Cryptocurrencies have transitioned from an obscure technical proof of concept to a multi-billion-dollar asset class over the past decade. Rising interest and prices have drawn the interest of short-term traders, while investors have been drawn to the long-term potential to disrupt multiple markets as well as the potential benefits of diversification.
Let’s take a look at the five different types of crypto traders and how to know where you fit into the market.
What Is Trading In Crypto?
In general, trading refers to the transfer or exchange of goods and services (buying and selling) for money or money's worth. In the world of cryptocurrency, trading is the act of speculating on cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via a cryptocurrency exchange.
Before diving into crypto trading, it is important to do some market research and understand the different types of traders.
5 Different Types Of Traders: Defined
There isn’t one trading style when it comes to cryptocurrency, there are a few. Some styles are more likely to fit your benefit and goals than others. There are different ways to denote the styles of trading, such as day trading, swing trading, position trading, diversified investors, and HODLRs.
The best way to understand what trading style works best for you is to try them out and be honest with yourself about how efficient you are at the style and how the style affects your emotional and logical well-being.
The Day Trader
Day traders focus on short-term trades that only last a day—they don’t hold any positions overnight. While crypto markets don’t open and close in the same way as equity markets, day traders tend to use leverage to profit from small price movements, which is risky to hold positions overnight when they cannot be actively monitored.
Most day traders focus on scalping—or short-term mean reversion, arbitrage, and/or liquidity mining strategies. Since these trades must be executed quickly, many day traders use tools like Hummingbot to execute trades. The goal is to rapidly generate small profits and/or use leverage to realize a lot of profit from small price movements.
The Swing Trader
Swing traders have a typical trading style of a few days or a week. Unlike day traders, they don’t typically use a lot of leverage and almost always position overnight. Most swing traders use technical analysis strategies to predict trend reversals—or the swing in price from low to high or high to low—to capture the maximum gain from a price movement.
For example, a swing trader may identify an inverse Head and Shoulders chart pattern that predicts a reversal in a downtrend. After the price breaks the neckline, the swing trader may enter into a long position and stay in the position until there’s a sign of a reversal lower. In that case, they may even sell the position and go short to capitalize on the downward trend.
The Position Trader
Position traders typically trade over the course of weeks or even months—in fact, position traders are often confused with investors due to their lengthy time horizons! Unlike swing traders, position traders prefer to identify a trend and place a trade alongside the trend as opposed to trying to catch a proverbial falling knife by predicting a reversal.
For example, a position trader may see that Bitcoin has been trending higher with a rising Relative Strength Index (RSI) reading and a rising price channel. They may enter into a long position and hold the position until the RSI reading starts to dip or the price breaks down from lower trend line resistance along its price channel.
The Diversified Investor
Investors tend to hold assets over the long term. Unlike swing or position traders, their goal is typically to diversify an existing portfolio rather than simply bet on a price increase. Investors will likely purchase future crypto exposure via exchange-traded funds (ETFs) that trade on a stock exchange but hold a significant amount of crypto assets.
For example, an investor might purchase crypto assets in order to diversify equity risks. Since crypto tends to have a weak or negative correlation with equities, they can be used in a portfolio to offset the risk of a significant decline in equity values. Crypto assets may also offer significant upside potential in their own right.
HODLR: The Crypto-Exclusive Traders
“Hold on for Dear Lifers” are strong believers in crypto for its own sake. As the name implies, they typically hold crypto assets for the long-term—even when they experience significant volatility. The only exception might be spending crypto where possible—to buy a coffee, for example—to help support its potential as a replacement to fiat currency.
For example, a HODLR may purchase a cryptocurrency project at a very early stage and hold for the long-term, regardless of any short-term volatility. Most HODLRs have amassed some wealth with Bitcoin, but rather than selling it, intend to hold it over the long-term despite the significant volatility that has occurred over time.
Cryptocurrency Traders: Which Trading Style Suits You?
Choosing the right trading style is an important part of becoming successful in the crypto markets. When choosing between different types of trader options, it’s important to take into account your financial and employment situation (e.g., do you have the time or capital to commit to full-time day trading or position trading) and your long-term goals (e.g., retirement vs. fun money).
It’s worth noting that active trading may also result in higher risk and tax liability. If you hold a crypto asset for less than a year, you must typically pay short-term capital gains tax rates that are equivalent to your ordinary income tax rate. Many studies have also shown that active traders tend to lose more than buy-and-hold investors.
ZenLedger can help you prepare your Crypto Taxes and ensure that you’re not overpaying. In fact, you can even find opportunities to harvest tax losses to offset your tax liabilities in the current year. You can easily pre-fill popular IRS forms with the right information or even integrate with TurboTax to complete your tax returns.
The Bottom Line
Crypto assets have become tremendously popular among both short-term traders and long-term investors. Of course, there are many different types of traders and investors, and it’s important to ensure that you’re the right fit for the right category. You should also keep in mind the risks and tax implications of different types of trades, which are always important considerations for any type of investing or trading.