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What Are the Best Crypto Trading Strategies?

Want to invest in crypto? Check out this EarlyBird guide to find out about the best trading strategies.

Last updated:

November 16, 2022

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

Cryptocurrency has become increasingly popular among investors over the past several years, and it’s easy to see why. Cryptocurrency feels more exciting than many of the traditional assets on the market. And after reading stories of other investors becoming wealthy with cryptocurrency, it’s hard not to be intrigued.

One of the first questions you’ll have to ask yourself if you decide to invest in cryptocurrency is what trading strategy you’ll use. Just like with stocks, there are plenty of different trading strategies available to investors, and each one has its pros and cons.

On the one hand, active trading strategies provide a level of excitement that many investors crave. On the other hand, those active strategies come with their fair share of risk. A long-term passive investing strategy might be more appropriate for most investors.

In this article, we’ll explore some of the different active and passive crypto trading strategies, how to start trading cryptocurrency, and how to decide which trading strategy is best for you.

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What Is Cryptocurrency?

Before we jump into the best crypto trading strategies, let’s take a step back and talk about what crypto actually is.

A cryptocurrency is a digital currency supported by a global network of computers. You’ll often hear people refer to cryptocurrencies as “cryptos,” but both terms mean the same thing. This name stems from the process in which crypto is kept safe and secure using digital encryption techniques.

Cryptos differ from traditional currencies (or “fiat currencies”) like US Dollars (USD) or Mexican Pesos (MXN) because they aren’t produced and distributed by governments or the central banks they control. Instead, cryptocurrencies are totally decentralized. That means they can’t be regulated by politicians, and they aren’t affected by common monetary issues like inflation.

Logos of leading cryptos
(Image Source)

It’s also worth noting there are no physical crypto coins that you can hand over to a cashier in a retail store. Instead, cryptos are online-only assets that are normally kept in digital wallets. But to keep cryptocurrency networks secure and transparent, balances are recorded on public ledgers that everybody in the world can access.

That means all crypto transactions are verified through a computing process known as “mining” and then recorded on the currency’s ledger. Most of these ledgers are supported by something called “blockchain” technology — so you’ll often hear investors refer to blockchain and crypto ledgers synonymously.

While anybody on the network can view the ledger, entries can’t be deleted, and they can’t be rewritten. That’s what keeps the process transparent and maintains confidence in each respective network.

There are loads of cryptocurrencies out there. You’ve probably already heard of the biggest cryptos like Bitcoin (BTC) and Ethereum (ETH). They’ve been around for several years now and have consistently maintained a pole position as the world’s two most valuable crypto assets.

Other big names in the crypto space include Tether, Solana, and the Binance Coin.

But these definitely aren’t the only cryptos people are trading. As of May 2022, there are more than 10,000 cryptocurrencies on the market.

Current market value of top 5 cryptos
(Image Source)

In terms of value and the best cryptocurrencies to invest in, it’s worth noting that a lot of crypto assets tend to fluctuate in value. Unlike fiat currencies, the value of cryptos isn’t decided by a central bank or the federal government. Instead, networks are driven by supply and demand. A cryptocurrency is only worth what investors are willing to pay for it.

As a result, cryptos tend to be treated more like commodities than regular currencies. It’s also worth noting most shops and websites aren’t yet equipped to process crypto payments (although this is slowly changing). That’s why tax authorities like the Internal Revenue Service (IRS) tax crypto-like an asset class — but we’ll cover taxes more in a minute.

First, let’s take a look at various crypto trading strategies and how investors use them.

Active vs. Passive Cryptocurrency Trading Strategies

When it comes to buying and selling cryptocurrencies, crypto trading strategies are generally split into one of two categories: active trading or passive trading.

An active trading strategy is when you buy and sell assets in order to generate a profit based on short-term price movements. By contrast, a passive trading strategy involves buying crypto-assets and holding onto those assets for a longer period of time — adding to the value of your portfolio as your crypto assets increase in worth.

But as always, there’s a bit more to it than that. To help give you an idea, let’s explore some of the most effective active and passive crypto trading strategies.

Active trading strategies

The most common types of active trading strategies crypto investors use are: arbitrage, high-frequency trading, range trading, bot trading, scalping, and technical analysis.

We’ll start with arbitrage.

Crypto arbitrage trading is a strategy in which investors capitalize on fairly small price discrepancies between an asset across different markets or exchanges.

In practice, that means buying a crypto like Bitcoin through one exchange and then almost immediately reselling your new asset onto a different exchange for more money. You’re not going to make a huge profit doing this — but if you’re fast and know what you’re doing, it is possible to make a quick buck with this strategy.

Next, there’s high-frequency trading (HFT).

HFT is also often referred to as “systematic trading,” and it’s when you use an automated trading platform to trade a large number of assets at high speed. It’s similar to arbitrage trading because you may only be holding onto crypto assets for a matter of minutes — and you’re probably not going to make a big profit on those trades.

But when you perform loads of these trades simultaneously, it’s possible to create bigger gains.

Range trading is another active trading strategy. Range trading is all about choosing a range at which you’re comfortable buying and selling over a period of time.

For example, let’s say you buy a single crypto coin for $2,000, and you think it’s going to rise by $100 by the end of the week. You’d then commit to a range between $2,000 and $2,100 and sell the coin back onto the exchange while its value remains within that range.

You’ve then got bot trading, which is a lot like arbitrage trading.

Like arbitrage trading, bot trading relies on automated computer programs (or “trading bots”) to buy or sell crypto positions to generate a profit. The key difference is that arbitrage trading focuses primarily on the difference in prices from exchange to exchange. Bot trading looks at a variety of other factors, including trading volumes, the time periods you’re looking at, historical trends, and more.

Scalping is a far more common active trading strategy, and it’s pretty simple.

When scalping, all you’ve got to do is take out a crypto position and then sell that position back onto the exchange based on small price movements. Unlike arbitrage trading, scalping doesn't rely on monitoring every exchange on the globe and reselling elsewhere. You simply buy crypto, monitor the price throughout the day, and then sell when its trading price is higher than the amount you paid.

Finally, there’s technical analysis.

Illustration of woman drawing chart

Crypto technical analysis is a strategy that uses mathematical indicators based on historical price trends to try and predict future price trends. The idea here is that markets follow established patterns over time — but this strategy can be tricky.

After all, a lot of cryptos have been known to fluctuate pretty dramatically, and you’ve really got to know your stuff to make an informed forecast about where prices are headed. As a result, technical analysis is not a strategy for beginners.

Passive trading strategies

Passive trading strategies are used by crypto investors who are in it for the long haul. Passive investors don’t stress over short-term market movements or scramble to shift positions based on small price differences.

The three most common passive crypto strategies are: buy-and-hold, crypto index investing, and dollar-cost averaging.

Buy-and-hold investing is exactly what it sounds like. You buy a crypto asset, put it into storage, and let it sit in your wallet for a long period of time. The idea here is that your asset will increase in value over time without you having to take any action. As a result, the overall value of your investment portfolio will go up alongside those asset values.

Illustration of woman carring child pointing at chart

Crypto index investing is a lot like investing in a traditional index fund that tracks securities like stocks.

A crypto index uses a pool of funds from investors to create a unique portfolio that tracks cryptocurrencies. While the index is actively managed by professionals, index investors don’t have to take any actions themselves. That’s what makes crypto index investing a passive strategy.

Finally, there’s dollar-cost averaging.

Dollar-cost averaging is when you take on crypto positions by investing equal amounts of fiat currency at regular intervals — regardless of what the asset is priced at or what’s happening in crypto markets.

The idea here is simple: when prices are down, you can benefit from taking on a higher volume of assets. When prices bounce back up over time, you’ll then have made a nice gain without a lot of effort.

How Do You Trade Cryptocurrency for Beginners?

If you’re just starting out trading crypto, your first step has to be to choose a trading platform. There are a number of payment service providers (PSPs), brokerages, and cryptocurrency exchanges that you can use to buy and sell crypto assets.

Generally speaking, the most popular option is a crypto exchange. That’s because they’re simple to use, enable you to safely store your assets using a digital wallet, and don’t charge high fees like brokerages do.

Alternatively, if you’re planning on investing in crypto as a way to support your child, consider giving them their own digital wallet with EarlyBird Crypto.

Mobile view of EarlyBird app with crypto wallet
(Image Source)

After choosing your exchange, you’ll need to set up an account and place some fiat currency into a digital wallet before you can start trading. Then, you’ll need to consider which assets you want to trade and how you plan on doing it.

First, think about your investment goals and your skill level. Decide what your time horizon is. For example, do you want to diversify your portfolio so you can cash in when you retire in 25 years? Or are you wanting to invest in crypto to pay for your child’s future college education in 15 years?

By selecting a timeline, it’ll be easier to decide whether you want to be a passive or active investor. From there, you should take a look at the various cryptos and select an asset that matches your goals.

Once you’re ready, you can use your exchange account to buy crypto and start trading.

Which Strategy Is Best for Crypto Trading?

As a beginner, a smaller and more passive strategy will generally be better for those with less experience and a lower risk tolerance.

Passive investment is particularly smart if you’re trying to build a nest egg for loved ones over a long period of time.

Illustration of man with arm around son next to pile of money

Going the long-term route, you’ll probably want to go for a more consistent performer like Bitcoin or Ethereum. But if you want to trade actively, you may want to learn more about cheaper coins that you can buy and sell as their positions change.

Another important point to bear in mind is how trades are taxed.

The IRS treats crypto like an asset, so you really only have to pay tax on capital gains you make when you sell it. That means if you’re an active investor making lots of transactions, you’re going to make your tax return more complicated by having a lot more capital gains to report and pay tax on.

As a result, it’s usually going to make your life simpler to go for a more passive strategy over time.

How Much Should I Invest in Crypto?

The amount you decide to invest depends on your tolerance for risk. It’s critical to note cryptocurrency is a volatile alternative asset.

That means while it can have a place in your investment portfolio, you should allocate only a small portion of your investments to cryptocurrency to reduce risk and ensure a well-diversified portfolio.

Conclusion

Your cryptocurrency trading strategy can be as simple or as complicated as you want.

But a passive buy-and-hold strategy allows you to benefit from cryptocurrency growth over the long term without dealing with any of the short-term volatility — and if you’re keen to buy and hold crypto for the future, you should definitely consider investing using EarlyBird Crypto.

With EarlyBird Crypto, you can build a nest egg for your child by investing in Bitcoin or Ethereum alongside a balanced UGMA portfolio using an EarlyBird account.

So, are you ready to start trading? Download EarlyBird today to add cryptocurrency to your child’s investment strategy.

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This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.

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EarlyBird Team

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INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
INVEST EARLY, GROW TOGETHER
Download EarlyBird today and start investing in your child’s tomorrow.
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