Top 12 Bitcoin & Crypto Trading Strategies

Bitcoin, the first digital currency to scale, has managed to generate widespread visibility since the first units were mined in 2009. In that time, Bitcoin has enjoyed astronomical price increases, rising from less than US$0.10 to nearly US$20,000 in 2017.[1]

Given that the digital currency has enjoyed such impressive upside, it is easy to see why investors would want to trade this innovative crypto asset. Bitcoin is highly volatile and managed to lose half its value in less than a week at some points. However, the robust liquidity and consistent trading volume make BTC attractive to legions of active traders world wide.

As a result, investors can benefit from having a list of go-to strategies they can leverage in order to bolster their chances of success. The following covers some of those strategies.

1. Do Your Own Research

Risk is inherent to investment, and it is of the utmost importance that investors conduct thorough due diligence before putting their money into anything. More traditional investments such as stocks and bonds carry a certain level of risk, but Bitcoin is more speculative in nature.

While an investor can look at revenue and earnings when evaluating a stock, or alternatively analyse interest payments when assessing a bond, Bitcoin's fundamental indicators may be less concrete. That's why many in the cryptosphere rely on technical analysis to capitalise on the significant price movements of BTC.

In addition to lacking these fundamental indicators, Bitcoin's underlying technology is complex, and learning about it can take significant time and energy. Fortunately, there are a great many resources available that present information on Bitcoin.

One place that crypto traders can start with is the Bitcoin whitepaper, which was distributed by Satoshi Nakamoto, the pseudonymous creator of Bitcoin, in 2008.[2]

2. Be Careful

There are several methods that investors can use in order to manage the risk associated with Bitcoin trading. For starters, potential Bitcoin traders should remember the old adage that people should only invest what they can afford to lose.

Further, an aspiring long or short-term trader could set up a practice account on an exchange and use that account to get familiar with the Bitcoin markets.

Once an investor has gotten this sense of the market, they could set up a regular account and use a small amount of money to trade the cryptocurrency. For instance, opening an account on cryptocurrency exchanges, such as Binance and Coinbase, is a great way to get involved in the global cryptocurrency market.

3. Have A Plan

Investors should make sure they have a plan in place before they start trading. Failing to have a solid plan is a mistake that many beginner traders make. Before making any trades, investors should figure out the best time for entering a trade. They should also determine the best time to get out.

Before making any trades, investors can benefit from determining their take profits goals. Further, they should figure out how much they are willing to lose, which can help them with creating appropriate stop losses.

4. Stage In

One good way to manage Bitcoin's chaotic price action is to stage in, which involves making incremental investments in the digital currency. This is common practice in the financial markets, across all asset classes.

If a trader wanted to start out by putting £100 into Bitcoin, they could buy £20 worth of the digital currency one week, wait another week, buy another £20 worth, and then continue with this process until meeting their goal. By investing at regular intervals, an individual can accrue a sizable position over a period of time.

5. Hedge Your Bets

Hedging effectively is another investment strategy for managing the risk of Bitcoin's volatility. Investors have many different tools they can use to do this. Traders can use options, for example, to achieve this goal.[3]

Options contracts allow the contract holder to manage the risk associated with a specific asset's rise or fall. An investor could purchase an options contract that would provide a payout if an underlying asset fell in value.

In other words, investors who hold Bitcoin could purchase some options contracts in order to reduce any loss they would experience if the digital currency declines in value.

Bitcoin investors also have the option to trade futures contracts based on the digital currency. Futures contracts obligate two parties to make an exchange at a prespecified date for a predetermined amount.

6. Diversify

Diversification is another great strategy that Bitcoin traders can use. While Bitcoin is the world's largest digital currency by market capitalisation, it is certainly not the only digital currency out there. There are many more options that investors can harness if they are interested in doing so.

The basic idea behind diversification is not putting all of one's eggs into one basket. Ideally, a diversified portfolio allows an investor to avoid losing money due to the fluctuations of its components. Diversification is a top strategy for many futures, forex and equities investors.

In other words, a diversified portfolio could, for example, consist of five digital currencies. These could be Bitcoin, Ether, Ripple, Litecoin and Monero. If each of these make up 20% of the portfolio, a loss in one component would ideally go along with a corresponding gain in another.

However, conditions are rarely that ideal. Fortunately, investors who are interested in obtaining effective diversification have many resources they can use for their own research.

7. Use Wallets

Another good strategy is to utilise digital currency wallets. External and online wallets may be used, with options to trade or convert crypto to GBP, EUR or USD.

Many exchanges have been hacked. Bitfinex, a leading digital currency exchange, suffered this fate in August 2016, resulting in the loss of 120,000 units of Bitcoin.[4] This was a high-profile hack, but certainly not the largest.

In 2014, Mt. Gox was hacked, resulting in the loss of 850,000 units of Bitcoin.[5] At the time, this amount of digital currency was worth close to US$500 million (close to £300 billion).[6]

These two incidents represent a mere sample of the different security breaches that have taken place in the digital currency space. By harnessing wallets, Bitcoin investors can help insulate their digital currency holdings from hacks. These wallets can also help insulate a trader from the risk that the exchange they are using goes out of business.[7]

8. Mining

One way that cryptocurrency investors can potentially generate returns during periods of low volatility is mining, which involves verifying transactions in exchange for a reward.[8] Bitcoin provides a great way to illustrate the basics of mining. Nodes (devices) on this network confirm transactions, which are then incorporated into blocks in Bitcoin's blockchain.

Bitcoin's mining incentive, which decreases over time, is 12.5 units of the cryptocurrency (or roughly US$50,000) at the time of this writing. This incentive is cut in half roughly every four years, with previous halvings taking place in 2012 and 2016.[10]

Mining bitcoin requires expensive hardware and can consume significant amounts of energy. Further, bitcoin prices can be highly volatile, causing the value of the mining reward to fluctuate substantially.

Fortunately, there are plenty of other digital currencies that can be mined. Other options include Ethereum and Uniswap. Investors should be sure to conduct thorough due diligence before getting involved.

9. Deposit Accounts

Another method investors can use to generate returns is depositing their digital currency into accounts that pay regular interest. BlockFi, a cryptocurrency lending startup, announced the availability of the BlockFi Interest Account (BIA) in March 2019, which offered an annual interest rate of up to 6.2% to investors in exchange for depositing their bitcoin and ether.[12]

However, the Terms and Conditions available on the BlockFi website emphasized that the company "will determine the interest rate for each month in our sole discretion."[12] While these accounts may pay up to 6.2% per year, there is no guarantee of what rate they will pay.

The same month that BlockFi launched its accounts and started advertising returns of up to 6.2% per year, it announced that April 1, 2019, accounts with balances exceeding a certain amount would have different rates.

BlockFi clarified by stating that accounts with balances up to and including 25 BTC or 500 ETH would receive an annual rate of as much as 6.2%, but that any balance over that amount would earn a tiered rate of 2%. In other words, an account with 30 BTC would receive a variable rate as high as 6.2% on the first 25 BTC and a fixed rate of 2% on the remaining 5 BTC.

Uphold, a digital currency platform, has announced a similar opportunity, stating that it will offer interest rates of up to 10% per year to investors who lend their cryptocurrency.[14] According to the "Apps Center" section of the Uphold website, investors who lend US$10,000 worth of Bitcoin to the CredEarn platform, for example, will receive two quarterly interest payments of US$250 each, as well as the Bitcoin they lent originally.

Interestingly enough, Uphold's Membership Agreement makes it clear that because the organisation is not a bank, balances "are not deposits" and they are not insured by the Financial Services Compensation Scheme, the Federal Deposit Insurance Corporation or any similar organisation.[15] Thus, the decentralised financial (DeFi) transaction is classified as an unsecured cryptocurrency investment.

Further, the interest rates paid to depositors are subject to change. "A number of factors determine whether we will raise or lower rates for future programs," according to the CredEarn FAQ.[16] "We may increase or decrease the Yield in our sole discretion 30 days after notifying you of the upcoming change in the Yield (a "Yield Change Notice"). We periodically change the Yield to respond to changes in prevailing interest rates, similar to the way banks periodically adjust the interest rates they pay for deposits."

10. Staking

Through a process called staking, investors can earn cryptocurrency by using their digital tokens to verify transactions.[17] This requires them to put their tokens into digital wallets, where they can be used for this purpose.

Investors can earn these rewards through networks that use so-called proof-of-stake algorithms, for example EOS and Cosmos Network.[17] In proof-of-stake, miners are randomly selected by holders of the relevant digital token, so interested parties can increase their chances of being selected by holding more cryptocurrency in a digital wallet.[18] Buy and hold investors view staking as a viable crypto strategy for passive income.

Another way to participate in staking is by working with startups that offer staking services. Battlestar Capital, for example, revealed in March 2019 that it was offering annual returns of up to 30% after entering a partnership with Celsius Network, a digital currency lending platform.[19]

While there are attractive aspects to staking, this activity also comes with specific risks. Some have voiced concerns that the digital tokens received through staking might be viewed as securities.[17]

Further, any digital tokens put toward staking may be "locked up" for notable periods of time, for example hours or days.[17] If an investor puts a digital currency toward staking and that cryptocurrency starts to plummet in value, they will be unable to sell in order to limit their losses. The downside suffered during a bull run may exceed the gains they receive through staking.[18]

11. Trading Small-Cap Cryptos

Just because the broader digital currency markets seem reasonably calm, that doesn't mean that all of its components lack volatility. The top 10-20 cryptocurrencies could be rather flat, for example, while digital assets outside of this specific group are experiencing strong enough volatility to present investors with significant opportunities.

In situations like this, investors might consider focusing on lesser-known cryptocurrencies, which could potentially generate impressive returns. Small cap cryptos can produce the volatility needed for implementing successful intraday, day trading and swing trading strategies.

Jeff Dorman, chief investment officer for investment manager Arca, spoke to developments like these in a March 2019 research note, where he emphasized that small-cap digital currencies had been generating strong returns and outperforming the broader market.[20]

He provided further detail when speaking with MarketWatch, asserting that cryptocurrency investors were seeking out so-called utility tokens, digital assets that provide a specific value within an ecosystem.[21]

12. Arbitrage Trading

One way crypto investors can make money in sideways markets is arbitrage trading, which involves taking advantage of price differences in the market. For example, if Bitcoin is trading for US$4,005 on BitMex and US$4,080 on Bitfinex, an investor can buy a unit of Bitcoin on the former exchange and simultaneously sell it on the latter, producing a US$75 profit. Although such instances are rare in the digital marketplace, many traders view arbitrage as the best crypto strategy.

This strategy may sound straightforward enough, but it certainly comes with its risks. Price differentials can close in short order, eliminating the opportunity for profit.[22] One reason for the rapid pricing corrections are automated trading bots.

Another source of difficulty can be slippage, which is when a trade executes at a price other than what was expected. Slippage is typically due to excess latency in the crypto trading platform. This can eliminate the price difference an investor was looking to harness.

Another consideration is trading fees. If an investor is looking to take advantage of small price differentials that exist between digital currency exchanges, the associated expenses can eliminate any profit earned or even create a loss.

Investors who are thinking about using arbitrage trading can benefit from conducting thorough due diligence before using this strategy.


Risk is inherent to investment, and trading crypto is no different. Fortunately, there are many different strategies that investors can use to manage the various risks associated with crypto trading.

Like any other investment, investors who are considering trading cryptocurrency can benefit greatly from conducting thorough due diligence. By performing this key step, they can increase their chances of meeting their investment objectives.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



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