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Three ways to make money trading on exchanges

Trading cryptocurrencies involves a certain amount of risk. But, as with anything in life, taking no risk means getting no reward. And trading crypto can be one of the more rewarding activities you've ever done! Not only can it be rewarding financially, but also in terms of acquiring new knowledge, putting it into practice and understanding how money works just a little bit better. Today, we're going to discuss three different ways you can make money trading on an exchange: buy-and-hold (colloquially called HODL), market making and active trading.

You can always trade cryptocurrencies directly between friends, but most effective trading happens on cryptocurrency exchanges. A good exchange is able to satisfy everybody's demands by providing enough liquidity on both sides of the trade (both buy and sell). The exchanges then ask for a certain fee from every trade that they keep as their profit and that hopefully encourages them to keep their product well maintained and secure.

Roles that a trader can play on an exchange

The fee structure of the exchange significantly impacts its prices and utility. This, along with the difference in liquidity and in market behavior between various exchanges and countries, is the reason why different exchanges have different prices.

Exchanges have different fees, rules, liquidity and prices

While there's a number of different ways an exchange could incentivise people to trade on it and extract fees, today most of the exchanges have converged on the maker-taker fee model. In this fee model the exchange establishes two roles for its traders: market makers and market takers.

Market takers are those people who come to the exchange and take liquidity from it. For example, when you buy BTC on one of the exchanges you take BTC from its order book.

Market makers are those people that supply the orders to the order book, and thus they bring liquidity to the market. There would be no trades happening on the exchange without market makers. In order to incentivise people to assume this role exchanges would typically charge a smaller fee to market makers, sometimes quite significantly so.

Now that we've covered the roles that you can play on an exchange let's discuss how to make money assuming these roles.

Buy and hold (HODL)

This is technically the simplest strategy of them all. If you have reasons to believe BTC, ETH, STN, or any other cryptocurrency is going to go up in price in the future you should simply buy this asset and hold on to it.

An efficient market ensures that this would be the cheapest way to make a profit from this information. Buying and holding brings higher returns per money and time spent than purchasing mining farms or any other strategy, provided that the purchased asset goes up in price.

This is also the most risky approach because it requires you to commit and take a certain side. Let's say you bought BTC and the price went up - good! But if the price went down you'll make a loss on this investment.

This strategy is preferential in volatile markets. All you need to do is wait the volatility out if you believe that the overall trend is positive. You also only pay the fee twice: first when you buy the assets, and then when you sell it and take the profit.

Market making