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What Is DeFi?

what is defi decentralized finance

What is Decentralized Finance?

DeFi is part of the new financial terminology arising from the crypto revolution that reshaped the basic operational principles of the world’s economy. DeFi stands for decentralized finance, a general term that covers a broad range of blockchain-related applications, with the single purpose of avoiding third-party intermediaries. 

This article will discuss the core features and components upon which DeFi is built. After our overview designed to help you understand the Ethereum background behind the majority of DeFi apps, there is a carefully considered list of Ethereum apps and the most popular DeFi tokens. Don’t let the high-tech framework discourage you. Once you understand the straightforward principles behind it, you will see why DeFi is considered to be the future of financing. 

How Does DeFi Work?

DeFi is a financial approach where assets are accessed through an open decentralized blockchain network. Contrary to bank or centralized exchange accounts, users aren’t by any means required to provide an ID or other forms of personal identification to access DeFi. Transactions are code-handled and open to public access. 

More precisely, DeFi is a blockchain software that enables users to connect themselves on a peer-to-peer basis and buy, sell, borrow, or lend assets without a centralized authority to facilitate the transactions. Since there is no corporate intermediary, payments can’t be blocked or denied, and neither can they be delayed or misguided due to a human factor. 

Because of its decentralized nature, Bitcoin is considered the first DeFi asset. However, it’s an inescapable fact that while cryptocurrencies have been making their way to global charts over the past decade, Bitcoin has been mainly bought and sold through mainstream centralized exchanges (CEXs). 

Etherium, on the other hand, which is the next-largest cryptocurrency, has been used for building DeFi applications, as it has proved itself to be more practical for creating other forms of decentralized apps. 

All DeFi products are in tune with Ethereum, which enables seamless cooperation in, for example, borrowing tokens from one platform and trading them on a completely different application. Plus, ETH and other tokens built on Ethereum have a shared ledger that keeps a full record of ownership, accounts history, and executed transactions. 

The easiest way to understand DeFi is by differentiating between the five component layers and the several types of DeFi apps or functionalities.

DeFi Layers 

There are five DeFi layers, each with a clearly defined objective: 

  • The settlement layer refers to the blockchain and the asset of its native protocol. The settlement layer enables the network to store all previously mentioned records securely under a predefined set of rules. 
  • The asset layer consists of all tokens that are issued on top of Ethereum, the settlement layer. It includes the native asset and all other tokens supported by the blockchain. 
  • The protocol layer’s role is to provide functionality by implementing a set of self-executing smart contracts between the two parties involved. Smart contracts ensure stable transactions between the buyer and the seller or the lender and the borrower with agreement terms directly written in code lines. The code tracks and controls the transaction securely without involving a third party or any other type of escrow service. 
  • The application layer consists of user-focused apps connecting to separate protocols. They appear in the form of online platforms like decentralized exchanges, for example, accessed through a web browser that abstracts the necessary interaction for concluding the smart contract. 
  • The aggregation layer refers to an extension to the application layer. It is also a user-oriented app that provides tracking and comparing tools, simplifying complex tasks by a simultaneous connection of various protocols, and combining relevant information more practically. Typical aggregation layer examples include lending and banking services as well as incorporated crypto wallets.           

Types of DeFi Applications

  • Decentralized exchanges (DEXs) are the most commercially spread DeFi apps. They allow users to exchange fiat money or cryptocurrencies for other cryptocurrencies such as USD for Bitcoin or Bitcoin for DAI. They are rapidly growing in popularity among the crypto community as a result of the full control and custody users have over their accounts and balances. 

Popular DEXs on the market: Changelly, ShapeShift, Bisq and Uniswap.

  • Stablecoins are cryptocurrencies that are bound to a regular currency in order to keep price balance and stability. 

Popular stablecoins on the market: Tether (USDT), True USD (TUSD), Paxos Standard (PAX), USD Coin (USDC), and Binance USD (BUSD).

  • Lending platforms use smart contracts to avoid centralized intermediaries that handle the process of lending.

Popular decentralized lending platforms on the market: InstaDapp and MakerDAO.

  • Wrapped Bitcoins (WBTC) are a method of sending Bitcoin to the Ethereum blockchain network enabling the Bitcoin to be directly used in an Ethereum DeFi system. Users can earn interest from the Bitcoin they lend through the lending platforms mentioned above.
  • Prediction markets are online spots where users can bet on the outcome of multiple upcoming events. The purpose of DeFi in such prediction markets is to offer a more practical and secure functionality without the expensive intermediary services.

DeFi Tokens

Right after cryptocurrencies, DeFi tokens have been in the spotlight of the financial ecosystem since the rapid digital transformation in 2020 that happened as a result of Covid-19. They are decentralized financial apps that run on blockchain networks, executing well-established trading practices with a decentralized approach. 

Take a look at the most popular DeFi tokens, but remember that their ranking frequently changes due to the volatile nature of the crypto market. Although HaasOnline TradeServer can monitor thousands of tokens, we’re not quite ready to fully support DeFi platforms. You can monitor tokens’ current position and compare market caps with third party tools such as DeFi MarketCap.

Aave (AAVE)

Aave is a dominant protocol utilizing an AAVE native token to ensure and handle the protocol. Aave is now in the process of migration from LEND to AAVE at a 100:1 rate, executed through the Migration Portal. 

Total Supply: 16,000,000 AAVE

Uniswap (UNI)

UNI is a native token of Uniswap, one of the leading decentralized exchanges in DeFi. It’s recognized for being a so-called “governance” token, allowing holders to vote on further developments regarding UNI’s distribution and fee schedule. This token can be earned by providing pool liquidity.  

Total Supply: 1,000,000,000 UNI

Synthetix (SNX)

Synthetix is also a widely recognized derivatives protocol supported by its native token SNX. Users can earn new derivatives known as Synths only if they stake no less than 750% of the Synths value in SNX. This proportion is referred to as cRatio allowing users to earn both native inflation and proportional rate of trading fees on Synthetix.

Total Supply: 190,075,446 SNX

Sushiswap  (SUSHI)

SUSHI is a lending protocol supported by the Sushiswap governance token. Once users link their Ethereum wallet to their Sushiswap account, they can lock the pool’s assets into a smart contract with an offered ratio of 1:1. So, if a user planned to add 4 ETH worth of liquidity to the existing SUSHI-ETH pool, they would need to convert 2 ETH  into SUSHI. Users can also leverage their earnings by providing liquidity to various supported pairs on Sushiswap.

Total Supply: 250,000,000 SUSHI

yEarn (YFI)

yEarn is an automated liquidity aggregator that allows a broad range of yield farming possibilities. This protocol is conducted by its native token YFI offering users to enhance their gains on assets through lending and trading services. 

Total Supply: 30,000 YFI

The Takeaway

We hope all this cleared up any questions regarding DeFi. It’s true, decentralized finance is still a developing part of the cryptocurrency eco-system, but its liberating approach is on a way to overpower the traditional, time-consuming, and pricey financial system. It’s definitely worth giving it a shot.

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What are NFTs and are they here to stay?

what are nfts

A historic moment for NFTs

A piece of digital artwork has been sold for a substantial $69 million at Christie’s auction house, but the winning bidder will not go home with a sculpture, painting, or even a print. Instead, they’ve received a non-fungible token, or NFT for short, which is a one-of-a-kind digital token.

As you might imagine, the transaction made international headlines, as this is the first time that an NFT-based artwork has been sold at a renowned auction house, sparking the interest of artists and collectors alike.

Still confused? Don’t worry, we’ll do our best to keep things simple and explain everything from the top.

What Is an NFT?

You’re not alone if you heard the words “NFT” or “non-fungible token” and had no idea what they meant. It was a pretty unusual concept before 2021, but in recent months, it’s become increasingly popular to hear it mentioned in relation to digital artworks being sold for millions of dollars.

NFTs are the new trend in the cryptocurrency world. They are cryptographic blockchain-based assets that have unique identifiers and metadata that differentiate them from one another. A Bitcoin, for example, is exchangeable, meaning that it can be traded or exchanged for another Bitcoin without sacrificing its value. A non-fungible token, on the other hand, represents a digital object such as a painting, animation, piece of music, picture, or video, that comes with a certificate of authenticity generated using blockchain technology.

You can think of them as collectibles of the Internet. A digital producer, for example, may create music, a video, or a picture file, and we can all copy it once it’s been published. It is neither unique nor valuable. 

But if that producer transforms the file into an NFT, the system adds digital information to it, and the holder of a file containing that data is the rightful owner of the authentic (original) copy. It’s almost as if you’re keeping a certificate of authenticity. This may seem absurd, but these digital collectibles are worth a lot of money. They are sold through online auction websites or through direct buyer-to-seller transactions.

Understanding NFTs

NFTs transform the crypto concept because each of them is created as a unique token, making it unlikely for one non-fungible token to be identical to another. NFTs, like Bitcoin, have ownership information that makes it easy to identify and exchange tokens between holders. In NFTs, owners can also include metadata or information related to the asset.

It all makes sense when you realize that NFTs were developed from the ERC-721 standard. They contain the same fundamental interface – ownership information, protection, and metadata.

When Did NFTs Become a Thing?

NFT technology has been available since the mid-2010s, but it has only recently become popular with CryptoKitties, a digital trading game based on the Ethereum cryptocurrency platform that enabled users to buy and sell unique virtual cats that were stored on the blockchain.

Each crypto kitty is one-of-a-kind. They replicate amongst themselves producing new offspring with different characteristics and attributes from their parents. In a few weeks after their launch, $20 million were invested in Ether on buying, feeding, and caring for these crypto kitties.

NFTs are a perfect match for sports memorabilia, another type of speculative asset whose value is based largely on the prices paid by its fans. The NBA announced a partnership with Dapper Labs in October to sell clips and photos of popular basketball players as NFTs. By the end of February, they had earned more than $230 million

The sparked interest of NFT is as a result of people appreciating independent artists’ work by purchasing their works, while others are fascinated by the idea of claiming ownership of a digital asset, which has fueled the growth of NFTs.

Why Do People Pay for NFTs?

NFTs are a breakthrough from the reasonably simple idea of cryptocurrencies. Contemporary finance mechanisms provide complex trading and lending processes for a variety of asset types, including real estate, lending contracts, artwork, etc. NFTs are an evolution in the reinvention of this framework since they allow a virtual version of physical assets.

Investments in works of art, photos, videos, and other types of digital files are often made since unique items hold their value for decades, if not centuries. In fact, art is an investment tool that provides artistic enjoyment and a certain kind of reputation, but also holds monetary value.

Here, you might be asking yourself, “How is it possible for a digital item like a tweet or an image to be distinctive when it can be copied with a single click?” Everyone can download Van Gogh’s Starry Night from the Internet or photograph the Venus de Milo while at the Louvre. However, this doesn’t mean that they own the original artworks.

The element that adds value to these digital products is blockchain technology. The blockchain provides true ownership of the product thanks to its special cryptographic features. To put it another way, the product you purchase is a “real digital copy,” and no one can claim your NFT.

Examples of Real NFTs that Have Been Sold at High Cost

·         Mark Cuban, the billionaire businessman, sold a motivational quote NFT for $1,700. “No one ever changed the world by doing what everybody else was doing,” the statement read. Cuban receives 15% royalties each time his NFT is resold, according to Business Insider.

·         According to the New York Times, a GIF of a toaster-pastry kitty zooming across the sky with an accompanying rainbow was sold for nearly $600,000.

·         In less than 20 seconds, musician Grimes (and mother of Elon Musk’s youngest son) sold her NFT collection of digital artworks for $6 million.

Where Can I Buy NFTs?

NFT marketplaces are gaining traction at a growing pace, indicating that NFTs are becoming more popular online. There are many choices out there, so with some research into the different NFTs, you can find the best option for you. Nonetheless, we’ve compiled a list of the most common (and reliable) NFT marketplaces to get you started. Some of them include OpenSea, Rarible, SuperRate, and Nifty Gateway

A Few Words Before You Go…

NFTs have made major breakthroughs in the luxury and gaming sectors, and there is plenty of room for them to further grow and expand. NFTs bring on new relevance and value to digital art, as the works of digital artists experience massive sales to the new crypto audience. Even celebrities are jumping on board as they see a new way to interact with their fans. Of course, keep in mind that digital art is just one application of NFTs. They can be used to signify ownership of any unique asset in the future.

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How do I choose the right crypto wallet?

how do bitcoin wallets work

Getting Started with Crypto Wallets

As a potential digital investor, you must be aware of how your assets are handled on the blockchain network. Remember the first business rule? Learn to manipulate the flow of your assets, before anything else! When we talk about crypto, proper use of crypto wallets is a pillar in managing your assets.

Despite the impressive number of people holding Bitcoin and other cryptocurrencies, the concept of crypto or digital wallet seems to be frequently misinterpreted. One issue arises from the initial response: How can a wallet store something which has no tangible presence in the real world?

Don’t jump to conclusions. In this article, we’ll provide a clear definition of what digital wallets are and explain how they operate. We’ll also go into the different types of wallets and what you should consider when choosing one for your assets. 

What Is a Crypto Wallet?

By definition, a crypto wallet is a software program or a hardware device that enables you to store, exchange, and keep a record of your cryptocurrencies. In comparison, if you possessed a certain amount of cash, you wouldn’t walk around with it in your pocket or hand. Instead, you would look for a safe place to hold the money out of sight.

So, the purpose of holding your regular money in a wallet is practically the same for digital assets. Furthermore, digital wallets allow you to make transactions, i.e send and receive Bitcoin and other cryptocurrencies (there are multi-currency wallets as well). However, since cryptocurrencies don’t have physical representation in the real world, they can’t be physically transferred to an actual location. The blockchain industry operates on different transactional principles. Let’s see how they work.

How Do Digital Wallets Work?

As we previously implied, crypto wallets don’t execute physical transactions of coins. Instead, they serve as tools to provide transactions with the blockchain system. Crypto wallets produce the information required to receive or send altcoins through the blockchain network. The main holders of safety and the information concerning your wallet are the set of public and private keys delivered to you once you activate that crypto wallet. The keys appear in a form of a random, case-sensitive code of numbers and letters. Crypto wallets also include a wallet address, which is related to the public key in that it’s used to send assets to your wallet. The public key is a compressed version of your address to make it easier to conduct transactions.

Let’s illustrate these notions in more familiar terms. If you want to receive an email address you give the address to the potential sender to know where to address the message. Similarly, you provide or ask for the wallet address if you plan to receive or send cryptocurrencies. Private keys, on the other hand, are the password in this email analogy. You must keep them safe and share them with nobody. Once you lose your private keys, you’re no longer the owner of the account.

Therefore, the wallet doesn’t really hold your assets, but the transaction records stored on the blockchain. The Bitcoin and other coins don’t leave the network, it’s only their ownership ledgers that are transferred from one wallet address to another.

Concerning privacy, the blockchain industry is transparent in nature, so everyone is allowed to see the balance of a crypto wallet as well as the full history of previous transactions. Fortunately, the wallet address doesn’t expose the owners’ identity in any respect even though there are technically legal measures to track down the person holding a particular wallet.

Types of Crypto Wallets

A complete understanding of crypto wallets is impossible without clear differentiation between the main types available on the blockchain market. Let’s take a look.

Online Wallets

Online wallets are a type of hot storage which allows access from any web browser. Just like any interactive platform, you need to visit the company’s website and set up your wallet following the instructions provided on the homepage. Online wallets are free, practical, and easily accessible. However, your private keys are kept online, which makes online or web wallets an immediate and easy target for cybercriminals. So, despite the convenient navigation, we highly suggest you use this crypto wallet only for short-term purposes and limited amounts of digital assets.

Recommended online wallets: Exodus, Electrum, Wasabi, and BTC.com.

Software Wallets

Software wallets are also hot storage as they require an internet connection to be accessed. Unlike online wallets, software wallets are apps you need to download either on your desktop or mobile. In fact, the majority of online wallet services tend to launch mobile apps (software wallet versions) in order to keep up with the dynamic lifestyle of modern generations. Furthermore, they feature considerably more sophisticated design and advanced tracking tools than web wallets. In terms of security, mobile and desktop wallets can be said to be slightly more secure since private keys are kept on your device. Yet, you should keep to the rule that large amounts of cryptocurrencies are not to be stored in hot storage.

Recommended software wallets: Exodus, Wasabi, Electrum, and Mycelium (mobile only).

Hardware Wallets

Hardware wallets or cold storage are physical devices resembling external drives (like a USB thumb drive) that we use to store valuable documents and photos. Therefore, in order to access your funds, you’ll need to plug the wallet into a supported device (a computer or mobile phone) and navigate through the simple software that comes with the hardware wallet. Hardware wallets are the most secure option for storing Bitcoin or other blockchain-based currencies. Your private key is kept offline and has no connection to online servers, so it’s safe from hacking attempts.

However, hardware wallets are not free. Their price ranges between $50-$200, depending on the model.

Recommended hardware wallets: Trezor, Ledger, KeepKey, and Bitlox.

Paper Wallets

Quite an interesting fact is that paper wallets were formerly considered the most secure crypto-wallets. They are created online and printed out on paper consisting of two character strings (your private and public keys) and QR codes. However, due to the massive shift towards digital payment methods, paper wallets are treated as an outdated storage source today. Still, you can use them as you’d use a hardware wallet – keep the majority of your crypto assets there, and move small amounts to hot storage when you need it for a transaction.

If you still think that nothing is safer than keeping your private key in your actual pocket, you can count on Bitcoin Paper Wallet or Wallet Generator.

Final Thoughts

What makes a suitable crypto wallet? There is no single answer since different wallet types satisfy the needs of different customers. Don’t let the overwhelming choice of crypto wallets available today distract you from your individual intention of using crypto. Before you set off, try to answer the following:

  • Do you plan to use the wallet for daily purchases or long-term investment? 
  • Will you focus on Bitcoin or try out less known but promising coins?
  • Will you need to access your digital wallet outside your home?
  • Will you trade a large amount in cryptocurrencies or start small? 

Once you learn how crypto wallets work and consider their features against your personal crypto goals, you’ll realize that it’s much simpler than it appears. 

We hope that you found our guide informative and more important, encouraging. We wish you a safe crypto journey!

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Cryptocurrency Taxes Overview – How to Report Your Gains and Losses

cryptocurrency trader taxes

An Overview of Crypto Taxes

Death and taxes are said to be the only things you cannot escape in life. When the latter is mixed with the world of cryptocurrency trading and investing, things can quickly become confusing and unclear. 

In this article, we break down the fundamentals of cryptocurrency taxes for our traders that reside in the U.S. We discuss how the asset class is treated from a tax perspective and also outline the process for properly reporting the gains, losses, and income associated with your crypto trading activity.

Cryptocurrencies are Treated as Property

Contrary to what their name suggests, cryptocurrencies are not currently treated as currency in the eyes of some governments. The IRS (the tax collecting agency of the U.S) makes clear in its official virtual currency tax guidance that cryptocurrencies are to be treated as property for tax purposes. 

What does this mean?

This means that all cryptocurrencies such as Bitcoin, Ether, XRP, and other altcoins need to be treated similarly to any other form of property like stocks, real-estate, or bonds from a tax reporting perspective.

In other words, capital gains and losses tax reporting rules apply to cryptocurrencies just like they do for stocks and bonds. 

Cryptocurrency Capital Gains

Whenever you dispose of a cryptocurrency (get rid of it), you realize a capital gain or capital loss on the disposal.

The IRS considers all of the following to be disposal events for cryptocurrency (also known as taxable events):

  • Selling crypto for fiat
  • Trading one crypto for another
  • Using crypto to buy goods or services

Let’s take a look at a couple of examples to further illustrate how this works.

Example 1

Craig purchased 1 Bitcoin for $10,000 in April. Five months later, Craig sold that Bitcoin for $12,000.

In this example, Craig realizes a taxable event when he disposes of his Bitcoin by selling it for fiat. He realizes a $2,000 capital gain upon disposal (Sale Price – Purchase Price). Depending on what personal income tax bracket Craig falls under, he will pay a percentage of tax on this capital gain.

Example 2

John also purchased 1 Bitcoin for $10,000. However two months later, John traded 0.5 of that Bitcoin for 30 Ether. At the time, the 30 Ether was valued at $6,000.

In this example, John is disposing of his Bitcoin by trading it for ETH. This incurs a taxable event, and John realizes a capital gain or capital loss. 

John’s cost basis for the 0.5 Bitcoin that he traded was $5,000 (0.5*10,000). The 30 ETH John traded for was worth $6,000 at the time of the trade, so John incurs a $1,000 capital gain on the transaction (6,000 – 5,000).

The Difficulty for Traders

As you might have realized from these examples, calculating gains and losses can become quite tedious for high volume cryptocurrency traders—especially when you are actively trading crypto with on our automated trading products. This challenge stems from the fact that your crypto trades are most often quoted in other cryptocurrencies while your capital gains and losses need to be reported in your home fiat currency (US Dollar). 

To effectively calculate your gain or loss from each trade, you need to know what the fair market value was in US Dollar for your cryptocurrencies at the time of the trade. 

Data aggregators like CoinMarketCap can be used to track down this data by hand. Alternatively, cryptocurrency tax software products like CryptoTrader.Tax can automate the entire crypto tax reporting and calculation process. 

Do Capital Losses Reduce Your Tax Liability?

Yes! While capital gains increase your taxable income, capital losses lower it—meaning you’ll pay less to Uncle Sam by filing your losses.

In the U.S., you need to report each taxable event whether it is a capital gain or a capital loss. One common misnomer amongst traders is that if they lost money overall, they do not need to report. This is not true, and they will actually miss out on large tax savings by not reporting losses! 

How Do I Report My Gains and Losses?

Capital gains and losses get reported on Form 8949. Simply report each taxable event (disposal) that you have within the tax year on a separate line of 8949. Once all disposals are entered, add them up to arrive at your net capital gain or loss. 

For each row on 8949 you will need to include:

  • A description of the property sold
  • Original purchase date
  • Date sold
  • Proceeds from the sale (in USD)
  • Cost basis in the property (in USD)
  • Gain / Loss

Below is an example of a filled out 8949 from a trader who was disposing of Ether.

IRS form 8949 with ETH example

Schedule D

Once you have your net capital gain or loss from all of your cryptocurrency disposals reported on 8949, you simply transfer this number to Schedule D of your tax return. Include both of these documents with your holistic tax return.

Cryptocurrency Tax Software

If you are looking for an easy way to automate your crypto tax reporting, it may be helpful to checkout some of the tools that have been specifically developed to help crypto traders with their tax reporting. 

HaasOnline has teamed up with CryptoTrader.Tax to help enable a more streamlined tax reporting for our U.S. traders. 

CryptoTrader.Tax integrates with most of the major exchanges we support to allow you to import your historical crypto transactions directly into their app. You can then generate your capital gains and losses tax forms based on this data with the click of a button.

HaasOnline users can use the discount code HAASONLINE to receive 20% off any CryptoTrader.Tax report.

Tips & Tricks

To ensure that you will be able to easily report your crypto taxes at year end, make sure you are keeping track of the various exchanges and platforms you are using to trade. If you are a heavy user of multiple exchanges, it can be easy to lose track of everything you did over the course of the year. To avoid this, make sure to keep clean records.

Once year end comes around, you will easily be able to account for all of your trades and transactions with these records and get your tax reporting done in no time. 

For more information on the intricacies of cryptocurrency taxes, checkout this guide: The Complete Guide to Cryptocurrency Taxes & Everything You Need to Know About Taxes and Cryptocurrency.

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Day trading crypto. Is it viable in 2021?

how to day trade cryptocurrency

How do you begin day trading crypto?

It is an exciting time of growth in the cryptocurrency industry, as day by day Bitcoin, Ethereum, and other cryptocurrencies prove to be more than just a passing fad and major financial institutions like JP Morgan recognize the importance of blockchain technology. However, the most activity in the crypto sphere continues to be on the ground, where early adopters and shrewd investors have made fortunes in the years since Bitcoin first entered the scene. Naturally, some interested in getting into the action have wondered: can you day trade Bitcoin and other cryptocurrencies? Well, the answer is yes, and it is easier than ever before, despite requiring some basic knowledge and continual research.

It’s no secret that cryptocurrencies have experienced volatile price swings over the past several years, with Bitcoin alone surging from $2,900 on September 12, 2017 to a high of $19,783 on December 17, 2017 before falling gradually to somewhere in the single-digit thousands for much of the time since. This price volatility makes day trading cryptocurrencies a potentially lucrative endeavor. However, with upside also comes risk, so it’s important to know at least the basics about the platforms and day trading strategies that are widely practiced before jumping in.

What is Day Trading?

As the name suggests, day trading involves buying and selling financial assets throughout the day in pursuit of profit opportunities. This may involve trading the same security multiple times within a single day and requires a different array of strategies than more traditional long-term buy-and-hold investing.

Day trading gained prominence and largely became possible for most people with the advent of internet brokers, as otherwise only those working for large financial institutions were able to execute trades. As highly liquid digital assets, cryptocurrencies are particularly well suited for day trading.

It’s quite simple to start day trading cryptocurrency, too, as long as you know how to get started. To that end, we hope this guide will equip even complete beginners with the knowledge of platforms and strategies that are commonly used to conduct day trading in the cryptocurrency space.

Technical vs. Fundamental Analysis

Before providing an overview of some of the major types of day traders, it is helpful to first discuss the difference between technical analysis and fundamental analysis.

Technical analysis refers to trading assets based upon price forecasts generated from analyzing historical market data. There are a wide array of strategies pursued under the banner of technical analysis based upon different signals that are put in place to direct a trader to buy or sell a given asset, a number of which will be detailed throughout this guide.

Fundamental analysis, meanwhile, involves close review of financial statements in order to construct price ratios and determine the appropriate valuation of a business. Traders employing fundamental analysis will usually look at some combination of dividends paid, cash flow, earnings, and current share price.

Day traders naturally favor technical analysis, as it is far more amenable to forming narratives used to predict and act upon intraday price swings. As a result, much of the discussion in this guide will largely fall under the general banner of technical analysis. However, it is common for day traders to employ both technical and fundamental analysis as deemed appropriate. For example, investing in a particular cryptocurrency based on the team behind it would fall under fundamental analysis. On the other hand, selecting a cryptocurrency to day trade on the basis of past price movements is an example of technical analysis.

With that brief overview of technical and fundamental analysis out of the way, let’s now turn to some of the most common types of day traders in the cryptocurrency market today.

Types of Day Traders

Although every day trader is unique, those day trading cryptocurrencies can largely fall into two non-exclusive categories: technical traders and speculators.

Technical Traders

While it is possible to trade shares of publicly listed crypto companies, fundamental analysis does not lend itself towards day trading individual cryptocurrencies. Instead, day trading based on technical indicators is ubiquitous in the cryptocurrency market. Technical traders use the aforementioned technical analysis to quickly enter and exit positions in select cryptocurrencies.

The range of technical indicators to follow is virtually limitless, bound only by the data available and a trader’s imagination. Nearly all day traders engage in technical analysis of some kind, as the motivation to buy or sell a given asset requires some kind of signal to help decide whether to buy or sell.

Speculators

Contrary to their negative reputation in the popular press, day traders who primarily engage in what can be considered speculation fulfill an important function in the market. Alert to news that may signal whether a particular cryptocurrency will be more or less desired in the market, speculators try to get ahead of the crowd and capitalize on expected price movements. In the case of a correct prediction, the speculator is rewarded with profits for moving the price of the coin closer to its correct market value. On the other hand, an incorrect forecast will result in losses, providing a valuable signal to other traders.

Speculators are distinguished from technical traders by the fact that, at least in their capacity as pure speculators, they are only focused on how unanticipated news will immediately affect a cryptocurrency’s price. Only the next price move from the present baseline matters to a pure speculator, not historical data or complicated charting patterns. Of course, many technical traders can also engage in speculation, and vice versa, but speculation is usually regarded as a different game than technical or fundamental analysis.

How to Day Trade Cryptocurrency

With those preliminary definitions out of the way, let’s now get into the nitty gritty of what a beginner looking to day trade cryptocurrencies should consider.

1. Pick a Cryptocurrency and an Exchange

With well over one thousand cryptocurrencies in existence, it’s important to narrow down which cryptocurrencies you want to trade. CoinMarketCap is a good resource to find up-to-date information about the cryptocurrencies with the highest price, market capitalization, 24 hour volume, and daily price change.

Next, budding crypto day traders will need to identify which exchange is best suited to transaction their cryptocurrencies of choice. Cryptocurrency exchanges vary in terms of cryptocurrency offerings and fee structures and so it pays to take the time to research carefully early in this process. It should also be noted that it is not necessary to stay limited to a single exchange, as one can use an automated trading bot like setting up our crypto arbitrage bot to trade cryptocurrency across multiple exchanges.

2. Plan and execute a trading strategy

This step is where the most successful day traders separate themselves from the pack. There are too many strategies for day trading crypto to make an exhaustive list, but later in this article we provide an overview of some of the best strategies for beginners to try when just starting out. Nevertheless, finding a good strategy that brings in consistent profits requires a lot of dedicated research time. But hey, if it was too easy, everyone would be doing it, right?

Since day trading involves buying and selling the same asset in short succession, crypto arbitrage is naturally appealing to cryptocurrency day traders. Arbitrage generally involves identifying price discrepancies in the market and buying and selling in quick succession to take advantage of these differences. However, arbitrage trading is limited to available opportunities and often yields very small profits per trade, making it just one of many potential day trading strategies to pursue.

3. … Profit (?)

Despite the many complicated techniques and strategies possible when day trading, buying low, selling high, and pocketing (or reinvesting) the difference is the name of the game. The best strategies will pay out profits, but no strategy is immune from the possibility of loss. What each individual day trader chooses to do with their gains is up to them, whether it may be reinvesting into more trading opportunities or taking some money out of the market for consumption of tangible items.

With that broad overview of crypto day trading out of the way, let’s now turn to some specific strategies crypto day traders employ.

Best Crypto Day Trading Strategies

Look for Scalping Opportunities

Scalping refers to the frequent buying and selling of an asset to profit off of minuscule price changes. While any given transaction will generate only a small profit, the sum of all transactions in a day will ideally be significant. The emergence of supercomputers in past decades has made high-frequency trading a common example of scaling in traditional securities markets.

When dealing with cryptocurrency trading, scalpers attempt to profit by buying at a certain price and selling as soon as possible at some higher price, even if just barely so. Since scalping relies on collecting many small profits throughout the day, it is very important to avoid big losses, as a single loss could easily wipe out hours or even days of profits. A safe way to engage in scalping is to use an automated bot like our Scalper Bot, which can be programmed to quickly transact small amounts of crypto and book profits as the opportunities appear.

Pursue Pattern Trading

Also known as switch trading or inversion, pattern trading utilizes technical indicators to produce buy or sell signals. Of course, these signals do not guarantee that buying or selling the cryptocurrency under consideration is a good idea, merely that the conditions specified in the trading strategy have been reached.

As a time-honored part of technical analysis, price patterns come in many different shapes and sizes. At a basic level, “uptrends” indicate that prices have been moving higher over a certain period of time, while “downtrends” indicate the opposite. A “sideways” market occurs when the price of an asset oscillates back and forth between two parallel trend lines. Other patterns appear in a price chart in the shape of “triangles,” “pennants,” “flags,” “wedges,” and so on. There have been far too many different technical indicators and price patterns identified and developed over the years to list, so those interested should do some research into different patterns and find one to try. The HaasOnline trading platform features native integration with a number of technical indicators that can be used for cryptocurrency day trading.

Put Stop Loss and Limit Sell Orders in Place

Often regarded as one of the most important pieces of advice to any day trader, using stop loss orders make sure that a trade is exited once the price of an asset reaches a certain level. This can prevent catastrophic losses in the case of huge price declines. For example, if you buy $5,000 in BTC, it is possible to set a stop loss at $4,000, meaning that the BTC will be sold if its value falls below $4,000.

A limit sell order can be combined with a stop loss, but is intended to activate once an asset reaches a certain price higher than the purchase price. Then, the limit sell order kicks in, selling the asset and booking the profits. In the reverse of the same example as before, imagine once again purchasing $4,000 worth of BTC but placing a limit sell order at $5,000. If the value of the purchased BTC reaches $5,000, the limi sell order will kick into gear and sell the BTC for $1,000 in profits.

Stop loss and limit sell orders are often available on major exchanges, such as Coinbase and Binance. Furthermore, the HaasOnline trading platform features proprietary safeties that activate whenever predefined market movements occur, among which stop loss and limit sell orders can easily be constructed.

Let Trading Bots Do the Work

After deciding which cryptocurrencies to transact and which trading strategies to follow, all that’s left to do is to hit the market and put those strategies to work. Manually watching market signals and executing trade orders is cumbersome, however, and will likely prove too unwieldy even for relatively simple day trading strategies. That’s where automated trading bots come in.

Algorithmic cryptocurrency trading uses computers to execute trades according to a program defined in advance. In that way, these “trading bots” can run with trading strategies without needing continual human intervention. The HaasOnline trading platform features a number of such trading bots, all of which allow cryptocurrency day traders to stack technical indicators, safeties, and insurances to create an individualized automated trading strategy. While algorithmic trading with automated trading bots is useful for anyone interested in buying and selling cryptocurrencies, they are especially useful for day traders.

Let’s look at a few examples. First, the Trend Lines Bot allows traders to set buy and sell lines which the bot will use to execute trades whenever those lines have been breached. Beginner day traders may especially benefit from using the Standard Trade Bot, which provides an intuitive interface through which to compile a strategy using various indicators and safeties. Finally, the Market Making Bot can create two limit orders for a given cryptocurrency at certain percentages away from the current price.

Algorithmic trading bots are a powerful tool in the hands of a cryptocurrency day trader. However, it is important to keep in mind that the bots will simply do what they are programmed to do. It takes careful research and programming to set up a strategy for the bots to follow that avoids major losses and takes advantage of profit opportunities as they come along.

Risks of Day Trading

While day trading can seem like an alluring way to earn consistent income, its risks must be acknowledged. Just as one can profit from price movements, one can also suffer losses when prices move in unanticipated ways. While risk can never be eliminated, certain strategies can limit downside potential.

Cryptocurrency day traders operating on margin are especially susceptible to price swings, as trading on margin involves borrowing funds from a broker or exchange to amplify the total amount of a given position. While trading on margin can create the possibility for outsized gains relative to some fixed level of capital, it also increases the chance for loss if the market moves in the other direction.

Day Trading Cryptocurrency Taxes

Knowing how to pay taxes on cryptocurrency can seem daunting to a beginner day trader, as the tax treatment of cryptocurrency is often unclear and varies by jurisdiction.

In the case of the United States, bitcoin and other cryptocurrencies are treated as property, like stocks and real estate. Therefore, cryptocurrencies are subject to capital gains taxation like any other investment vehicle. What you have to pay will depend upon how long you held the taxable asset, as long-term investments of over one year are subject to different capital gains taxation rates than short-term investments.

Long-term capital gains tax rates are usually lower than those applied to short-term transactions, but the exact difference will depend upon each individual’s situation. Thus, day traders usually, though not always, face higher tax rates than long-term buy-and-hold investors.

We highly recommend that cryptocurrency day traders keep detailed records and consult a tax professional when filing taxes. This makes it possible for another trusted set of eyes to check if everything is documented properly and goes far in preventing any major issues with the IRS in the future. Cryptocurrency day traders using HaasOnline’s cryptocurrency trading software will be able to find records of gains and losses on every trade, which can prove invaluable around tax season.

Tips for Cryptocurrency Day Trading

Below are some tips to keep in mind when getting started day trading cryptocurrencies.

  • Limit losses and practice, practice, practice

There are no sure bets in day trading, but it is possible to limit losses with the right strategies, such as the aforementioned stop loss orders. Once you have a basic strategy running, there is no substitute for thoughtful tinkering and continued practice.

  • Focus on the fundamentals

It is usually better to narrow in on a small selection of cryptocurrencies, exchanges and strategies at first. Then, with a working strategy in place, branching out incrementally is easier than jumping in head-first from the beginning.

  • Stay aware of psychology

Ever heard of FOMO? Fear of missing out on a big price rally can cause panic and deviation from a tried-and-true trading strategy. Keeping emotions in check in a turbulent market environment is a hallmark characteristic of a veteran trader.

Frequently Asked Questions (FAQ)

What is the best cryptocurrency to day trade?

A cryptocurrency can be particularly suited for day trading for a variety of reasons.

First, liquidity, proxied by market size and volume, is important to a day trader, so naturally the most popular cryptocurrencies like Bitcoin Core (BTC) and Ethereum (ETH) are attractive targets, along with Ripple (XRP), Bitcoin Cash (BCH), and Litecoin (LTC).
Next, fees are also important to a day trader who plans to enter and exit a position in a certain cryptocurrency multiple times within a certain day. As mentioned before, fees vary by exchange, necessitating some preliminary research before deciding which exchange to use to day trade cryptocurrency.

Finally, cryptocurrency day traders should be aware of the history of a cryptocurrency and some of the actors pulling the strings of a coin’s development. Each cryptocurrency has its own unique origin story and learning who’s working behind the scenes and what their motivations are may help a day trader determine which coins may experience particular price volatility at a certain time.

What is the best strategy for beginners?

While there is no single best strategy for any kind of day trading, good strategies for beginners will be simple to construct and execute, with minimal on-the-spot decisions required. It takes time to become familiar with trading software and hone one’s trading instincts, so it can be more comforting to put into place an automated strategy with minimal downside potential.

Are there any differences between day trading Bitcoin, Ethereum, and altcoins?

The major differences between day trading Bitcoin versus Ethereum or other altcoins come in the form of different market structures. While major cryptocurrencies like Bitcoin and Ethereum sport substantial daily trading volume, small altcoins may seem appealing due to the possibility of enormous price volatility, but actually be difficult to sell in the case of a thin market. Day trading altcoins can certainly be profitable, but the relative lack of liquidity and the possibility of “pump and dump” schemes adds extra risk within an already volatile market.

What is a simple strategy that works?

Trading strategies tend to work in certain market environments at certain times. With that said, using an automated trading bot to scour cryptocurrency exchanges for arbitrage opportunities can be a low-risk high-reward strategy in specific scenarios. Also, an automated scalping strategy put into place with the HaasOnline Scalping Bot can be an easy entry into the world of cryptocurrency day trading. Otherwise, there are a variety of pattern trading strategies based upon technical indicators that may be simple for beginner day traders to put in place with a standard trading bot.

Final Thoughts

In this guide, we have tried to provide a basic yet detailed overview of what beginners should know before jumping into the world of cryptocurrency day trading.

Those looking for a streamlined way to pursue cryptocurrency day trading may find the HaasOnline cryptocurrency trading platform appealing. There are a number of key features such as automated trading bots, integration with major exchanges, native support of many technical indicators, and proprietary safeties which make day trading easier both for complete beginners and veterans in the space. HaasOnline has three different plans according to how many features you will need, with even the beginner plan providing unlimited trades across all supported exchanges, with no fees on trade activity charged through the platform.

We hope this guide has been useful and hope we can assist you in achieving your goals in day trading cryptocurrency.

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