Since launching 12 years ago, Bankless Times has brought unbiased news and leading comparison in the crypto & financial markets. Our articles and guides are based on high quality, fact checked research with our readers best interests at heart, and we seek to apply our vigorous journalistic standards to all of our efforts.
BanklessTimes.com is dedicated to helping customers learn more about trading, investing and the future of finance. We accept commission from some of the providers on our site, and this may affect where they are positioned on our lists. This affiliate advertising model allows us to continue providing content to our readers for free. Our reviews are not influenced by this and are impartial. You can find out more about our business model here.
What Is Crypto Day Trading and How To Report Loss
Crypto-day trading refers to the strategy that involves frequent sales and purchases of cryptocurrencies throughout the day to make a profit. Unlike long-term crypto investors who assess an asset’s performance over time, day traders aim to make immediate profits off of fluctuations in price in short periods.
Introducing Crypto Day Trading
Crypto-day trading involves identifying short-term trends with a series of indicators and tools to capitalize on price movements in the span of a short time. The goal is to buy and sell at the correct points to turn a profit at the end of the day. Due to the small size and high volatility of cryptocurrencies, crypto day trading is a high-risk venture.
The term day trading is borrowed from stock markets. Similarly, both aim to capitalize on market acumen: day traders of crypto and stocks alike analyze the price fluctuations by various parameters to identify trends that rapid price fluctuations follow. Unlike day trading stocks, these fluctuations can be fairly steep and yield high returns in crypto day trading due to their highly volatile nature.
How Did It Begin?
Regardless of the form of investment, money invested in cryptocurrencies has risen dramatically from about early 2017 into the next half-decade. The value of major cryptocurrencies, most notably Bitcoin, has reached incredible heights.
The highest-ever boom as of this writing occurred in 2021 where 1 BTC was worth over $65,000. The high value and volatility of cryptocurrencies make them a lucrative source of speculative investments, leading many investors to embrace day trading for quick and high profits.
Day trading has proved to be a double-edged sword, though. The 2021 peak is often attributed to declining real-life conditions; factors like the pandemic, inflation, and low wages are thought to have paved the way for many to find refuge in quick money-making schemes and cryptocurrencies were the greatest opportunity.
While significant wealth was generated especially by young people, cryptocurrencies’ volatile nature is hard to be mastered and requires high-risk tolerance and a solid understanding of market cycles. The investor mistakes that occur due to a lack of market acumen are often referred to as FOMO (fear of missing out) investing where crypto investors make unsubstantiated trading decisions.
Basics of Day Trading
Day training requires a solid and thorough understanding of the market cycles of cryptocurrencies, trading strategies, and indicators, along with key risk management skills and most importantly, capital that a trader can afford to lose. While the delicacies of day trading are vast and not to be simplified, it is possible to list some of the outstanding points for prospective traders.
Popular Strategies
It’s crucial to pick and follow a trading strategy. The most popular include;
Scalping refers to “scalp” in the market for small opportunities. Scalpers typically buy and sell cryptocurrencies over the course of a few hours and capitalize on small price changes. They aim to cash out with small percentage capital gains. Scalping is often the most suitable method for using trading bots.
Arbitrage refers to a strategy where traders buy currency from one exchange and sell in another one, and capitalize on price discrepancies in different platforms.
Range trading involves identifying high and low prices in non-trending markets. Traders identify when a cryptocurrency is oversold or low in value to buy, and when it is oversold and high in value to sell.
Indicators for Identifying Trends
Every strategy has its own set of indicators that work together to realize a pattern. There are a few common indicators used among them.
Direction — Identifying the direction of a trend, upward or downward, is often possible by monitoring the moving average, which helps gauge market sentiment. It shows what the average movers are doing with their digital assets in the long term or short term. If the short-term MA is below the long-term MA, it shows that sellers are more active than buyers. If a short-term MA is above the long-term MA, it indicates that buyers are more active than sellers, for example.
Momentum — Traders also look at how fast and how strong the trend is. Towards the end of a trend, it typically slows down. The relative strength index, reflecting the confidence in the asset, is usually the preferred indicator to understand the momentum.
When RSI is strong, it indicates high confidence in the currency and strong momentum, and vice versa. If RSI diverges from the price rise, it may mean that the buyers were exhausted and sellers may become more active. If RSI converges with a price rise, it may indicate a bullish behavior or sustained downward trend if it pairs with a price decrease.
Choosing Platforms
There is a myriad of cryptocurrency exchanges available, and traders usually opt for more than one. The major things to consider while choosing a platform include,
Listings — Every platform has a different collection of cryptocurrencies. It’s wise to know which coins to invest in to identify the platforms that list the desired collection.
Years active — Established platforms like Coinbase or Binance are usually credible and more trustworthy. It’s important to assess a platform’s credibility, especially when trading high-value volumes.
Fees — Every platform also imposes its own fee structure and amounts. Some may be more suitable for day trading or varying amounts being traded. Some, for example, encourage high-volume trades by waiving the fees above a certain limit.
Supported cryptos — When deciding which platform to use, being aware of the cryptocurrencies that may be traded in advance can be a useful tool. A smaller exchange with more supported cryptocurrencies and trading pairings may be more useful to day traders interested in altcoins than a larger exchange with fewer alternatives.
User Reviews — One of the greatest ways to decide which exchange to utilize is to visit various crypto communities and read user reviews.
Choosing Assets
Asset liquidity describes the ability to exchange an asset for cash. The price of a cryptocurrency may change from when the trader initiates the trade until it is executed, which is called slippage. This difference may be costly due to the high volatility of cryptocurrencies. Low liquidity can cause slippages, and result in loss.
Volatility refers to the unpredictability of the price and is a necessary evil for day trading. It allows for more opportunities for capital gains throughout the day and is usually higher for altcoins with smaller circulation rather than established coins like Bitcoin.
Trading volume measures the number of trades that occur in a given span of time and is a reflection of the interest in a cryptocurrency. It indicates whether there’s high liquidity or not and whether it can be sold quickly at a higher value than purchased.
Will Day Trading Persist?
Research shows that nearly 40% of day traders quit after one month while 80% quit within the first couple of years, and a staggering 95% lose money.
Day trading in itself is an incredibly high-risk venture and the volatile nature of cryptocurrencies increases the stakes even higher. To get ahead of the curve, traders increasingly rely on programmable trading and making use of trading bots.
A 2019 research estimated that a whopping 86% of all crypto trading was done by bots, which cements the path day trading will follow in the future.
FAQs
Is crypto good for day trading?
Cryptocurrencies have been seen as lucrative other assets for day trading. Due to their high volatility, and price fluctuations day traders capitalize on yielding high rewards, but it also means they constitute a high-risk venture.
How much money do I need to do a crypto day trade?
It’s possible to start crypto day trading with a few dozen, hundred, or thousand dollars. It does make sense to start with small amounts that a trader can afford to lose, though.
How do I start day trading crypto?
The natural first step is to get acquainted with different cryptocurrencies and study their market fluctuations. It’s also important to study and examine different strategies, and indicators, and generally get informed about entry and exit points. Then, a trader should choose a suitable platform or platforms, identify their capital assets, and cash in thereafter.
Is crypto day trading hard?
Cryptocurrencies are distinctly volatile and show differing patterns of liquidity. Its therefore crucial to have a thorough understanding of the underlying technology blockchain along with the market fluctuations — all of which make crypto day trading a difficult pursuit.
How many hours do crypto day traders work?
Unlike the traditional stock market, the crypto market is open 24 hours and 7 days. For this reason, day trading in crypto is not quite a day trading, and day traders don’t follow a standard 9-5. It boils down to a matter of preference on how many hours a day a trader wishes to commit.
What are capital gains and how they taxed?
Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. Capital gains are realized when a capital asset is sold or exchanged at a price higher than its basis. The basis is an asset’s purchase price, plus commissions and the cost of improvements less depreciation.
Capital gains taxes are owed on the profits from the sale of most investments if they are held for at least one year. The capital gains taxes are reported on a Schedule D form. The capital gains tax rate is 0%, 15%, or 20%, depending on your taxable income for the year. High earners pay taxes more.
What are capital gains with example?
Capital gains Example: Suppose a person purchased 100 shares of Rs 100 each at a total cost of Rs 10,000. (Case 1: Capital Gains) After some time, say one year, if he sells those shares for Rs 130 each with the total selling price of those 100 shares being Rs 13,000, it would result in a profit of Rs 3,000.
How to avoid capital gains tax on cryptocurrency?
Long-term capital gains will help you. Hold crypto long-term. If you hold a crypto investment for at least one year before selling crypto, your capital gains qualify for the preferential long-term capital gains rate.
Crypto capital gains VS Ordinary income
Long-term capital gains rates are often lower than ordinary income tax rates. Long term capital gains are taxed at rates of zero, 15 and 20 percent, depending on the investor’s total taxable income. That compares to the highest ordinary tax rate of 37 percent for 2022. The total capital gains tax rates are highly advantageous
What is tax loss harvesting? Should I turn on tax loss harvesting?
If you know your income will be lower in the coming years, this method can be a great way for you to pay capital gains taxes at a lower rate. You can even implement tax loss harvesting by selling investments at a gain when the tax rate is very low or even zero and then buying back the investment
Do crypto transactions count as day trades?
There are no day crypto transactions limit because they are technically not regulated the same way that stocks and options are.
How to Report Crypto Losses and Reduce Your Tax Bill
According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and crypto losses need to be reported on Schedule D and Form 8949 if necessary.
You must report income, gain, or crypto losses from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
You calculate your crypto losses by subtracting your sales price from the original purchase price, known as “basis,” and report the crypto losses on Schedule D and Form 8949 on your tax return. If your crypto losses exceed other investment gains and $3,000 of regular income, you can use the rest in subsequent years
Can I write off crypto losses?
-
The IRS requires that you report all sales of crypto, as it considers cryptocurrencies property.
-
You can use crypto losses to offset capital gains (including future capital gains if there is applicable carryover) and/or to deduct up to $3,000 from your income.
