Day Trading vs. Long-Term Cryptocurrency HODLing: Benefits and Drawbacks

What is cryptocurrency?

A cryptocurrency is a digital or virtual currency protected by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology - a ledger that is enforced by a diverse network of computers.

A distinctive feature of cryptocurrencies is that they are not issued by any central authority, government, or bank, which makes them immune to government interference. According to CoinGecko, there are over 2.52 million cryptocurrencies in 2024 to date, and their number is constantly growing.

Why invest in cryptocurrency?

Cryptocurrencies have several potential advantages that make them an attractive asset for many investors. Here are a few of them:

1. High profitability: the value of coins is constantly changing, and sometimes quotes can grow several times.

2. Liquidity: the cryptocurrency market does not close on weekends or at night - you can trade on various exchanges 24/7.

3. Independence from traditional banking systems: cryptocurrencies offer new opportunities and force banks to adapt to the changing financial landscape. Such independence from traditional banking systems can be especially beneficial in countries with unstable economies or where citizens have limited access to banking services.

4. Diversification: cryptocurrencies represent a new asset class that can be attractive for ideal portfolio diversification.

Learn more about 5 trading strategies and tips you need to know for 2024 here.

What is cryptocurrency day trading?

Day trading is one of the most popular trading strategies on both cryptocurrency and traditional exchanges. The term “day trading” comes from traditional markets, which do not operate 24/7 and have set business hours.

This is a type of short-term trading strategy in which a trader opens and closes positions within one trading day. Traders seek to profit from short-term price fluctuations within a few hours. Day trading requires active market monitoring and quick reactions to price changes.

Unlike traditional markets, the round-the-clock operation of the cryptocurrency market provides day traders with more opportunities to trade, since they can choose to trade at any time of the day or night.

The cryptocurrency market is known for its high volatility, which means cryptocurrency prices can change rapidly in a very short time. This can provide opportunities for day traders to profit from short-term price movements.

For successful day trading in cryptocurrencies, a trader must be able to:

control his emotions,
adhere to his strategy and make informed decisions based on analysis and logic,
understand the market well and be able to analyze market trends and indicators.

Benefits of day trading in cryptocurrencies

If you are ready for constant monitoring, day trading can become a great source of income. With the right approach, day trading in cryptocurrencies can bring stable and regular income.

Here are some of the most favorable benefits of day trading:

There is no need to move positions overnight. If you trade for short periods during the day, when you can only focus on the market. You do not need to bear the additional risks of holding positions overnight. Night risks can be very expensive, as they can lead not only to the triggering of stop losses but also to the slippage of orders.
Shorter drawdown periods. Most traders understand that from time to time, they will have a series of losing trades. At the same time, a day trader, as a rule, comes out of his downturn in trading much faster than a long-term trader. A shorter recovery period after drawdowns can be especially important for those who trade to make a living.
Making a quick profit. Day traders quickly know whether their trading decisions were right or wrong. This may be suitable for more impatient people who often want to find out relatively quickly whether their trade was profitable or unprofitable.
High level of trading activity. It is suitable for traders who experience the thrill of trading and prefer to stay always in the market. For them, day trading is best suited.
Simple decision-making. Many day traders use simple decision-making methods because they need to make quick decisions about entering or exiting the market.

Learn how to do day trading in cryptocurrency

As already mentioned, day trading in the cryptocurrency world involves buying and selling digital currencies during one trading day. Day traders use intraday trading strategies in an effort to capitalize on market volatility and rarely stay in positions for more than one day.

Day traders use technical analysis, graphical models, and technical indicators to determine trading settings. The most common day trading strategies include scalping, range trading, and high-frequency trading.

Scalping – this is an extremely common trading strategy among day traders, which consists of using small price movements for short periods of time. These may be gaps in liquidity, bid-ask spread, and other market features that can be exploited. Scalpers use tools such as order book analysis, volume heat maps, and a variety of technical indicators to determine entry and exit points for individual transactions. However, due to the fast execution of trades and high risk, scalping is usually suitable for more experienced traders.
Range trading – that is a simple strategy that is largely based on the analysis of candlestick charts and the search for support and resistance levels. As the name suggests, range traders look for price ranges in the market structure and make trades based on these ranges. Range trading is a relatively simple strategy that may be suitable for beginners. It requires a good understanding of candlestick charts, support, and resistance levels.
High-Frequency Trading (HFT) - consists of using algorithms and trading bots that can quickly enter and exit many positions in a short period of time. The development of HFT bots requires an understanding of advanced market concepts at the same time as deep knowledge of mathematics and computer science. Therefore, such trading is more suitable for experienced traders.

The best cryptocurrencies for day trading

Choosing the right cryptocurrency for day trading can be a difficult task. Day trading cryptocurrency can be lucrative but also quite risky.

Here are some of the best cryptocurrencies for a day trade:

Bitcoin (BTC) - Bitcoin is the best crypto to trade with during the inflation period.
Ethereum (ETH) – Ethereum is predicted to grow in the near future. To begin with, ETH-ETF (Ethereum Exchange-Traded Fund) is accepted. That fact allows investors to invest money in the Ethereum cryptocurrency through traditional stock markets.
Avalanche (AVAX) – Avalanche is known as an old undervalued blockchain, but with good prospects for growth.
Solana (SOL) – Solans is considered to be the best altcoin to trade for great quick returns.
Binance Coin (BNB) – Binance Coin is also a great choice for day trading.

How does market capitalization affect day trading in cryptocurrencies

Market capitalization is the simplest indicator for choosing a coin based on only one number. The market capitalization is calculated as follows:

Capitalization = The total number of tokens in circulation * The market price of the token

Depending on their total market capitalization, coins are divided into categories, which makes it easier to compare cryptocurrencies:

Large capitalization: > 5 billion
Average capitalization: 1-5 billion
Small capitalization: 500 million — 1 billion
Micro capitalization: < 500 million

Go to CoinMarketCap and find out today's cryptocurrency prices by market cap.

Why is market capitalization important and what does it say about the coin?

The higher the market capitalization, the lower its volatility tends to be over time.
The higher the market capitalization, the higher the liquidity, which allows you to enter and exit trading positions at any time.
The lower the market capitalization, the higher the risk and potential profit‌.

Risks and drawbacks of day trading in cryptocurrencies

Although using short-term timeframes has a number of advantages, day trading also includes some disadvantages like:

Higher trading costs. Day traders tend to make more trades than long-term traders as they enter and exit the market during the trading day. Since each transaction involves the payment of a trading spread and possibly even broker fees, these costs can accumulate and reduce the overall profitability of your trade.
Greater effect of order slippage. Since a day trader will usually be more active, his trading account will also tend to execute more stop-loss orders. Accordingly, there is a risk of slippage.
Trading requires more time. You will have less time for other things.
Time consuming. Since day traders tend to look for opportunities to enter and exit the market during the day, this means that they will often need to observe it more closely and spend more time on market activity.
The need for quick decision-making. To take advantage of small intraday market movements, day traders usually need to make simpler and faster decisions compared to long-term traders. This requires quick thinking, which can create more stress for the trader.
Higher cost of market monitoring software and news services. Day traders‌ should keep their finger on the pulse of the market. This often means investing in expensive systems that allow them to track the market and related financial news in real-time.

Find out more about the risk management in crypto trading in this article.

HODL: What is a long-term investment in cryptocurrencies?

HODL is a term frequently used by cryptocurrency investors who refuse to sell their cryptocurrency, regardless of whether the price increases or decreases.

Sometimes HODL is interpreted as "Hold on for Dear Life" and means refusing to sell even during times of strong market volatility and poor market performance.

HODL is a term originally formed on the popular BitcoinTalk forum in December 2013 and titled "I AM HODLING". A user with the nickname GameKyuubi stated that he was "holding" his Bitcoin despite significant market fluctuations.

HODL's philosophy is based on the belief that cryptocurrencies, despite their volatility, will grow in value over the long term.

Advantages of HODL

The advantages of the HODL are obvious. If an investor expects to hold coins for several months or years, he does not need to react to temporary market collapses. There is also no need to be nervous about what is happening, as well as update cryptocurrency exchange rates and his portfolio a hundred times. He knows that after some time the market situation will be much more attractive, so you can let the situation take its course.

HODLing has a number of advantages:

1. The potential for high profits. Some cryptocurrencies provide the opportunity to generate income in the amount of 50% of the initial investment.

2. Mitigation of short-term market fluctuations. The HODL strategy is rooted in the belief that, despite short-term market fluctuations, cryptocurrencies will increase in value over the long term.

3. Less stressful and time-consuming. A well-chosen holding strategy with the diversification of cryptocurrencies can bring much greater profits than using classic financial instruments such as gold, stocks, or real estate.

Learn how to do HODL in cryptocurrency

The HODL strategy is relevant for Bitcoin and altcoins in the TOP 50. With the growth of the cryptocurrency market, the prices of major digital assets continue to rise, despite the high volatility compared to fiat currencies. This is mainly due to the increase in the number of participants in the cryptocurrency market and the expansion of its application in various fields.

The best cryptocurrencies for HODL

To choose a coin for a long-term holding, you need to pay attention to several indicators.

It is important to consider the usefulness of the project and what problems it solves. If the functions of a cryptocurrency are able to solve significant problems, then the probability of its successful promotion and growth in price is higher.

It is also worth studying the white paper and the roadmap, which reveal the technical details and plans for further development of the project. Analyzing completed plans according to the roadmap is also of great importance when choosing a coin for long-term holding.

When choosing a cryptocurrency for a long-term holding, it is important to pay attention to the team behind the project. The openness and accessibility of information about the creators and owners of the platform are key factors. In fraudulent projects, such information is often hidden, and an increase in the price of a coin is accompanied by a short-term hype, followed by a sharp drop in price to minimum values or even complete liquidation.

It is possible to define liquidity and trading volume as two key indicators that must be considered when choosing a cryptocurrency for trading. On many cryptocurrency exchanges, you can get reliable information about these indicators, which allows you to audit the state of supply and demand in the market.

One of the factors influencing the reliability and popularity of a cryptocurrency project is cooperation with other companies, projects, and government agencies.

The number of active wallets and the number of cryptocurrency holders are also important indicators. Some cryptocurrencies provide information about this on their websites, as well as on monitoring services such as CoinMarketCap and CoinGecko.

HODL: Considering market capitalization and liquidity

Market capitalization (or market cap) is a key factor to consider when choosing a cryptocurrency for HODLing. Generally, cryptocurrencies with a larger market capitalization are considered more stable and less risky, but they can also offer lower potential income. Liquidity, or how easily a cryptocurrency can be bought and sold without affecting the overall market price, is also very important. Cryptocurrencies with high liquidity are usually easier to trade and may offer more favorable prices than cryptocurrencies with low liquidity.

Risks and drawbacks of HODL

The disadvantages of HODL come from its advantages. If the holder of the crypto‌ is ready to keep it for several years, he may not closely monitor what is happening on the market and miss a profitable opportunity.

The second disadvantage of HODL is the inability to insure against the collapse of cryptocurrency projects. One of the possible risks for investors in cryptocurrency is the closure of the project (the so-called "scam"). On the cryptocurrency exchange, traders place stop loss or orders for such situations to automatically sell an asset if its exchange rate falls below a certain level.

From time to time, there is an uneven distribution of coins among the participants, which leads to the appearance of a significant number of coins for one or more participants and a monopoly influence on processes that may be unprofitable for others. This, in turn, may affect the price of the asset and reduce the reward in the case of staking. The reallocation of resources to other projects can lead to a decrease in the price of cryptocurrencies and a decrease in profits, especially if investments were made at the maximum price level.

There may be a risk of unauthorized access to crypto assets by intruders. To protect against this, it is recommended to keep most of the funds in cold wallets that are not permanently connected to the Internet.

However, the approach of HODLers and traders is completely different, so it is not a fact that it is worth comparing them. In addition, the stop loss may work, after which the cryptocurrency exchange rate will return to its previous level — and this happens in a matter of minutes. In this case, the trader loses some of the money and the position.

Conclusion

Investing in cryptocurrency can be an exciting venture, allowing you to earn a high income and become part of cutting-edge technology. However, it is necessary to take into account the risks and problems associated with investments in blockchain, since this industry is still relatively new and the market is very volatile.

HODL long-term investment strategy involves storing assets for several years and provides an opportunity to receive a complex income and reduce the impact of short-term market volatility. When investing in cryptocurrency for the long term, it is very important to conduct thorough research, diversify your investments, and take into account your risk tolerance and investment goals. An experienced HODLer is always aware of developments in the cryptocurrency space and is ready to reconsider his positions if significant changes occur that may affect the long-term prospects of his investments.

Day trading in cryptocurrencies involves the purchase and sale of assets in a shorter period and can provide quick profits, but at the same time involves higher risks and trading costs. Understanding these risks and how to mitigate them can lead to significant benefits. Keep up to date with market news, changes in legislation, and technological advances that may affect your investments. Constantly study blockchain technology, investment strategies, and risk management.

Although cryptocurrencies have become an important financial instrument, investing in cryptocurrencies is considered a risky venture. Market volatility, uncertainty of the regulatory framework, and security threats are just some of the problems faced by crypto investors. Before dealing with crypto, you should make sure that you fully understand how it works, and its pros and cons.

Dyor is always here to help you make informed and successful trades!