While HODLing cryptocurrencies have been generally a good investment for those who bought in at the early stages of Bitcoin’s price development, there is no guarantee that Bitcoin or any other cryptocurrency will grow in value forever.

The only certainty is high volatility. If you can accurately predict price movements, you can turn this knowledge into substantial profit by making the right trades. However, when trading cryptocurrencies, there are a lot of things that you must pay attention to.

In this article, I will not make any predictions about which coins will go up or down in value. As a trader, you are personally responsible for conducting your own research and analyses, as well as for deciding the trustworthiness of your sources. Rather than telling you which coin to buy or not to buy, I will instead provide you with a list of tips and tricks that will help you monetize your crypto knowledge.

Spot Trading or Derivatives: Pick your Poison

One of the most important things to be aware of is that there are two general categories of crypto trades. The more common of these two is spot trading. When you make a spot trade, you buy actual cryptocurrency tokens in a transaction that is instantly settled. This allows you to withdraw these tokens from the exchange and use it for payments or in DApps such as DeFi platforms.

Derivatives, on the other hand, are not actual cryptocurrencies, but rather financial products that mimic the value of a target asset. Often, this underlying asset can be a cryptocurrency. Therefore, a cryptocurrency derivative trades at around the same price as the coin itself.

Some of these derivatives have an expiration date, which means they will be settled against the actual cryptocurrency at a later date. Based on traditional finance, futures allow traders to buy an asset (a cryptocurrency in this case) at a later point in time, at a price that is fixed now. This allows merchants to hedge against market risks. Since cryptocurrencies are highly liquid assets, their futures price reflects the market sentiment about the price a coin will be trading at on the settlement date.

In addition, there are also futures that simply never expire. These perpetual contracts therefore always trade at around the same price as the spot market. There is an automatic settlement mechanism called the funding rate, which tethers the contract price to the spot price, whenever they deviate. Most exchanges apply the funding rate multiple times a day.

There are a number of factors that make derivatives interesting for traders. Firstly, these allow their users to trade with leverage, which can multiply profits (but also losses). Some exchanges are known to offer leverage up to 200x. While this can greatly increase profits, it is also a risky business. If you should accrue losses that cannot be covered by your account balance anymore, your leveraged positions will be liquidated and you lose nearly all of your balance.

Luckily, this means that your losses are capped at the amount of money you hold as balance on your derivatives wallet, but when trading at high leverage, be prepared that your positions will be liquidated very quickly if prices move in an adverse direction. Since you can freely choose your leverage for every trade, choose a level that you are comfortable with.

Instead of mirroring the price of a specific cryptocurrency, some derivatives are tethered to other underlying indicators such as the Bitcoin hashrate, the total value locked up in DeFi, the price of gold, or a basket of multiple altcoins. However, there are not many derivatives exchanges available out there and not all of them support the same coins. CoinMarketCap features a list of derivatives exchanges, so make sure to consult this list in order to pick the right exchange for you.

Staking and DeFi

What many people either forget or don’t know is that they can receive an APR on their cryptocurrency holdings. When you buy cryptocurrency on the spot market, consider moving them out of the exchange and locking them up in a short-term DeFi contract, unless you are actively day trading the currency.

This way, you can both profit from the price movements of the currency and earn additional returns from the DeFi investment. Remember, locking cryptocurrency in DeFi can net you an APR of up to 10 % depending on which coin you lock up on which platform. Factor this in when comparing different cryptocurrencies.

Basically, the same goes for Proof of Stake coins. You can stake them in order to earn rewards for validating blocks. You should keep this in mind, as some exchanges automatically stake the coins for you and pass you a share of the rewards. However, even if your exchange has a staking program, you can earn more rewards by moving the coins out of the exchange and staking them yourself.

Hedge your positions

One of the cruel lessons of life is that there is no reward without risk. The higher the risk, the higher the reward. Luckily, with cryptocurrencies, you can choose your own level of risk exposure. If you are feeling lucky, take out a leveraged position. If you want to decrease your risk, only use a fraction of your crypto holdings for trading and hedge against the risk with staking or DeFi.

While there can never be any reward without risk, you can at least maximize the ratio between risk and reward by building your own personal hedge fund. For example, if you think that Ethereum will perform better than Bitcoin, you can go long on an ETH perpetual contract and short a BTC contract with the same amount of money.

Since crypto-assets are highly correlated, their prices will likely move in the same direction, meaning that while your position on one coin loses value, the other one will rise in value. However, if your prediction is correct, you can still make a profit on the different returns of BTC and ETH. This profit can even be multiplied by using leverage.

You can even go so far and completely remove all volatility by buying a cryptocurrency on the spot market and then shorting the same currency with leverage, to such a degree that the combined value of your holdings stays the same, regardless of where the price moves. This is especially useful if you want to reap the staking reward of a specific Proof of Stake coin, without being subject to the coin’s volatility and inflation. Remember that you will pay a funding rate on your perpetual contracts though and that your position might be liquidated, so constant rebalancing between the two positions is required.

Trading Fees

Although crypto exchange fees are generally far below one percent, they can easily eat up a significant share of your profits, especially when you are a day trader. You should consider and compare different exchanges and their trading fees, as the most popular exchanges do not necessarily have the lowest fees.

Remember though, low trading fees are not the only quality that should determine whether an exchange is worth trying out. Security is just as important given that your funds are in the hands of a centralized custodian which could be vulnerable to hackers. This is why you should always make sure that your chosen exchange has a clear-cut security concept. At the very minimum, they should store their users’ funds in cold wallets.

Often, exchanges have different fee rates for market makers and takers. Essentially, if your trade is settled instantly, you have to pay the taker fee, which is higher. If your trade cannot be settled at the price you have specified, it is added to the exchange’s order book, waiting to be filled at a later date. In that case, you are paying the maker fee. This is supposed to incentivize adding liquidity to the order book, rather than removing liquidity.

How much you will actually pay in fees thus depends on your trading strategy. Keep this in mind when comparing fees. As a general rule, smaller exchanges have a high disparity between maker and taker fees (some even have negative maker fees, thus essentially paying traders to add their orders), while this spread is relatively minor in the larger exchanges.

Save on Trading Fees with Phemex

Recently, alternative business models that do not rely on trading fees have emerged. One such example is the Singapore-based crypto exchange Phemex. This platform offers zero-fee spot trading services in exchange for a low-cost premium membership. An annual premium membership comes at just below $70. Traders can thus easily save hundreds, if not thousands of dollars by purchasing this membership rather than paying fees all year long for each trade.

Phemex’s incredible growth is proof of the promising nature of this business model. Therefore, keep an eye out for other exchanges that may be adopting this practice in the near future.

Besides zero-fee spot trading, Phemex also offers a derivatives exchange with a negative maker fee that ranks among the most generous in the market. You can trade perpetual contracts for BTC, ETH, XRP, LINK, XTC, LTC, and GOLD, with up to 100x leverage.

In terms of security, Phemex features a top-notch trading engine developed by industry-leading experts who priorly served as executives for Morgan Stanley. All user funds are held in cold multi-signature wallets. Two Factor Authentication is required for all safety-critical actions.

Recently, Phemex has partnered up with the payment processor Banxa in order to enable fiat deposits. However, the single biggest pro of Phemex, which differentiates it from all other exchanges is its zero-fee business model. If you are looking to save on trading fees, consider registering at Phemex for a free 7-day trial premium membership.