With cryptocurrencies carving out a solid niche in the financial world, understanding how to trade them is essential. In this guide, we’ll delve into a variety of strategies designed to help you maximise returns while effectively managing risks.
To start, let’s focus on two key strategies that are considered a good starting point for beginners and should make up the majority of your portfolio – HODL and Dollar Cost Averaging (DCA). They are straightforward to implement and are considered relatively low risk.
For those who are confident in taking on a higher level of risk, we’ll also introduce high-risk strategies such as recursive borrowing via the Wirex Multiply product. Each strategy comes with its unique set of advantages and potential drawbacks. The key to successful trading lies in picking the strategy that aligns best with your risk tolerance, comfort level, and goals.*
Table of Contents
Derived from a misspelling of “hold,” HODL has become a popular term in the crypto world. Its meaning evolved over time to describe the HODLers’ state of mind: ‘Hold On for Dear Life‘. The HODL strategy involves buying and holding onto your cryptocurrencies for an extended period. The idea is to resist selling your assets, regardless of the short-term market fluctuations.
Ease of use: One of the most significant benefits of HODLing is its simplicity. It requires minimal active engagement, making it a suitable strategy for those who prefer not to monitor market trends constantly. All you need to do is buy a cryptocurrency that you believe in and wait.
- Potential for long-term gains: Given the historical performance of significant cryptocurrencies such as Bitcoin and Ethereum, holding onto these assets for a long time can lead to substantial returns. Cryptocurrencies have the potential for exponential growth over extended periods, offering significant earnings to those who patiently hold.
- Market volatility: The world of cryptocurrencies is known for its extreme volatility. Traders following the HODL strategy may have to endure periods of intense market volatility, which could potentially lead to substantial unrealised losses. You need to stay calm during these periods and stick to your strategy.
- Missed opportunities: The HODL approach can cause traders to overlook short-term opportunities to buy more at a lower price or sell at a peak, especially during significant market movements.
HODL Strategy Example:
Suppose you believe in the long-term value of Bitcoin (BTC). You use the Wirex app to buy 0.1 BTC when it’s priced at $25,000. Instead of worrying about daily price fluctuations, you hold onto your Bitcoin for several years. Over this period, if the price of Bitcoin increases to $40,000, you would have made $1,500 with minimal effort.
Dollar Cost Averaging (DCA) Strategy
The DCA strategy involves consistently buying cryptocurrencies for a fixed amount over a regular time interval, regardless of their current price. By doing so, you average out the price you pay for the assets over time, reducing the impact of short-term volatility.
- Risk mitigation: By buying a set amount regularly, you decrease the chance of buying a large amount just before the market drops. This strategy helps to avoid the emotional decisions that come from trying to time the market, which can often lead to costly mistakes.
- Trading discipline: DCA promotes a disciplined, long-term approach to trading. By automating your purchases at regular intervals, you can buy without letting short-term market fluctuations affect your decision-making process.
- Missed potential gains: If the price of a cryptocurrency consistently rises over your holding period, then DCA can lead to a higher average purchase price, resulting in missed opportunities for larger profits compared to a lump sum purchase made early.
- Psychological challenges: Even though DCA can help mitigate risk, it requires a commitment to buy at regular intervals. This can sometimes be psychologically challenging, especially when market conditions suggest a different approach might be more profitable.
Suppose you decide to allocate a portion of your weekly budget, $30, to buy Ethereum (ETH). You set up a transfer to your Wirex account and buy $30 worth of ETH every week, regardless of the price. This strategy allows you to spread your purchases over time, capturing the average market price of ETH and reducing the impact of short-term price volatility.* Over time, this could potentially result in a lower average cost per coin compared to making a one-time lump-sum purchase.
Recursive Borrowing (Wirex Multiply Product)
Recursive borrowing, such as the Wirex Multiply Product, involves borrowing money to amplify potential returns. By recursively borrowing, you can open a position that is larger than your initial committed funds or margin, thereby potentially increasing your profits/losses if the market moves in/out of your favour. *
- Amplified returns: Recursive borrowing can significantly increase profits if market movements align with your predictions.
- Access to larger capital: It allows traders to gain exposure to a larger position than what their account balance would normally permit.
- Amplified losses: If the market moves against your position, your losses are also amplified and could completely consume your initial funds.
- Rollover fees: Maintaining recursive borrowing positions involves fees, which accumulate over time and could eat into potential profits or add to losses.
- Liquidation risk: If the value of your collateral falls too low due to market fluctuations, your position could be liquidated, and you may lose your initial funds.
Assume you believe that the price of Bitcoin (BTC) is about to rise. With only $1,000 in your account, you decide to open a recursive borrowing position using the Wirex Multiply product. You choose a 10x Multiplier, which means you can open a position worth $10,000. If Bitcoin’s price increases by 5%, your profit will be $500, a 50% return on your initial $1,000 payment. Remember, if the market moves against you, your losses would be magnified in the same way.
DUO Positions (in the Wirex App)
DUO is a Wirex product that allows users to earn a pre-determined high yield of up to 400% APR, and potentially make a net profit when measured in the paid currency, as long as the market remains within a specific range.*
- Profit potential: DUO offers a high yield that enhances the overall profitability of the strategy and increases potential returns.
- Market independence: DUO allows users to earn regardless of whether the global cryptocurrency market goes up or down. For instance, a DUO trade on ETH and BTC will be profitable if both ETH/USDT and BTC/USDT are up by 1% at the product’s expiration time. In which case the DUO’s yield will mostly determine the profitable outcome.
- Risk: DUO exposes the users funds to the price difference between two assets. The higher this difference, the lower the profits when measured in the initial fund’s currency. As it is based on the price difference, as long as the price of the two currencies chosen remain close to each other, the high yield payment would offset the potential loss. If the currency prices deviate, DUO will deliver the worst performer at the expiration time.
- Limited flexibility: The fixed duration of the trading period may not suit users who prefer shorter or longer timeframes. This could limit their flexibility in executing trading strategies.
Duo Position Example:
The user chooses a 12-hour plan with a 217% APR on the AAVE/USDT DUO, starting with 0.4 AAVE at a price of $100. At the end of the plan, if AAVE finishes above or equal to the initial price, the user receives USDT, including their initial payment (converted in USDT at the initial $100 price) and the generated APR. If AAVE finishes below the initial price, the user receives AAVE, including their initial AAVE payment and the APR. In the latter scenario, although the base asset’s value may decrease, receiving AAVE could become profitable if its price rises in the future.
Scalping is a high-frequency trading strategy that involves executing many trades within a single day in an attempt to make small profits from minor price changes.
- Quick profits: Scalping targets small price variations to generate profits. These minor price changes can add up to substantial gains by the end of the day due to the high number of trades.
- Reduced exposure: Scalping involves holding positions for a very short duration, often just a few minutes. This short duration reduces the risk of exposure to adverse long-term market movements.
- Time and attention: Scalping requires you to constantly monitor the market, which can be exhausting. It requires a high level of focus and can be very time-consuming.
- Transaction costs: Since scalping involves a large number of trades, the transaction costs can add up and eat into your profits.
Using the Wirex app (spot trading or Multiply), you focus on a particular cryptocurrency pair like BTC/USDT. You notice that the pair’s price fluctuates frequently within a small range. You decide to make many trades throughout the day, buying low and selling high, profiting from these small price changes.
Swing trading is a strategy that seeks to capture gains from the price changes of a cryptocurrency over several days to weeks. Swing traders often use technical analysis to look for price patterns and market trends to help predict future price movements.
- Profit from short-term trends: Swing trading allows traders to capture potential profits from both rising and falling market trends. You’re not just hoping the price goes up; you can also profit if the price falls.
- Less time-consuming: Swing trading requires a more hands-on approach than HODLing or DCA, but it’s less time-consuming and attention-intensive than scalping.
- Requires market knowledge: To be successful at swing trading, you need a solid understanding of technical analysis, market trends, and the broader factors affecting crypto prices.
- Risk from market volatility: Swing trading involves holding a position for several days or weeks. During this period, sudden market changes can adversely impact your trades, leading to potential losses.
Swing Trading Example:
On the Wirex app, you observe the price chart of Litecoin (LTC) and notice that it’s currently at a low point in its cycle and believe it is likely to rise in the near future. You buy LTC now and plan to sell it when the price peaks in a few days or weeks, aiming to capture this price swing.
In conclusion, remember that all trading strategies come with inherent risks. The trick to successful trading lies in understanding these strategies, your risk appetite, your goals, and the time you can dedicate to trading. Always remember to start small, learn as you go, and most importantly, never trade more than you can afford to lose.
*The prices of Cryptoassets fluctuate, sometimes dramatically. The price of a Cryptoasset may move up or down and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling Cryptoassets.
*The value of cryptoassets may fluctuate significantly over a short period of time. The volatile and unprecedented fluctuations in price may result in significant losses over a short period of time. Any Cryptoassets may decrease in value or lose all its value due to various factors including discovery of wrongful conduct, market manipulation, change to the nature or properties of the Cryptoasset, governmental or regulatory activity, legislative changes, suspension or cessation of support for a Cryptoasset s or other exchanges or service providers, public opinion, or other factors outside of our control. Technical advancements, as well as broader economic and political factors, may cause the value of Cryptoasset s to change significantly over a short period of time.