How To Make Money Trading Alt Coins
An Introduction to Alt Coins
The success of Bitcoin has opened many people's eyes to the possibility that virtual currency could gain mainstream acceptance. It offers a wide range of potential advantages over regular currency. These include lower fees for merchants (hence cheaper prices for consumers), the ability to transfer money to anyone, anywhere in the world without high bank transfer costs, the fact that it is international and not controlled by a national government, the opportunity to wrestle power and profits back from the wealthy bankers and put it into the hands of ordinary people, and the additional benefit that it is not inflationary - meaning that it does not lose its value over time like the dollars, pounds or other fiat currency which you own.
Bitcoin itself, however, is far from perfect; it is the trailblazer, but perhaps not the finished product that will hit the big time. The distributed nature of Bitcoin, with no owners or central management team, whilst providing many benefits also means that there are limits to how much Bitcoin can be changed to reflect our growing knowledge of how virtual currency can be used and how we would like it to work. Problems include potential security concerns, slow transaction times, uneven distribution, the fact that one coin costs so much - a result of the limited number available - which means that small payments end up being a tiny and hard to read fraction of one coin, and limited functionality compared to what we now know is possible.
As a result of this, a range of other virtual currencies have emerged which aim to solve the problems with Bitcoin and extend its functionality. Most have very small user-bases currently, but some are growing fast and could easily provide real competition for Bitcoin. If a virtual currency does become mainstream, it may well be one of these new alt coins rather than Bitcoin.
Making Money as an Alt Coin Trader
The growing, but still relatively undeveloped market for alt coins presents many opportunities for traders to make a profit. I should know - since becoming fascinated with the whole virtual currency phenomena just a couple of months ago I have started earning the largest part of my income from trading Bitcoins and the alt coins (the rest comes from writing on blogs and sites like Hubpages, and the odd freelance job).
You can start trading and making money with just a small investment, and personally I think it is great fun. It is also much easier than forex trading or day trading on the stock markets - something which I tried a year or two ago and failed at miserably. There are two main reasons for this - firstly the fees you pay to trading platforms (or 'exchanges') tend to be quite low, and secondly you are not competing with financial institutions and professional traders (except the home-grown variety like me!).
In this article I will walk you through some of the best ways to make money from trading alt coins. Before you start trading, however, you will obviously need to have some virtual currency to start trading with. Because there are more places to buy Bitcoin for regular fiat money it is probably easiest and best to start off by buying Bitcoins and then transfer them to an exchange where you can trade a good range of alt coins.
Personally I think the best exchange for trading alt coins is Cryptsy, as the fees are very low (0.2 - 0.3%), there are over 60 different coins available to trade, and you earn reward points for being a regular trader.
Becoming an Alt Coin Market Maker
Market makers perform the exact same job in the alt coin markets as they do in the traditional financial markets such as forex. But whereas there is little or no possibility of a home based trader becoming a market maker in the traditional markets, it is definitely possible (and very profitable) within the Bitcoin and alt coin markets.
When you go to an exchange to trade one currency for another you will find that there are lots of buy and sell orders available. Some of these offers are posted by people who just want to convert one currency they own to another that they would like to own or to spend. Some are posted by traders who are seeking to profit from changes in pricing over time (see below). But with just these two groups there would not be enough offers available to 'make a market'. The best offers would often stray from the true market price, and offers close to the market price would often be for just small amounts - meaning that anybody wanting to exchange a larger amount would have to either wait for a corresponding offer to become available or pay a price that is a long way from the real market rate.
This is where the 'market maker' comes in. The difference in price between the highest buy offer and the lowest sell offer is called the 'spread' (on a regular forex trading platform it is usually the financial institution running it which takes the spread, but this is not the case for peer to peer alt coin exchanges). Lets say the market price for Bitcoins is $600 dollars. A market maker may then offer to buy Bitcoins for $598 and sell them for $602. This means that there are always plenty of offers on the table for regular users to make an exchange which is close to market price, and the market maker pockets 'the spread' as their profit. Although the $4 in my example may seem like a small amount - lots of trades going in both directions can soon build up to a very healthy return.
How To Be A Successful Market Maker
Obviously the above description of how a market maker operates is somewhat simplified. This is because making markets in this way exposes you to 'currency risk'. That means that you may buy Bitcoins, for example, as slightly below the market price - but then the price may fall before you can sell them leaving you out of pocket.
There are two things that you need to do to be a successful market maker, reducing your risks and increasing your profits. The first is to find currency pairs with a large spread. Because the alt coin markets are new and undeveloped there are still not enough market makers, there are often times when the spread becomes fairly large for some markets.
The second is to post small offers close to the market price, but larger offers further away. If a market only has small offers close to market price, then someone wishing to exchange a larger amount will have to also take offers further down the orderbook and therefore pay more. One of the main roles of the market maker is to make sure that there are always enough offers on the table no matter how much somebody wants to exchange - and the more they want to exchange the larger the spread you will be able to charge. To extend on my previous example, you may offer to buy 0.1 Bitcoins at $598, 0.25 at $597.5, 0.5 at $597, 1 at $596 and so on.
An Example of an Orderbook
Picking Long Term Winners
A more long term approach is simply to buy and hold alt coins which you believe have long term potential to grow and succeed.
The more users a virtual currency has, the more its price is liable to go up as demand for the coins outstrips the limited supply. Because many alt coins are very cheap to buy right now there is a huge potential for any successful coin to see its price go up as just as dramatically is Bitcoin's did over the last few years (or even more so!). Of course many alt coins may also fail, or see their price fall over time - so this is a high risk, high reward endeavour.
If you are going to take this strategy my advice is to look for coins which offer genuine improvements over Bitcoin, some kind of unique functionality, and / or a specific niche market.
Check out my article on The Best Alt Coins for 2014 to see my own top picks.
If you have any experience of trading in the traditional financial markets then you can use the exact same skills and apply them to the new alt coin markets. Technical analysis - the art of analysing price graphs to look for trends - is a huge subject. There are literally hundreds of different strategies, tools and techniques; but fortunately there are also plenty of resources available which you can use to learn how to identify support and resistance lines, use moving averages, and so on. The book I've included a link to on the right was written for traders working in the traditional financial markets, but the lessons and techniques can easily be applied to any market.