The idea of Bitcoin and other cryptocurrencies feels like it has only just been created, but the first instance we see of these digital assets came out around 11 years ago. It feels like such a new and unexplored space because it is cryptocurrency trading that has taken off greatly, and this side of the ecosystem really only became big in the last three years.
So, what is cryptocurrency trading? It’s an important question with a lot of sides to it as the cryptocurrency ecosystem is very new and different to traditional markets, but at the same time there is a lot of crossover and similarities.
To properly understand what cryptocurrency trading is, one needs to understand a little more about the markets, the cryptos, the pairings, tools and tricks like leveraging and the strategies and risk aversion that come with that. It is also key to understand some of the bigger, more popular cryptocurrencies and how they are different from one another.
Of course, understanding how cryptocurrency trading works is the first step to starting to trade in cryptocurrencies, and to find out the best place to start trading cryptocurrencies, you also need to do some research. But, this guide will be able to help there as well.
Cryptocurrency trading works a lot like normal trading in today’s digital world. Because trading in Bitcoin and the like is entirely digital given the nature of the asset, it fits into an online trading space quite well.
Most common ways to trade cryptocurrencies, which relates to other trading markets like forex, stocks and commodities, is either through buying and selling on the spot market as a given price. Then there is futures trading where the trader and seller agree to a predetermined price to sell in the future. There is also CFD trading and even peer-to-peer.
Most of this trading for the common cryptocurrency trader takes place on an exchange which offers different trading services and tools. Some exchanges just offer the chance to buy and sell — still a form of trading — while others can offer futures, options, CFDs and more.
Cryptos have very similar markets to other assets, and often emulate the trading tools that the likes of commodities and stocks use, but they are still often more highly prized. The reason for this is that cryptocurrencies have a few unique facets that make them excellent assets to trade.
Firstly, they are entirely digital. Unlike trading gold, which can be done through CFDs, there is no need to hold a physical asset and have to deal with the responsibility of looking after the asset.
More so, cryptocurrencies flow between being an asset and a currency and thus are quite liquid, usable, and have a unique global property in that they are entirely borderless and not tied to a country like Forex.
But, the main reason that the cryptocurrency trading market has bloomed as much as it has is because these assets are notoriously volatile. Volatility is a double-edged sword in that it creates the chance for high returns, but can also lead to higher risks. But, for traders, this allure is very enticing and has formed a new market for their growth.
Even though there are similarities between traditional markets and cryptocurrency markets, it is not that simple for a trader to move from trading gold or forex to trading cryptocurrencies — it can be even more confusing for a totally newbie trader.
However, education is key in this journey and that is what it is important to understand a few key essentials before starting on this journey.
A cryptocurrency is defined as: “A digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.”
This gives an insight into their vast array of potential uses, but when it comes to trading it is important to just think of them as digital assets that have an associated market which sees the price fluctuate greatly in most circumstances.
The way these new and nascent markets work in the cryptocurrency space is similar to other commodities or assets, but the difference is they are a lot less mature. Being a less mature market means they are harder to predict, and more prone to wild swings in price. The reason for this is because external news especially has a big effect on the price because most of the investors are speculators and are easily swayed by happenings around the market.
Just like most markets ,the supply and demand of a certain digital asset has a big role to play on how the cryptocurrency’s price will move. But, what makes them a little different is that they are mostly decentralised assets and thus there are no political or economic concerns that can shift the supply and demand — as is seen with OPEC and oil.
If there is an oversupply due to increased mining and the creation of new coins, or added supply from a sell off, the price usually falls. However, if demand rises dueto good news around a certain cryptocurrency, then the price will start to climb.
Another important factor to consider when looking at the movement of cryptocurrency markets is the market capitalisation of a coin, this is the value of all the coins in existence and how users perceive this to be developing.
Then, there are the external factors, such as key events or even advances and integration of the cryptocurrency. Because these assets are still looking to find their key use case outside of trading, and news on integration or adoption often spurs on the market.
When it comes down to the business of trading in cryptocurrency, there are a few terms that traditional traders will be familiar with, but it is still important to go over them in a crypto context. Things like pairings, speads, lots, leverage and pips need to be understood and can help leadtraders to better trading strategies and risk management.
To understand pairings, one needs to understand what the cryptocurrency will be paired to — this is usually a currency of a certain currency, and is called fiat. Fiat refers to a national currency such as the pound or the dollar. So, an example might be that you wish to trade your USD with Bitcoin (BTC).
There are also opportunities to trade pairs between different cryptocurrencies. So, you could trade your Bitcoin (BTC) for some Litecoin (LTC, making a pairing of LTC/BTC meaning that the exchange rate between these coins, for the amount you are putting in, will give your Litecoin from your Bitcoin.
Another important aspect of trading you should understand is the spread. The spread is the difference between the buy and sell prices for a cryptocurrency. This is similar to many other markets, and so, when you open a position on a cryptocurrency market, you’ll be presented with two prices.
If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.
Lots are also known as batches and cryptocurrencies are often traded in lots used to standardise the size of trades. Because of the known volatility in the market, lots tend to be very small. They usually equate to just one unit of the base cryptocurrency.
Leverage is one of the more powerful tools in trading cryptocurrency and works well for profit making on a volatile asset. It is a way of gaining exposure to large amounts of cryptocurrency without having to put up the full amount of capital into a trade at the start
When you leverage, you put down a small deposit, known as margin and so when you close a leveraged position, your profit or loss is based on the full size of the trade.
Pips are simple units of change in cryptocurrency trading and are used to measure movement in the price. These refer to a one-digit movement in the price at a specific level.
Generally, bigger cryptocurrencies are traded at the ‘dollar´ level, so a move from a price of $190.00 to $191.00, for example, would mean that the cryptocurrency has moved a single pip.
However, some lower-value cryptocurrencies are traded at different scales, where a pip can be a cent or even a fraction of a cent.
Once you have a good understanding of how cryptocurrency works, and some of the key terminology and methods, it becomes imperative that one looks at the different ways to trade cryptocurrency. Cryptocurrency trading, like most trading, is very personalised, and very specific to the needs of a trader.
Some traders like more risk and prefer getting bigger rewards while others are happy with taking smaller risks and letting profit trickle in without fear of big losses. This all comes down to cryptocurrency trading strategies.
There are a number of cryptocurrency trading strategies to learn and to perfect. None of them are exact and fool proof, and are in fact more geared towards finding a good fit for the trader. Ensuring you have a strategy that suits you, and fits your goals, will ensure you don’t get hit too hard by losses and are happy with the profits that you make.
Cryptocurrency trading strategies lead you on to learn more about technical analysis and how charts work and what information can be taken from the charts. This is one tool that is extremely helpful in devising a strategy that is more effective, rational, less emotional, and predictable.
If you can understand technical chart analysis you can start to plan ahead with your trades using your head rather than your heart. And by using your head and mitigating emotional trading you will be able to use a strategy that also mitigates risk.
Risk management is one of the most key elements to trading in cryptocurrency because if you can keep the risks down and lessen the blow of big losses, you are in a position to make more trades and reap better rewards. But, if your risk management is weak, you will likely have bigger losses that can wipe out your capital and kill off your hopes of being a successful cryptocurrency trader.
Risk management also ties into trading strategy as it helps a trader decide how bold or cautious they want to be. By utilizing strong risk management techniques, a trader can still profit while softening the blows of any big losses.
Tools like stop orders and take-profit as well as considering the one percent rule and calculating your expected return are all ways in which a trader can paint a clearer picture about the worst case scenario of a trade and then decide what choice of action to take.
Once all the fundamentals are sorted and a trader has the knowledge to start trading in cryptocurrency, the next step is to find the right platform and to begin trading. This is also a vitally important step as platforms are very different in their offerings, security, trustworthiness and reputation.
Once you have found a cryptocurrency trading platform that suits you, it is quite easy to get going and trading, it all starts with creating an account.
When you decide to create an account, you will have to provide a bit of information. However, some sites only need very basic information and do not take any personal data. One such trading platform that only takes a few minutes to sign up is PrimeXBT.
Once you have created an account you can deposit money and transfer it into cryptocurrency with most platforms and from there you will be able to start trading and use the power of the platform and its tools for trading.
Cryptocurrency trading is a little more complex than other trading because the cryptocurrency ecosystem is extremely large and there are many different assets to trade. A lot of people will know, and trade, Bitcoin, but there are hundreds of other coins that will offer unique opportunities, but also unique risks.
As a rule of thumb, most traders like to look at the bigger, more established coins, and this is usually decided upon the market capitalisation of the coins. Some of the bigger coins are discussed below.
Bitcoin is the most well known, and widely regarded cryptocurrencies around today. The coin has the longest history, is the most well established, has the greatest liquidity and popularity, and remains the most decentralised and pure example of a value-gaining digital asset.
Bitcoin was the original cryptocurrency, and It can be thanked for the entire ecosystem breaking into the mainstream. Bitcoin’s mainstream adoption came from its growth in value over 10 years, and its rapid growth in 2017. But its recent growth for traders, institutional and crypto, has come because of its volatility.
Bitcoin was created to be a currency, or a digital cash system, but its evolution has taken it towards being a digital asset, and has long been called ‘Digital Gold.’ This comparison is quite apt as it ticks a lot of boxes that gold does — including scarcity and the ability to be anti-correlated to stocks and traditional markets.
Litecoin is another cryptocurrency that has been around for quite some time, and was created when it became clear that Bitcoin was going to be more of a digital asset than a digital currency. Litecoin has been called the silver to Bitcoin’s gold, and is meant to be faster, cheaper, and more efficient to use for general transactions.
It is true that Bitcoin drove the idea of cryptocurrencies to be about a store of value, but there is a resurgence in the desire to use them as a means to transact. Litecoin has the feature that makes it good for transactions, such as high transfer per second, as well as the Lightning Network.
If Bitcoin was the first generation of cryptocurrencies, Ethereum was certainly the second. This new blockchain brought with it huge features and capabilities for the technology which were never even part of Bitcoin’s design. More so, they showed that cryptocurrencies do not have to be entirely financial in nature — but this advancement has made Ethereum very viable and financially attractive.
Etherereum has been explained to be a ‘world computer’ and this means it is a decentralised network that operates with smart contracts that can run as an entity without the need for intermentatories in a number of different sectors.
Ripple, or to be more correct, XRP as the token is known, is an interesting cryptocurrency to invest in as it is controlled by the company — Ripple. Ripple is a cryptocurrency company that has taken aim at banking and the future of finance with its blockchain platform and XRP token.
When it comes to investing in XRP, there is a strong feeling that you are investing in the company Ripple and their work. However, this is not a bad thing as the cryptocurrency has remained in the top three or four of market caps across the ecosystem for a long time and it has seen many successes already.
Bitcoin, having recently crossed its 10 years of existence, took the prize for being the most profitable asset to invest in over that past decade. Its increase in value was unmatched, but it must be remembered that Bitcoin did start at basically zero and rose to $20,000 in that time.
Cryptocurrency trading is not an expensive trading opportunity as it has a very low barrier to entry and is open and accessible. For example, some platforms need only a minimum deposit of $10 to get started.
Many people think that if they missed Bitcoin’s run to $20,000 they missed the boat on investing in Bitcoin. However, the fact of the matter is that Bitcoin is continually growing and maturing and as it makes it way into the traditional trading scene, its market is expected to rise.
Just like all trading, there are inherent risks in trading in cryptocurrency. More so, traders need to be aware that cryptocurrency is less regulated, less mature and has higher volatility than most assets and thus there can be bigger chances to lose money.
Cryptocurrency trading has many similarities to traditional trading, but it is also very unique as an asset. The familiarity makes it an easy cross over for established traders looking for more, but its inclusiveness and the ease of use from cryptocurrency trading platforms makes it open for newbies as well.
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