How Much Money Do I Need to Trade Cryptocurrencies?
Are you looking to grow your crypto trading account, or do you seek regular income from your digital assets trading?
There are multiple cryptocurrencies available to trade. For a novice trader, it can be tricky to know where to start. Crypto is a decentralized market and, in many cases, highly volatile. At the time of writing, Bitcoin has surpassed previous highs and is a classic example of cryptocurrency volatility.
Bitcoin Example 2021
14th April – the price hit a new high of $64,900
23rd April – the price was at $47,308
26th April – the price is $53,543
In just over one week, a $14.5k drop and then a rise of $6k.
Had you been on the wrong side of that drop, you'd have lost a lot of money.
Okay, so Bitcoin is an extreme scenario. At the current price, few people can afford to trade Bitcoin.
But how about all the other cryptocurrencies? How much money do you need to trade a cryptocurrency?
Before thinking about how much money you need to trade Cryptocurrencies, there are other things to be considered. You first need to open an account with a Cryptocurrencies Broker or exchange.
When Bitcoin first hit the high of $20k a few years back, many new brokers and exchanges crawled out of the woodwork and not all with good intentions. Many novice traders imagined new cryptocurrencies hitting the kind of life-changing highs of Bitcoin. With cash stuffed in their hands, they dived into the cryptocurrency market, aided and abetted by unscrupulous brokers.
So your first plan of action is to make sure your broker or exchange is recommended and regulated. That done, you can now move on to working out how to make money from trading cryptocurrencies.
How Can I Make Money from Trading Crypto?
You can make money from trading Crypto. But there are some pre-requisites.
The first question to address is whether you have trading experience. Have you become acquainted with trading Forex, stocks, or commodities? Have you an idea of how the financial markets work?
Do you understand technical analysis? And, do you have a trading plan and a cryptocurrency trading strategy that you have thoroughly tested?
Yes, this stuff may seem dull. We understand you just want to trade cryptocurrency and not mess about being sensible.
Trading cryptocurrencies is not like trading Forex. Well, it is, and it isn't. let's explain.
Forex currency pairs are a known entity. They have established their market patterns and, for most of the time, are highly liquid. You can choose currency pairs with less volatility and take your time applying your trading plan for regular profits from the market.
Cryptocurrencies, on the other hand, are still a relatively unknown entity. Nobody knows what will happen with Crypto and if it will ever become adopted by mainstream financial institutions.
Crypto is volatile, which means it gives you good opportunities for gains. But the potential for some hard, fast losses is real.
How Do I Day Trade Cryptocurrencies?
Not all traders are the same. There are many different ways to make money from trading Cryptocurrencies:
Scalping – you trade on the lower timeframes like the 1-minute, 5-minute, or 15-minute. You look to take advantage of price fluctuations to enter and exit a trade within a short period. If you want to scalp cryptocurrencies, you'll study the charts and take note of the trending direction and aim to enter a trade with the emerging market flow.
Scalping cryptocurrencies is time-consuming and, if you spend too long staring at charts, you'll quickly feel mentally exhausted.
Day trading – day trading is ideal if you don't want to spend hours at the charts or don't have a lot of time. Ideally, you will be trading cryptocurrencies on the 30-minute, 1-hour chart or even as high as the 4-hour chart. You are aiming for the intra-day price movements, and, once again, it is best to go with the flow of the current trend.
Swing Trading – Swing trading is ideal for the time-strapped cryptocurrency trader. You are looking for the bigger swings in market price. Your analysis will likely be on the 4-hour, daily or weekly charts. In some cases, it helps to check the monthly chart
For scalping crypto, financial requirements are low as you are turning trades over quickly. Because your stop loss is small, you can get away with a smaller balance. That is, as long as you don't have multiple trades running simultaneously,
With day trading cryptocurrencies, your stop loss needs to have more room. Risking 1% per trade means you need a larger balance to support that.
For instance, if you had a $200 account and needed a 100 pip stop, that could be $10, which is 5% of your account. Lose half a dozen of those in a row, and your capital takes a dent.
Swing trading cryptocurrencies needs a more significant balance. You may be holding on to a trade for days or weeks, or maybe even months. Your stop loss could be 100 – 300 pips which is too big a risk for an account with a few hundred dollars.
The financial requirements for scalping, day trading, or swing trading are very different - more on swing trading cryptocurrency below.
There are several options for how to trade cryptocurrencies:
- You can buy and sell cryptocurrencies as a stand-alone purchase – you can buy cryptocurrencies on an online crypto exchange. Here, you can exchange one cryptocurrency for another cryptocurrency.
Some crypto exchanges may exchange for fiat currency. If the exchange doesn't offer fiat currency, you will need a Cryptocurrency wallet.
For day trading crypto, you could purchase at a low and sell at a high. Or for swing trading crypto, you can buy low, sell high or sell high and buy low.
- Trade dollars to Crypto – some cryptocurrencies are paired up with the US dollar. For example, ETH/USD, ETNUSD.
If your trading broker offers crypto on your account, there is no requirement to exchange cryptocurrency via a crypto wallet
- Trade Crypto to Crypto – You can trade one crypto against another, such as Bitcoin to Etherium
What is a Crypto Wallet?
A crypto wallet is where you can securely store your cryptocurrencies. A crypto wallet is usually well protected with two-step authorisation (2FA), and make sure your password is super strong. Crypto wallets are notorious for getting hacked, so take preventative measures to secure your crypto wallet.
Open a cryptocurrency wallet only with a trusted and recommended provider.
Do I Need to Spend Time Paper Trading Cryptocurrencies?
It's always advisable to spend a few months paper trading. You can open a demo account or document notes of crypto prices. Set an entry and exit price and assess your results.
Time spent practising day trading cryptocurrencies will not be time wasted. Because of high volatility, trading crypto can bring significant losses for the uneducated trader.
Become skilled at analysis, know your entry and exit points, and where to set your stop loss. Practice these things until it becomes second nature.
When you are making consistent profits, then tentatively venture into live day trading crypto with micro-lots until you can prove you can return regular profits under the pressure of day trading with real money.
It's essential to remain realistic about what is possible, especially if your trading capital is under $500.
It takes time to learn how to trade cryptocurrencies.
Invest time in educating yourself on cryptocurrencies because it will reap the rewards and help you to avoid unnecessary losses. Spend time watching the cryptocurrency charts, noting how the price moves and what patterns, if any, form on the charts.
Invest in a Cryptocurrency training course if your budget allows.
Read Also: How to Identify Cryptocurrency Market Trends
How Much Money Do I Need to Trade Cryptocurrencies? – Why it Matters
You can start trading Cryptocurrencies with a few hundred dollars. But how you manage such a small amount will either make or break your account. You can start with a lot more, say a few thousand dollars, but the same trading rules always apply.
Assuming you have deposited your money with a regulated broker or exchange, that's the first step. Whatever money you have put aside for trading cryptocurrencies, your priority is to protect your capital at all times.
As Crypto moves so fast, losses can quickly eat into your capital. If you are serious about making money from trading cryptocurrency, you must set up a risk management plan to protect your account. A guideline for this is to trade no more than 1% risk on each trade. So if you have, say, $200, you can only risk $2 per trade.
For this, you need a broker that offers micro-lots.
If you have come to cryptocurrency trading for big, fast gains, think again. Play the slow game, and you stand a chance of getting ahead.
Even if you start with, say, $5000, your risk management stays the same, only risking 1% of your account. $5k may seem like a lot of money. In a way, having more capital can be tricky. You may be inclined to risk more because the extra money feels like a safety cushion.
Trust us when we say that an attitude of carelessness will rapidly reduce your cryptocurrency account down to nothing.
Accept that trading cryptocurrencies will not make you rich right out of the gate.
It's unlikely that you will buy crypto for a few dollars and watch it rise to double figures overnight. If you genuinely want to generate income from trading cryptocurrencies, play the slow, patient game. Build your account up steadily by compounding your profits.
Only ever risk money you can comfortably afford to lose and stick to your trading plan.
How to Make Steady Profits in Cryptocurrencies by Compounding
Whether you have a few hundred or a few thousand dollars to start trading cryptocurrency, the main thing to focus on is getting your head in the right place.
Professional traders call it the trader's mindset.
It takes time to develop a calm, disciplined mind, one that doesn't react to losses by throwing your laptop out of the window or slowly pulling your hair out.
When restricted to trading 1%, it can feel like the gains can't come fast enough.
Switching to a trader's mindset stops you from thinking about how many dollars you can make. Instead, you focus on percentage growth and compounding gains.
So, let's see what that looks like in real terms.
Imagine you have deposited $250 into your regulated broker account.
You can risk $2.50 per trade. Let's pretend you are pretty good at this trading malarkey. Your risk to reward (RTR) is 1 to 1 (meaning you risk $1 to return $1), and you make a $2.50 per day profit over five days.
By day five, you have made $12.50.
Your account balance is now $262.50
Now, your 1% risk is $2.62 per trade
By the end of five days, you have made a $13.10 profit
Your account balance is now £275.60
Over two weeks, you have grown your trading account by just over 10%, which is a very respectable return for professional cryptocurrency traders.
And you start the following week with a 1% risk of $2.75 per trade. And, so it continues.
There's a magic ingredient, though, for making more profit from trading cryptocurrencies.
It's easy really, just increase your RTR. If you stick with 1 to 1 RTR and have a 50% win rate, you will end up at breakeven or with a slight loss.
Increase your RTR to a minimum of 2 to 1 and increase your gains without increasing your risk.
Now, you risk $1 to gain $2. On a $250 account, with one trade a day, that's a $5 gain per day. At the end of the week, it's a $25 return.
Even better is a 3 to 1 RTR because it gives you more room for losses. Three losing trades take you back to breakeven. But, if you were stuck on 1 to 1 RTR, you'd be in a loss situation. It's common sense and will grow your account much faster than you can imagine.
What novice traders tend to do is fall into a boom or bust mentality. One week, they make lots of profit. Then the next week, take too many risks and lose the gains. Then, feeling demoralized, they continue to increase risk, trying to claw back lost profit.
How Much Money Do I Need to Day Trade Cryptocurrencies?
You know you need a day trading plan and a good RTR. The next stage is to figure out how much money you would need to day trade cryptocurrencies.
Cryptocurrencies are relatively new compared to Forex currency pairs, so there isn't as much history to check. Even so, select crypto where there is at least a couple of years' historical charts. Trading brand new cryptocurrencies is too risky because there is nothing in the past to compare current price patterns.
How much money you need to day trade cryptocurrencies depends on your goals and your timeframe for profits. If you start trading cryptocurrencies with less than $500, it may take a lot longer than if you started with $5000.
$500 is doable, but it will take longer to compound to a big enough balance to withdraw regular profits.
As you are risking only 1% of your account, the daily returns will be monetarily small. Ideally, $2000 to $5000 gives you more scope for better returns. If you want to make an income from trading cryptocurrencies, increased working capital makes it that little bit easier.
How Much Money Do I Need to Swing Trade Cryptocurrencies?
As we mentioned earlier, cryptocurrency swing traders may hold trades for days or weeks. Some professional cryptocurrency traders may wait months for a swing trade to set up. They will carefully plot their charts to wait for the perfect moment for an entry.
They are looking for a long-term move, perhaps a reversal. Or crypto swing traders will wait for a price correction in the market.
Patience is the king of attitudes for swing trading crypto. It can be frustrating to wait for days or weeks for a trade to set up how you want. And, many times, the trade ends up not working out.
An RTR of 4 to 1 as a minimum protects you from all the trades that don't work out.
A high RTR means that you can have a low win rate, but the wins are so significant that it balances out the losses. The aim is to target the best entry and exit points.
Because the stop losses involved in swing trading crypto have to be wider, it is necessary to have more capital. Even trading micro-lots, a 300 pip stop loss could be a $30 risk, so you would need $3000 to stay within the 1%. You could increase your risk to 2%, but it is safer to stick with less risk on your account if possible.
Ideally, a capital balance of $5000 would be an excellent start. You can comfortably stay within your risk management plan but have significant returns on your trades. With, say, a 5 to 1 RTR, a $50 risk would return $250.
Swing traders take fewer trades. The reason is that they want better returns, and they wait for the best possible entry points for their cryptocurrency trades. Less time exposed to the market equals less risk.
A swing trader may take one or two trades a week. Some cryptocurrency swing traders may take one or two trades a month. With such good returns, there is no good reason to expose their account to unnecessary risk.
How Much Capital Do You Need for Longer-Term Cryptocurrencies Trades or Investing?
For long-term investment or trading of cryptocurrencies, it may be preferable to start with more capital, such as $5000. You may be holding cryptocurrencies for months at a time, and, in that time, you will likely want to take on more trades or invest in more cryptocurrency.
Because you strictly adhere to a 1% risk management plan, if you have less than a few thousand dollars capital, it could prove to be challenging. For long-term cryptocurrencies investment or crypto trading, your account balance needs to be able to support bigger stop losses without putting your account at risk.
Because cryptocurrencies are so volatile, it may be challenging to find a trading position with a small stop loss. But your trades need room to breathe.
On a $1000 account, with a micro-lot, your 1% risk is a mere $10, which doesn't allow a lot of space for a trade to move without stopping you out.
Even with experience, a professional crypto trader seeks to reduce potential risk. Just because you have ample working capital is no reason to throw caution to the wind.
If you cannot increase your working capital, the only way to overcome that is to play the long game.
- Wait for a crypto trade where you can enter for a smaller stop loss
- Practice trading something less volatile where you can reduce risk. For example, a low volatility Forex pair
- Practice day trading, so your risk is less than swing trading. Once you have built up your balance, then you can try swing trading cryptocurrency
Some professed cryptocurrency experts fail to teach the importance of protecting your trading capital. It's not enough to know you can top up your capital balance if you lose some of it.
Trading cryptocurrencies may be the most challenging thing you ever do, so why not set out to do it right from the start.
It doesn't always follow that the more capital you have, the more you will win on cryptocurrency trading. A big balance can sometimes create a sense of complacency because it doesn't feel as if you're losing much when you have a lot of money.
Stay alert to complacency because it's easy to slip into that mindset. Whether you have a lot of money to trade or only a few hundred dollars, the main thing is that you manage your risk at all times.
Check Out: Top 9 Cryptocurrencies To Buy
Recap of How Much Money Do I Need to Trade Cryptocurrencies
It may take considerable time before you become a profitable cryptocurrency trader. It is especially so if you are a novice to trading crypto. There is danger in being in a rush to get rich. Because traders with this intent usually end up blowing their trading accounts.
Start small and practice trading a high RTR with a low-risk percentage of your balance. If you can practice with a demo account, all the better. Take your time to learn and become a better cryptocurrency trader.
Stick to your trading plan. Understand that losses are inevitable. If you talk to professional cryptocurrency traders, they will likely tell you that they have a low win rate. But their RTR is very high, so their gains swallow up the losses.
Never beat yourself up for losing. It really is part of the game. If you hear crypto traders bragging about an 80%-100% win rate, run for the hills. They are not speaking the truth.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments such as Cryptocurrencies may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
eToro – The Best Platform to Trade Cryptocurrencies
eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.
Virtual currencies are highly volatile. Your capital is at risk.
Read More: What Are The Best Cryptocurrencies To Trade