What is crypto trading?
The act of speculating on cryptocurrency price movements through a Contracts for Difference (CFD) trading account, or buying and selling the underlying coins through an exchange, is known as cryptocurrency or crypto trading. CFD trading is a type of derivative that allows you to bet on changes in the price of Bitcoin (BTC) without owning the underlying currency.
For example, you can go long (buy) if you think the value of a cryptocurrency will increase, and go short (sell) if you think the value of a cryptocurrency will decrease. Both are leveraged instruments, meaning you only need a small deposit (known as trading cryptocurrencies on margin) to gain full exposure to the underlying market. However, since your profit or loss still depends on the total amount of your investment, trading cryptocurrencies magnifies gains and losses.
Additionally, investors use cryptocurrency options to reduce risk or increase market risk. Crypto options trading refers to “derivative” financial instruments that derive their value from the price of another asset, in this case the underlying cryptocurrency.
Before considering getting involved in crypto trading, it’s important to have a thorough understanding of the assets and technologies involved. Bitcoin is the breeding ground for thousands of other cryptocurrencies.
Related: Read Cointelegraph’s “What is Bitcoin?” guide.
Like stocks and other financial markets, trading cryptocurrencies can be complex, involving various components and requiring knowledge. Bitcoin was launched in 2009 as the first crypto-asset and remains the largest cryptocurrency in terms of market capitalization and penetration.
However, over the years, entire industries have emerged for other digital assets that can be traded for profit. All other cryptocurrencies besides BTC are called altcoins, the largest of which is Ethereum ( ETH ).
This guide will explain cryptocurrency trading strategies and familiarize you with cryptocurrency trading platforms and applications, trading components, trading styles, and the role of technical and fundamental analysis in developing a comprehensive trading strategy.
How to trade cryptocurrencies for beginners
There are many different approaches on how to trade cryptocurrencies. In order to start trading cryptocurrencies, you first need to have sufficient knowledge about the subject. It is also important to understand the risks involved and the laws that may apply depending on one's jurisdiction, so decisions should be made accordingly.
Sign up for a cryptocurrency exchange
Unless you already own cryptocurrency, you will need to open an account with a cryptocurrency exchange. The best crypto brokers on the market include Binance
Coinbase, eToro and Gemini. All three services have a simple user interface and a wide variety of altcoins to choose from.
To open an account with a cryptocurrency brokerage, you will need to provide personally identifiable information just like you would with a stock brokerage. When creating an account, you will need to submit your address, date of birth, Social Security number (in the United States) and email address, among other information known as Know Your Customer (KYC) requirements.
Fund your account
After signing up with a cryptocurrency brokerage, you need to connect your bank account. Most cryptocurrency exchanges accept bank deposits via debit cards and wire transfers. Wire transfers are generally the most cost-effective way to fund your account and are available on Coinbase and Gemini.
Choose a cryptocurrency to invest in
Most cryptocurrency traders place their funds in Bitcoin and Ethereum. However, it is possible to trade using technical indicators as the movements of these cryptocurrencies are more predictable than smaller altcoins.
Many cryptocurrency investors put some of their money into altcoins. Although riskier than large-cap cryptocurrencies, small- and mid-cap cryptocurrencies have greater upside potential.
Start trading
If you are looking for a cryptocurrency trading strategy, you can try automated cryptocurrency trading using software like Coinrule. Cryptocurrency trading bots implement a process designed to provide you with the highest possible returns based on your investment goals.
You can make money quickly, keep your coins or diversify your portfolio with crypto automated trading, which can give you a conservative, neutral or aggressive approach. You can even actively explore trading cryptocurrencies on some websites while conducting automated trading on others.
Store your cryptocurrencies
If you are actively trading BTC, you will need to have your funds on an exchange in order to use them. For example, if you want to buy cryptocurrencies to hold in the medium to long term, you should buy a Bitcoin wallet.
Software wallets and hardware wallets are two types of cryptocurrency wallets. Both are secure, but hardware wallets offer the greatest protection because they store your cryptocurrencies on a physical device that is not connected to the internet.
The Basics of Cryptocurrency Trading
The value of Bitcoin is determined second by second and day by day by a city that never sleeps. As an autonomous digital asset whose value is determined by the open market, Bitcoin presents unique challenges in terms of volatility that most currencies do not face.
Therefore, it is important for newbies to understand how the crypto asset market works so that they can navigate the market safely, even intermittently, and get the most value from participating in the crypto trading economy.
Bitcoin trading varies in size and complexity, from simple transactions such as cashing out to fiat currencies such as USD, to using a variety of trading pairs to profit in the market to grow your portfolio. Of course, as cryptocurrency trading increases in size and complexity, so does a trader's risk exposure.
First, let's review some basic concepts.
The Structure of Crypto Trading
Cryptocurrency trading consists of buyers and sellers. Since there are two opposing sides to a transaction—buying and selling—one person must gain more than the other. Therefore, trading is essentially a zero-sum game: there are winners and losers. Having a basic understanding of how the cryptocurrency market works can help minimize potential losses and optimize potential gains.
When buyers and sellers agree on a price, the trade is executed (via the exchange) and the market valuation of the asset is set. In most cases, buyers tend to place orders at a lower price than sellers. This creates two sides of the order book.
When there are more buy orders than sell orders for a cryptocurrency, the price usually increases because there is more demand for the asset. Conversely, when more people are selling than buying, the price will fall. In many exchange interfaces, buy and sell are represented by different colors. This is to give traders a quick overview of market conditions at a given moment.
You may have heard a saying in trading: "Buy low, sell high." This statement can be difficult to understand because high and low prices can be relative, although the adage does give a basic representation of the motivations of buyers and sellers in the market.
Simply put, if you want to buy something, you want to spend as little money as possible. If you want to sell something, you want to make as much money as possible from the transaction. While this is generally a smart move to follow, there is the additional dimension of going long versus short an asset.
Being long on an asset (aspiration) means buying the asset and earning a profit based on its price increase. In contrast, shorting an asset (shorting) essentially means selling an asset with the intention of buying it back when its price is lower than the price you sold it for, thereby profiting from the price drop. However, shorting is a little more complicated than this brief description and involves selling a borrowed asset and then paying it back.
Read the market
To the layman, "the market" may seem like a complex system that only experts can understand, but the truth is, it all comes down to people buying and selling. At first, how to trade cryptocurrencies may seem like an esoteric concept. However, once you start to understand it, the idea becomes much simpler.
The total number of active buy and sell orders is a snapshot of the market at any given moment. Reading the market is the ongoing process of discovering patterns or trends over time that traders can choose to act upon. Overall, there are two market trends: bullish and bearish.
A "bullish" market, or bull market, occurs when price action appears to be steadily increasing. These upward price movements are also known as "pumps" because the influx of buyers pushes prices higher. A "bearish" market, or bear market, occurs when price action appears to be steadily declining. These downward price movements are also known as "sell-offs" because the heavy selling causes prices to move lower.
Bullish and bearish trends can also exist within other larger opposite trends, depending on the time frame you are looking at. For example, a small bearish trend may occur within a broader long-term bullish trend. Generally speaking, an uptrend causes price action to form higher highs and higher lows. A downtrend forms lower highs and lower lows.
Another market condition called "consolidation" occurs when prices move sideways or trade within a range. Typically, consolidation phases are easier to spot on higher time frames (daily or weekly charts) and occur when an asset cools off after a sharp up or down trend. Consolidation also occurs before a trend reversal, or when demand is subdued and trading volumes are low. In this market state, prices basically trade within a certain range.
technical analysis
Technical analysis (TA) is a method of analyzing past market data (primarily price and volume) to predict price behavior. While there are a variety of TA indicators, with varying levels of sophistication, that traders can use to analyze the market, here are some basic macro and micro level tools.
Market structure and cycles
Just as traders can find patterns in hours, days, and months, they can also find patterns in years of price fluctuations. The fundamental structure of the market makes it susceptible to certain actions.
The cycle can be divided into four main parts: accumulation, rise, distribution, and decline. As the market moves between these phases, traders will continually adjust their positions by consolidating, retracing, or correcting as they deem necessary.
Bulls and bears are distinct creatures that behave in opposition to each other under common environmental conditions. It is crucial that traders not only know which role they belong to, but also which role is currently dominating the market.
Technical analysis is not only necessary to position yourself in this ever-changing market, but it is also essential to proactively respond to the ebbs and flows that occur.
chasing whales
Price movements are primarily driven by "whales" - individuals or groups with large amounts of capital to trade. Some whales operate as “market makers,” setting bids and asks on both sides of the market in order to create liquidity for an asset while making a profit in the process. Whales can be found in almost any market, from stocks and commodities to cryptocurrencies.
Cryptocurrency trading strategies must understand the trading tools that whales prefer, such as their preferred TA indicators. In short, whales tend to know what they are doing. By anticipating whales’ intentions, traders can work with these expert movers to profit from their own strategies.
psychological cycle
With a menagerie full of metaphors, it's easy to forget that real people are - in most cases - behind these trades, and as such, they are subject to emotional behavior that can have a significant impact on the market.
This aspect of the market is illustrated in the classic chart "The Psychology of Market Cycles":
While the bull/bear market framework is useful, the psychological cycles described above provide a more detailed range of market sentiment. While one of the first rules of trading is to keep emotions at bay, the power of group mentality can often take over. The rally from hope to euphoria is driven by FOMO — the fear of missing out — from those who have yet to position themselves in the market.
Navigating the line between euphoria and complacency is critical to choosing when to exit before a bear market takes over and people panic sell. Here, it is important to consider the price action of large volumes, which can indicate the overall momentum of the market. The "buy low" philosophy is very obvious, as the best time to accumulate during a market cycle is during the depression period after a sharp decline in prices. The greater the risk, the greater the reward.
The challenge for serious traders is not to let emotions dictate their trading strategies amid the deluge of trending topics and analysis in the media, chat rooms, or so-called thought leaders. These markets are highly susceptible to manipulation by whales and those who can influence the pulse of the market. Do your homework and act decisively in your cryptocurrency trading actions.
Basic tools
Being able to detect patterns and cycles in the market is critical to gaining clarity from a macro perspective. Understanding your position relative to the whole is most important. You want to be an experienced surfer who knows when the perfect wave is coming, rather than listlessly paddling through the water hoping for something good to happen.
However, a micro perspective is also crucial in determining your actual strategy. Although there are a large number of TA indicators, we will only cover the most basic indicators.
support and resistance
Perhaps the two most widely used TA indicators under the terms "support" and "resistance" relate to price barriers that tend to form in markets, preventing price action from going too far in a certain direction.
Support is the price level at which a downtrend tends to pause due to an influx of demand. When prices fall, traders tend to buy low, forming a support line. Conversely, resistance is the price level at which an uptrend tends to pause due to selling.
Many cryptocurrency traders use support and resistance levels to bet on the direction of price, adjusting on the fly when price levels break through their upper or lower limits. Once a trader determines the lower and upper limits, this provides an area of activity within which the trader can enter or exit trades. Buying on the floor and selling on the ceiling is usually standard operating procedure.
If the price exceeds these barriers in either direction, it indicates the overall sentiment of the market. This is an ongoing process because when a trend breaks, new support and resistance levels tend to form.
Trendline
While the static support and resistance barriers shown above are a common tool among traders, price action tends to move up or down as the barriers move over time. A series of support and resistance levels can indicate the larger trend in the market represented by the trend line.
When a market is trending upward, resistance levels begin to form, price action slows down, and price is pulled back to the trend line. Cryptocurrency traders pay close attention to support levels on rising trend lines, as they indicate areas that help prevent significant price declines. Likewise, in a downtrending market, traders will pay close attention to the sequence of falling peaks, connecting them into a trendline.
The core element is the history of the market. Over time, the strength of any support or resistance level and the trendline it creates will increase. Therefore, traders will record these obstacles to inform their ongoing trading strategies.
integer
One of the influences on support/resistance levels is the fixation on round price levels by inexperienced or institutional investors. When a lot of trading happens around a nice round number - as happens typically with Bitcoin every time its price approaches a number divisible by 10,000 - for example, it can be difficult for the price to move above that, creating a revolt.
This frequent occurrence proves that human traders are easily influenced by emotions and tend to take shortcuts. Of course, with Bitcoin, if a certain price point is reached, it tends to create a burst of market action and expected enthusiasm.
moving average
With market history of support/resistance levels and the resulting downward/upward trend lines, traders will often smooth this data to create a single visual line representation called a "moving average".
The moving averages do a good job of tracking the bottom support levels of uptrends and the peak resistance levels of overall downtrends. Moving averages provide a useful short-term momentum indicator when analyzing trading volume.
chart pattern
There are many ways to chart the market and find patterns within it. One of the most common visual representations of market price action is the "candlestick." These candlestick patterns provide traders with a visual language to predict possible trends.
Candlestick charts originated in Japan in the 1700s as a way to assess the way trader sentiment strongly influences price action, going beyond simple supply and demand economics. This type of market visualization is a favorite among traders because it can contain much more information than a simple line or bar chart. A candlestick chart has four price points: open, close, high, and low.
How does this relate to cryptocurrency trading? They are called candlesticks because they are rectangular in shape with lines above and/or below that resemble wicks. The wider part of the candle is where the price opened or closed, depending on its color. The wick represents the price range of the asset that was traded during the candlestick's set time period. Candlesticks can encapsulate different time spans, from a minute to a day or even longer, and display different patterns depending on the chosen timeline.
Fundamental analysis
So, how do we determine the potential of a specific crypto asset outside of or prior to trading market action?
Technical analysis involves studying market data to determine one's trading strategy, while fundamental analysis is the study of the underlying industries, technologies, or assets that make up a specific market. For cryptocurrencies, a trading portfolio may include Bitcoin and altcoins.
How to determine if an asset is based on sound fundamentals and not hype, overhyped technology, or worse – nothing at all? For fundamental analysis of a new asset, several factors should be considered:
Developer
Before investing in a cryptocurrency asset, one must evaluate the integrity and competence of the builders behind it. What is their track record? What software projects have they brought to market in the past? How active are they in developing the underlying protocol for the token? Since many projects are open source, this activity can be seen directly through collaborative code storage platforms such as GitHub.
Community
Community is crucial to cryptocurrency trading projects. The combination of users, token holders, and enthusiasts generates much of the power behind these assets and their underlying technology. After all, there is always a social element to any new technology. However, because of the large amounts of money involved - and the frequent presence of non-professional retail investors - the space is often susceptible to poison and hostile factions. Therefore, healthy, transparent discussion within the community is welcome.
Technical specifications
Not to be confused with technical market analysis, a cryptoasset’s core technical specifications include a network’s choice of algorithm (how it maintains security, uptime, and consensus) and issuance/emission characteristics such as block times, maximum token supply, and distribution Planning. By carefully evaluating a cryptocurrency network’s protocol stack and the monetary policies implemented by the protocol, traders can determine whether such functionality supports a potential investment.
innovation
While the intended use case for Bitcoin when it was launched was electronic money, developers and entrepreneurs have not only discovered new use cases for the Bitcoin blockchain, but also designed entirely new protocols to accommodate a wider range of applications.
Liquidity (and whales)
Liquidity is critical to healthy markets. Are there any reputable exchanges that support specific crypto assets? If so, what trading pairs exist? Is there healthy trading/volume? Are there large stakeholders in the market? If so, what is the impact on their trading patterns?
However, generating liquidity takes time, as a new innovative protocol may already exist but may not have immediate access to liquidity. This kind of investment comes with risks. If trading volume is low and there are few trading pairs, you are basically betting that a healthy market will eventually form around the project.
Branding and Marketing
Most cryptocurrency networks do not have a central figure or company to facilitate branding and marketing around their technology, resulting in branding that may lack a unified plan or direction.
This is not to discount the branding and marketing that emerges from the agreement over time. Indeed, a comparative analysis of the marketing efforts of core developers, companies, foundations, and community members provides a detailed understanding of how certain actors communicate their value propositions to the masses.
infrastructure
The quality of this crypto transaction can be seen as a reflection of the project’s technical specifications. Despite being presented in a white paper or at a conference, what is the actual physical manifestation of the protocol in question?
It pays to map out the stakeholders: developers, block validators, merchants/companies, and users. Additionally, it is important to understand who the network administrators are, their role in securing the network (mining, verification), and how power is distributed among these stakeholders.
On-chain analysis
Given that all cryptocurrencies operate on blockchain technology at a fundamental level, a new type of analysis has emerged that relies on blockchain data - on-chain analysis.
By looking at supply and demand trends, transaction frequency, transaction costs, and the speed at which investors hold and sell cryptocurrencies, analysts are able to make precise qualitative and quantitative observations about the strength of cryptocurrency blockchain networks and their price dynamics. Various markets.
On-chain data also provides valuable insights into investor psychology, as analysts are able to link various macro and microeconomic events to investor behavior, which is immutably recorded on the blockchain.
Analysts look for cryptocurrency trading signals, patterns and anomalies in buy, sell and hold behavior related to market rallies, sell-offs, regulatory events and other network-oriented events. This is done to predict potential future price movements and investor reactions to upcoming events, such as network upgrades, token supply halvings, and actions taking place in traditional financial markets.
Cryptocurrency Trading vs. Stock Trading
Stocks and cryptocurrencies are two very different investment vehicles. While both are liquid assets that belong in your speculative portfolio, the similarities end there. These are two completely different securities that should be kept in different parts of your portfolio.
Stocks are ownership shares in a publicly traded company. Each share of stock you purchase gives you a percentage of the company. This ownership is proportional to the number of shares issued by the company.
Investors can make a profit by selling their shares to other investors. The difference between the amount you spent on the asset and the amount you received when you sold it is called capital gain. Beyond that, the advantages of owning shares depend entirely on the company in question. Stocks also gain value by providing dividends to shareholders and exercising voting rights.
Cryptocurrency is a digital asset that exists only on the Internet. This means it has no physical component and exists only as a record in an online ledger that tracks ownership. This is in contrast to the U.S. dollar, which has both a physical component (you can withdraw and hold dollar bills) and a digital component (you can own a dollar, which is nothing more than an entry in your bank account recording that ownership). Individual units of a cryptocurrency are called tokens, just like individual units of a stock are called shares.
Trading cryptocurrencies is risky
Risk management is also an important aspect of trading. Before entering a trade, it is important to know how much you are willing to lose if this crypto trade goes against you. This can be based on many factors such as your trading capital. For example, a person may wish to risk only losing 1% of his or her total trading capital, either in total or per trade.
Trading itself is a risky endeavor. It is nearly impossible to accurately predict any future market activity. At the end of the day, it's important to make your own decisions based on available information and your own judgment, and to make sure you're properly educated.
In addition, trading strategies vary from person to person based on preferences, personality, trading capital, risk tolerance, etc. Trading comes with great responsibility. Anyone engaging in trading must evaluate his or her own personal circumstances before deciding to trade.
C3 Tip: The views, thoughts and opinions expressed here are solely those of the author. This article does not contain investment opinions or recommendations. Every investment and transaction involves risk.