Crypto Position Trading

Defined as a strategy that involves holding crypto assets for long periods of time until the trader decides to act, crypto position trading relies on macroeconomic factors, price valuation metrics, and on-chain analysis tools. So, instead of actively trading and basing their decisions on daily price movements, position traders try to predict price movements in the long term, managing their position in the process.

Unlike scalpers and day traders who hold positions for comparatively shorter periods, position traders are closer to swing traders, but typically hold their positions longer, for weeks or months, depending on the macro analysis outcomes rather than short-term price fluctuations. Holding positions for such long periods means position traders must be resilient and maintain their approach, as interim drawdowns are likely.

The effectiveness of position trading strategies is often assessed relative to passive buy-and-hold approaches. However, unlike passive investors, who remain invested throughout, active traders accept higher execution risk levels. While the two strategies cannot be directly compared, market evidence indicates that passive holders often outperform active traders over comparable periods.

Position traders rely on a combination of instruments, specifically macroeconomic trends, long-term technical analysis, and on-chain instruments.

Macro and fundamental analysis: Assessing the broader market context is essential to position trading. Comparing macro factors, such as Bitcoin’s relative position to historical halving cycles and liquidity conditions, helps traders understand wider market cycles. Similarly, Bitcoin’s position within its market cycle and dominance are often used to assess the performance of altcoins, as altcoin market phases often historically coincide with Bitcoin’s market cycles.

On-chain analysis: Market valuation can be assessed through on-chain analysis metrics, such as Market Value to Realized Value (MVRV) and Network Value to Transactions (NVT) ratios. The MVRV ratio expresses how the current market capitalization compares to the historically realized capitalization for that coin, allowing traders to identify trading opportunities when prices might be unexpectedly high or low. Observations often indicate that when the MVRV ratio is above ~3.7, the market might have peaked, while ratios below 1 indicate undervaluation. On the other hand, the NVT ratio compares the market value of a cryptocurrency to the volume of on-chain transactions and their value. The higher the NVT ratio, the greater the likelihood of an inflated valuation.

Long-term technical analysis: When analyzing potential crypto trading positions, data regarding monthly and weekly price movements takes precedence over hourly and daily charts. Long-term indicators traders often rely on include the 200-week moving average, which many believe is useful as a support level during Bitcoin bear markets, for instance, while Fibonacci retracement levels are often thought to help identify areas of accumulation.

Before entering a position, experienced traders assess how multiple factors interact with each other and only choose to enter a trade when the right combination of macroeconomic conditions, on-chain tool ratios, and technical analysis occurs. For example, a favorable entry position often consists of the following – a favorable macro environment for risk assets and an undervalued cryptocurrency market compared to previous cycles, as indicated by MVRV and NVT ratios, as well as choosing an asset that trades at close to the long-term support level. Entering a market before these conditions align and during a prolonged downturn, on the other hand, will achieve the opposite of a favorable outcome.

One of the key differences between day traders and their position trading counterparts is position sizing and the stop-loss levels they set. Position traders tend to set wider stop-losses, oftentimes 20% to 30% below the entry position, anticipating larger price fluctuations. For example, a trader with a $20,000 portfolio who can afford to risk 5% per trade has a maximum loss of $1,000. With a stop-loss limit of 30% below the entry price, the maximum position size would amount to somewhere around $3,333, as $3,333 x 30% equals $1,000. Not reducing the position size would exceed the maximum risk tolerance for the trader. This math assumes an unleveraged position; traders sizing a position through trading margin or derivatives need to weigh liquidation price alongside the stop-loss level, since the two can diverge under leverage.

Scaling a position is also common in crypto position trading, with traders spreading their allocated funds across multiple entries. While this reduces the risk of making an entry too early or too late, if the first entry is the optimal one, it will also reduce the potential returns.

Position traders are no strangers to coping with significant losses that result from temporary downturns in price. Bitcoin has several times dropped 50% to 85% during bear market cycles, while altcoins have seen their value slashed by as much as 80% to 95% compared to cycle peaks. The largest peak-to-trough drawdown of the Bitcoin price cycle occurred in 2011, when it fell by almost 94%, with the most recent drawdown occurring in 2021-2022, when it fell by approximately 77%. Even a 50% drawdown on a $10,000 position will reduce the position to $5,000 until the market recovers, which is never guaranteed.

So being patient, disciplined, and in possession of a clearly outlined thesis before entering a trade is essential. Not every individual is prepared to hold through a 50% drawdown, but if the entry thesis is argument-backed and meticulously prepared prior to entering the trade, it is more likely that traders won’t close positions during the drawdown, while the opposite typically applies when the entry thesis is not documented and confirmed before opening a position.

When it comes to stop-loss limits, there are divided opinions among traders. Some automatically sell and rely on hard stop-losses, i.e., sell at a predefined price drop percentage. Others choose to exit a position only when the reasons for entering it are invalidated, such as the existence of different macroeconomic conditions from the ones when the position was opened, as well as on-chain metrics and long-term technical signals that have changed significantly.

As a trading strategy where an investment is held for longer periods of time, crypto position trading may receive a more favorable capital gains tax treatment, depending on the jurisdiction. In the US, crypto assets held for more than one year are taxed at rates of 0%, 15%, or 20% depending on the income level bracket. In contrast, assets that are disposed of in under a year create taxable events that are subject to short-term capital gains tax rates. So, a trader with a $10,000 profit who is in the 32% tax bracket would pay $3,200 in income tax for taxable events subject to the short-term capital gains tax but only $2,000 under the long-term gains rates.

That said, it is worth pointing out that tax rules vary across jurisdictions. Some tax authorities exempt long-term crypto holdings altogether, while others may apply a flat rate for both short-term and long-term holdings. That’s why it is best to consult a tax professional.

While trading tax implications are not a top priority for most traders, a trading thesis that stipulates a holding period of nearly 12 months should be reassessed to check if crossing the 12-month mark qualifies the trader for tax rates that are significantly enough to affect the overall return of the trade.

As a subset of crypto position trading, leveraged position trades allow traders to control larger positions without owning the crypto asset they are trading. Unlike unleveraged position trading, leveraged positions are subject to funding rates. When long position traders outnumber short sellers, the former typically pay funding fees to the latter. Since these payments usually occur every 8 hours, cumulative amounts can get substantial and affect overall profits during bull markets.

Here’s a breakdown of how a long position hold is affected by funding rates when the leverage is 2:1, and the allocation is $5,000 (the trader controls a $10,000 position). The funding rate is 0.01%, and it is charged every 8 hours. The total funding cost would amount to $1,095 annually (0.01% x 3 daily payments x 365 days = 10.95% per year).

Therefore, when trading with leverage using perpetual futures, funding fees create a completely different cost structure from that of unleveraged spot position trading, and cumulative costs shouldn’t be discarded as negligible fees.

Contrary to what many might believe, opting for the wrong asset isn’t the most serious mistake in position trading. Instead, it is one or all of position sizing, not being prepared for a more sizeable downturn, and choosing a bad exit point guided by emotion. If a trader cannot cope with a 40% unrealized loss, entering a position with a 40% stop is not a prudent move regardless of thesis strength.

What traders must understand is that while it might seem like position trading removes or reduces market risk, that is not the case, as the risk is still very much there, only spread over a long period, with gains and losses developed in the long term.

If you feel that position trading is taking a toll on your finances, mental well-being, or affects everyday decisions, consider reducing position sizes significantly or stop trading. Contact the National Problem Gambling Helpline 1-800-522-4700 (US) for any issues that can be attributed to gambling-related financial distress.