2. Long-Term Holds Might Be Wiser

Given the market’s volatility, aspiring day traders might be better off with a long-term investment approach. This “buy-and-hold” strategy allows them to ride out price swings without the stress of timing exits. While their chosen cryptocurrency will still be subject to ups and downs, they avoid the potential regret of selling just before a significant price surge.

However, not all cryptocurrencies are guaranteed to rise. Choosing projects with strong potential and diversifying one’s holdings are crucial to mitigate risk. This is a core reason why many traders focus on Bitcoin, which according to CoinMarketCap, represents over half of the total cryptocurrency market capitalization.

3. “Free” Crypto Trading Often Comes with Hidden Costs

Unlike stock trades where commissions have plummeted, crypto transactions rarely come without fees. While some platforms like Binance.US offer commission-free trading on major coins like Bitcoin and Ethereum, others like Robinhood and Webull achieve similar results through “spread mark-up.” This means the buy price for users is higher than the actual market price, and the sale price is lower. This hidden fee allows brokers to profit while advertising commission-free trades.

Unfortunately, some platforms like Coinbase are less transparent about these mark-ups, making it difficult for users to estimate true costs. These mark-ups can easily translate to 1% fees on both sides of a trade, significantly impacting frequent day traders. Finding brokers that offer ways to minimize these additional fees is crucial.

4. Trading Small Amounts Can Be Costly

Trading with small amounts of cryptocurrency can be disproportionately expensive due to percentage-based fees. Platforms like PayPal and Venmo charge higher fees for smaller trades, eroding potential profits. While some exchanges offer volume discounts for high trading activity, cost alone shouldn’t be the sole reason to trade.

5. Beware of Maker-Taker Fees

For those accustomed to free stock trades, understanding “maker-taker” pricing on crypto exchanges is essential. These exchanges often have two different fee structures depending on the type of order placed. “Maker” orders that add liquidity to the market by placing limit orders (orders that may not fill immediately) typically incur lower fees. Conversely, “taker” orders that remove liquidity by placing market orders (orders that fill immediately) usually come with higher fees. While the difference might be small, active day traders should aim to minimize these incremental costs.

6. Choose a Platform Tailored for Active Trading

Several options exist for buying and selling crypto, including the often expensive Bitcoin ATMs. However, active day traders require a platform designed for frequent trades with reasonable costs. While services like PayPal and Venmo allow cryptocurrency purchase, they aren’t suitable for day trading.

Consider platforms like crypto exchanges, which may offer hundreds of tradable cryptocurrencies, or traditional brokers like Interactive Brokers, which offer a limited selection but with competitive pricing.

7. Crypto ETFs May Be a Better Alternative

For those aiming to trade while minimizing costs, exchange-traded funds (ETFs) are now viable options for Bitcoin and Ethereum, the top two cryptocurrencies by market cap. ETFs offer several advantages over direct crypto trading:

• Reduced Fees: Brokers typically allow ETF purchases with no transaction fees, eliminating the complexities of exchange pricing structures.
• Enhanced Security: Traditional brokers have a proven track record of security compared to crypto exchanges, which have faced issues like fraud and data breaches.
• Lower Overall Costs: Management fees for the best Bitcoin and Ethereum ETFs are relatively low, potentially leading to lower overall fees (transaction fees + management fees) compared to trading on crypto exchanges.
• Reduced Storage Burden: ETF managers handle the secure storage of the underlying cryptocurrency, eliminating a user concern.

For those focused on trading the biggest cryptos, utilizing ETFs might be a more practical choice.

8. Profitable Crypto Trades Are Taxable

The semi-anonymous nature of cryptocurrency ownership might lead some to believe their trades are untaxed. However, the IRS considers profitable crypto trades subject to capital gains taxes, often assessed at higher rates for short-term trades compared to long-term holdings. While brokers and exchanges are supposed to report gains and losses on Form 1099 (similar to stock transactions), this doesn’t eliminate tax liabilities.

Just like with stocks, you can offset gains with losses to reduce your tax burden through a strategy called tax-loss harvesting, where you sell losing crypto holdings at the end of the year. A guide to cryptocurrency taxes can provide further details on this topic.

9. Crypto Isn’t (Yet) Subject to Wash-Sale Rules

Unlike traditional asset investors, cryptocurrency traders currently aren’t bound by wash-sale rules. This means they can sell a cryptocurrency at a loss and repurchase it within 30 days without disqualifying the loss for tax purposes. This strategy can be beneficial for offsetting gains at the end of a profitable year, even if the trader believes the cryptocurrency’s price will eventually recover. However, it’s important to note that the IRS is considering extending wash-sale rules to cryptocurrency, so this advantage may not last.

Navigating the Challenges of Cryptocurrency Day Trading

The volatile nature of the cryptocurrency market presents significant challenges for day traders. However, understanding and addressing these challenges is crucial for long-term success. One key area to focus on is the impact of transaction costs, which can gradually erode capital with repeated trading.