky strategy, which is why I myself don't even do it with my whole portfolio. If you are successful however, it can unlock great rewards. 

As always, this post is by no means investment advice, nor is it to be taken as such. I am not a licensed adviser, but rather am providing my own views on investment strategies. You should and need to research all investment decisions before making them and do not base them off other people. 

I hope that you enjoyed this post, and if you did please give me a follow. My goal is to post frequently about various finance, cryptocurrencies, and investment topics. If you ever have any questions, or would like me to write a post about a specific topic, please reach out to me at [email protected]. Lastly, I encourage you to check out yesterday's post, and especially the free excel document included in it to see the power of compounding interest.