September 2018 update
Since I wrote this article last year, BTC has gone from $3,000 to $20,000, then tumbled down to around $7,100 (as of today).
People have asked me how I’ve fared in this wild market.
The answer is that I’m still standing! Due to my style of trading, I’m able to get in and out of the market after a few hours each day.
Do the wild swings make day trading harder? No. In fact I’d say volatility makes day trading easier. You can find 1-3% price movements quite easily, whereas in a stable market you need to work a lot harder to find short term trading opportunities.
Read on to hear more about how I got into trading, and a little bit about my trading style!
How I got into cryptocurrencies
In 2011 I owned about 3500 Bitcoin which I purchased for $600. Today 3500 BTC is worth over $20 million dollars.
The day I first heard about Bitcoin on Reddit, a friend had also called me to tell me about it. We spent most of our friendship talking about Ayn Rand and programming, so when we heard about a currency that was software and couldn’t be controlled by governments we were very interested. I purchased $600 worth of BTC and my friend and I planned on buying a mining rig.
Being 22 years old in New York City is a financial struggle. I didn’t have enough money to pay rent, and the value of my Bitcoin had dipped to $550. I sold it all and ditched my plans for a mining rig. My financial situation needed to be stabilized before I could invest in assets based on my philosophical beliefs.
Bitcoin stayed in the news over the years. The price went up and down, silk road happened, the legality of it was called into question, exchanges were hacked, and people gained and lost millions of dollars. Through it all, Bitcoin’s price kept rebounding, kept going up.
Ethereum hit the scene with the promise of using the blockchain for more than just currencies. You could build decentralized apps on top of Ethereum and even new currencies. In the summer of 2016 I decided to buy ETH at around $9. The day after I purchased Ethereum something called the DAO hack happened and the price dropped 50%. Unlike in 2011, I didn’t need the money I invested to cover any bills. I watched my Ethereum swing between $4 and $20 for about 8 months. I wondered if I could take advantage of those swings by buying when the price was low, selling when it was high, and buying back in when the price dipped again. Though I didn’t take any action on the thought, the idea lingered in my head.
In the same period I shut down my company, Bitfountain, after running it for 5 years. Bootstrapping my own company gave me an unprecedented amount of freedom. I lived in 4 countries, traveled to many more, and only worked a few hours per day. However, since the company had run its course, I needed a new source of income.
I applied for only one job as a software engineer. It was the kind of job people love - high salary, all the Silicon Valley benefits, friendly team, well funded company, challenging engineering problems. After three rounds of interview they decided not to move forward with me.
I’m not going to lie and say I didn’t want the job anyway. I did want it. But I also feared losing my freedom. I’d be working more for less money and less flexibility than I had while running Bitfountain. Gone would be the days where I could spontaneously book a flight to India with no return date. No more of the four hour lunch breaks that I’ve come to cherish over the years.
Going through the interview process made the possibility of losing my freedom real. When they rejected me I didn’t even think about applying for another job. I went into panic mode searching for a way I could make money on my own.
Check out this presentation I gave on why I trade.
Now continue reading :)
My first month as a cryptocurrency trader
At this point I still owned Ethereum and the price was still swinging back and forth. Since I needed an income and didn’t want to get a job, it was time to try this trading idea. But I set a strict requirement that if I didn’t earn enough money to pay my rent after a month, I’d quit trading.
It’s fourteen months later and I’m still trading.
I signed up for two exchanges: GDAX and Poloniex. GDAX made sense because it is run by Coinbase, the company where I purchased and held Ethereum. I needed Poloniex as well because there were many cryptocurrencies being traded there (Altcoins - cryptocurrerncies that are not BTC).
Those are the first two exchanges that I used. Now I use others since each exchange has pros and cons. I wrote about the best cryptocurrency exchanges if you’re interested in getting an overview of the possibilities.
A live crypto exchange is intimidating at first glance. There are charts and numbers changing at the speed of sight.
I felt overwhelmed but sat through the confusion to try and make sense of what I was looking at. Soon I could see where to place orders to buy and sell, and the charts started to make sense too.
I made $5 on a $100 investment in my first 45 minutes of trading. 5% profit. Bullish!
As the month went on I spent hours trading. I’d buy when the price looked like it was going up, and sell when it looked like it was going down. I didn’t use any technical indicators and I didn’t have a strategy. But it worked. I made enough to pay my rent, so the possibility of making a living from this was validated.
Although I profited, I wasn’t sure if I just had a lucky month. I wanted to formalize my trading knowledge so I could do more than buy low and sell high. There had to be a real strategy to this stuff. I read as many books as I could on trading stocks and foreign exchange markets. I made a lot of mistakes. But eventually I found my rhythm and strategies.
Earning Bitcoin while my rent is paid in US Dollars
This isn’t an introduction on how to trade cryptocurrency, but I need to give you some background on it before continuing on the topic of making a living day trading cryptocurrencies.
For myself, and most crypto traders, the goal is to increase the amount of Bitcoin we own. I don’t care about the US dollar, at least not directly. When I look at the price of a cryptocurrency, I look at it in terms of BTC. For example, right now the price of 1 ETH (Ethereum) is 0.049 BTC. My trades are based on that price, not the fact that 1 ETH is $304.
The goal is to get more BTC.
Another thing I need to make clear is the type of trading I do - day trading. My base currency is Bitcoin, which I use to buy Altcoins like Ethereum, ZCash, Golem, etc. When I make a trade to buy an Altcoin with BTC, I could end up selling the Altcoin back for BTC within a matter of minutes or hours. All of my profits are converted back into BTC at the end of each trading day.
Again, even though I buy and sell several Altcoins, at the end of the day my net worth is in Bitcoin. There are three reasons for this:
Many exchanges are cryptocurrency-only. They don’t allow you to trade with USD or another fiat.
I’m simultaneously investing in Bitcoin by holding my day trading profit in BTC. I earn more USD when the price of Bitcoin goes up against the dollar.
I believe in Bitcoin as a store of value.
Why was it important to clear this up? Because I’m earning Bitcoin but my rent is paid in USD! I need to sell BTC for USD to pay my bills. Several things were on my mind the first time I had to do this.
What if I sell my BTC now and the price shoots up tomorrow? Won’t I be missing out on profit? Yes, but your bills will be paid.
If I don’t sell now and the price of BTC drops, I won’t be able to pay my rent. Sell now so you can pay your rent.
This is a conundrum that you’ll need to deal with as an investor or day trader. You can always hold out for more, but at the same time you are risking a loss. If you have bills, just sell the Bitcoin for fiat and don’t look back.
When do I sell Bitcoin for a Tesla Model X
After a few months I got better at trading. I was earning more Bitcoin than I needed to cover my monthly expenses. At the end of the month I sold only what I needed, and kept the rest of my net worth in Bitcoin. Around this time in my trading career it was getting to the point where I could have bought a Tesla or put a down payment on a house by selling my Bitcoin.
Let’s say the price of Bitcoin has reached an all time high, as it has done so many times in 2017. Do you sell your Bitcoin to realize your profit in USD?
I am faced with that decision every day now.
Taking the USD I’ve made to buy a home is a solid decision. I can live a nice middle class lifestyle in Los Angeles. Or I can drive a flashy car while I rent a crappy apartment in Los Angeles. It all comes down to your values.
But that’s not the route I am taking.
The magic of compounding profit
This is going to shock some people but I’ll clear it up soon:
I don’t care much about Altcoin bull runs where the price dramatically increases 15-20% in a few hours. Those aren’t the patterns I am looking for when I trade. In fact, if i see a chart like this I almost always ignore it:
I aim for 1% profit every day.
Why would I ignore 20% gains and instead focus on 1% gains? There are two reasons.
The first reason is that 1% is manageable. Most cryptocurrencies are moving up and down by 1% every hour. The wild bull runs are hard to find, hard to time properly, and easy to go in the opposite direction where you lose a lot.
If you learn certain patterns and indicators, it is possible to consistently achieve 1-2% gains. Those gains are only exciting if you understand how far they can get you.
That brings me to the second reason that I only aim for 1% per day.
I’ll make much more money in the long term. Let’s run the numbers. Say you start your trading career with a $1,000 investment. If you trade every day using patterns and indicators that yield 1% profit per day, you’ll earn $37,783 after one year.
After 2 years you’ll earn $1,427,587.
How much do you need to work to earn 1% per day?
Of course the numbers above assume you trade 365 days per year. Not many people are willing to forego vacation and weekends to work as a full time crypto trader, even with numbers like that.
It makes a whole lot more sense if you are only working 90 minutes per day.
At this point I am actively trading for only 1 to 2 hours every day.
In the beginning when I was shooting for 20% gains on a trade and not knowing what to look for, I worked a lot more. Not only that but I also let my emotions control my trades. For example, I once purchased Stratis after the price dropped massively. My assumption was that on such a sharp decrease in price, it had to rebound eventually. I was wrong. The price kept diving. I had to hold the currency for 2 weeks just to secure a 35% loss instead of an 85% loss. I was constantly tuned into that chart waiting for an opportunity to sell back to Bitcoin.
Now I have my strategy that I stick to without letting my emotions interfere. I have a set of coins that I like trading so I only look at those charts. I have patterns and indicators that I look for on those charts so I can quickly flip through them. Within minutes I can set my orders, set alerts on my desired entry and exit prices, and walk away from the computer.
Don’t evade taxes. You might be trading on an exchange that doesn’t report to the IRS or you might want to take advantage of the lack of regulation in the space. As the market cap of crypto increases, be sure that the IRS is going to find out how to get their slice. And they will look into the past.
I am not a tax advisor. This is a simple overview of what I keep in mind as I trade. My accountant handles my taxes, and I advise you to get an accountant to do the same. Keep in mind that this is US-centric. You need to double check if this is the case in your country.
The taxable event is when you sell your cryptocurrency for fiat. In my case, it is when I sell BTC for USD. How much tax you pay depends on how long you were holding the cryptocurrency.
Crypto that you hold for less than a year
Let’s split this into 3 transaction types.
Buy crypto with fiat - no tax. When I buy Bitcoin or another Altcoin with USD, I do not pay tax on that transaction.
Sell crypto for fiat - pay ordinary income tax. When I sell Bitcoin for USD, I am taxed using the FIFO (first in, first out) method of accounting. For example, if I buy BTC with an initial investment of $1,000 and a week sell the BTC for $1800, I’ll pay taxes on the $800 profit.
Buy crypto with crypto - unclear, but does not seem to be a taxable event. This is where things get foggy. Consult your advisor, but as far as I know this is a like-kind exchange which is not taxable but must be reported to the IRS. The exchange you use will output all of these transactions so you can hand them to your accountant.
Update: The IRS has clarified that a crypto to crypto exchange is not a like-kind exchange. The profit made from each transaction is taxed. More info here.
Crypto that you hold for more than a year
If you are holding a currency for more than a year it is classified as long term capital gains. Once you sell your Bitcoin or Altcoin for USD, you’ll be taxed at a rate of 15%.
This is another reason why I like keeping my net worth in Bitcoin. If I hold it for more than a year I only need to pay 15% tax whenever I decide to cash it out to USD. That’s a much lower rate than normal income tax.
Other ways to make money with cryptocurrencies
I’m not going to go too deep into other ways you can earn money with cryptocurrencies because I don’t do them myself. At least not right now. Passive income is great. After you make an initial investment, you mostly sit back and watch the money roll in. It’s like buying a home and renting it out - there will be some maintenance issues but it’s mostly passive income.
Cryptocurrencies offer at least two routes for passive income.
Most cryptocurrencies are mined. You invest in a very strong computer and the electricity to run it, and you are rewarded with crypto for contributing to the network as a node that confirms blockchain transactions.
This is an alternative to mining that does not require vast amounts of electricity. The idea is that you stake the cryptocurrency that you own over a wifi connection. That crypto that you stake is used to validate transactions on the blockchain, and you are rewarded more cryptocurrency for putting the currency you own in the pool.
Proof of stake is not widely used yet, but it is going to be introduced into Ethereum next year.
I’m not at all against mining or staking as a way to earn money in crypto. In fact, I intend on staking Ethereum when it is possible. The reason I don’t pursue these routes right now is because day trading can offer a much higher return on investment if you are willing to learn and be disciplined.
I’ve gotten quite a few emails asking me questions about how I day trade crypto. Here are some of the questions with my answers.
Your strategy is to increase the amount of BTC that you own. What happens if you become bearish on Bitcoin?
BTC is my base currency right now because I believe in it as a store of value, and I believe that its value will keep increasing against fiat currencies. However, if I stop believing in the future growth of BTC, I can easily sell it for USD and continue my strategy of 1%/day growth with USD as my base currency.
I am emotionally invested in the success of Bitcoin and crypto in general. But as far as my day trading is concerned, I’m ready to drop BTC at any moment because there is no room for emotions in this game.
Does it get harder to day trade when you are using larger sums?
At first I thought it would be harder because in my head I’d be taking 10 BTC positions and hoping there would be enough liquidity on the exchange to fill my orders. The solution is to only take large positions trading high volume coins, and to take several smaller positions on medium/low volume coins.
Now I take up to 8 positions in a trading day. I’m not against taking more as my principle investment grows.
Do you value technical analysis over fundamental analysis?
Yes. I follow the charts. Fundamental analysis could give me a hint on which charts to look at, but at the end of the day my trades are based on technical indicators.
Do you use trading bots?
No. I don’t know anyone who earns a living letting a bot make their trades. I’m not against it if it works. Let me know if you know of someone who does it.
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