Crypto trading means the trading of cryptocurrencies or digital currencies for other assets, such as conventional fiat money (for instance EUR, USD or GBP) or other digital currencies (such as BTH, ETH or RPL). Cryptocurrency trading might seem daunting at first and only accessible to the digitally savvy.
While it does require some familiarity with the digital world, once you know the basics of crypto trading, it’s not that difficult to get started. So let's look at the basics of how digital currencies and cryptocurrency trading work and how you can take your first steps.
It’s extremely important to keep in mind that cryptocurrency trading is a highly risky affair, and you not only need some digital literacy, but also do some research and practice trading. Don’t worry, we will show you what to watch out for!
What is crypto?
Cryptocurrencies are digital assets created by cryptographic means using blockchain technology as their backbone. The blockchain technology is a decentralized record-keeping method in which a network of computers are maintaining and verifying transactions, thus eliminating the need for a central authority that issues the currency and regulates its circulation.
The users participating in maintaining the blockchain are called miners, who use their computers to validate transactions. They are paid in crypto tokens for their work. Similarly to traditional currencies, cryptocurrencies can be used for buying products and services. They can also be traded.
Today, there are thousands of cryptocurrencies, with their total value adding up to more than $1.3 trillion as of June 2021, according to Coinmarketcap. In comparison, the New York Stock Exchange, the largest stock exchange in the world, has an equity market capitalization of just over $25.3 trillion as of June 2021.
It might seem like buying and selling Bitcoin and other cryptocurrencies is an easy way to make quick money, but you should be extra careful when investing in cryptos. Be aware that it is a speculative place with high price volatility. Trading cryptocurrencies can create the illusion of quick gains but it is just as easy to lose your money.
Where can you trade crypto?
Trading digital currencies, such as Bitcoin or Ether, starts with finding the right platform to buy and sell.
What you need to know about cryptocurrency exchanges
Cryptocurrency exchanges are platforms where you can buy and sell digital currencies. On crypto exchanges, you can trade one cryptocurrency for another - for instance, convert Bitcoin to Ether - or buy cryptocurrency using conventional money like USD, EUR or GBP. The exchanges reflect the current market prices of the coins they are offering.
Users can also convert their Bitcoins or other coins back to fiat currencies on crypto exchanges, making it possible to withdraw funds to your regular bank account in conventional currencies. Bear in mind that you can also hold your cryptos in your own wallet, which we will explain a bit later.
Crypto exchanges are different from traditional exchanges in that you can open an account directly at a crypto exchange, whereas you need a brokerage account to access a traditional exchange.
How to choose the best crypto exchange?
There are hundreds of crypto exchanges available for investors, so you should do some research before deciding which one best fits your needs.
- Make sure it is a safe and legitimate platform! Do some research on the reputation of the exchange and check the safety protocols it has in place, to make sure your sensitive personal and financial data and your funds are secure. Other signs that you’re looking at a safe and legit crypto exchange is that it has a large number of clients as well as high revenue and trading turnover; and that the company is listed on a traditional stock exchange.
- Make sure the crypto exchange you have set your eyes on actually offers or accepts the cryptocurrency you want to buy or sell.
- Check what payment methods are available at the exchange: some support deposits by bank transfer, some use PayPal, others also accept credit and debit cards, while some only use cryptocurrency.
- Check the security features of the particular exchange, as they could be potential targets for hackers. Two-factor authentication for login is a must-have.
- Check also the transaction fee structure, so you can find the one that best suits your trading patterns.
Setting up an account at a cryptocurrency exchange, which is in essence a cryptocurrency trading platform, takes only a few minutes.
You will need to provide basic personal information and some financial details, such as your bank account or credit/debit card number that will be used to fund your exchange account. Many exchanges also ask for a photo ID before allowing you to start crypto trading.
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Other forms of crypto trading
Cryptocurrencies, such as Bitcoin, can be traded in several other forms, including spot trades, CFDs, ETFs/ETNs or futures.
Only a few traditional brokers allow customers to buy or sell spot crypto. Robinhood was the first mainstream broker to offer Bitcoin (Robinhood Crypto is available in most, but not all, US states). TradeStation also offers trading cryptocurrency, including Bitcoin, as does eToro.
Several online brokers offer cryptocurrencies as CFDs (Contracts for Difference). CFD trading allows you to invest in cryptocurrencies indirectly by betting on their price movements. The advantage of trading CFDs is that brokers are regulated by financial authorities, adding an extra level of safety. CFDs are leveraged products, meaning you only need to put up a smaller deposit, or margin, to gain full exposure to the market - though keep in mind that this, while amplifying your gains when prices go up, can also quickly wipe out your holdings if the market goes down.
Several Exchange Traded Funds (ETFs) or Exchange Traded Notes (ETNs) are also available that can give you various levels of cryptocurrency exposure. Cryptocurrency ETFs/ETNs track a single cryptocurrency or a basket of different crypto tokens, including Bitcoin and others.
You can also trade Bitcoin futures, a feature that is provided by some brokers, like TradeStation or Interactive Brokers. However, this is only recommended for experienced traders, not for beginners. Find out more about futures here.
If you want to start crypto trading, there is also the option of a digital currency asset manager, such as Grayscale Investments. Two of its investment trusts, Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Classic Trust (ETCG) are publicly traded over the counter, which means investors can buy them through many discount brokers.
How to store your crypto?
As with conventional currencies, you need a wallet to store your crypto coins. Some exchanges provide a wallet, but if you want to own your coins independently of the exchange, you need to set up a crypto wallet of your own.
Digital wallets provide a link to your cryptocurrency on the blockchain, the public ledger where the verified transactions are kept. Cryptocurrency wallets generate and store the private key (a form of cryptography) for a user to access their crypto coins or tokens.
The user is given a public key for sending and receiving Bitcoin or other crypto tokens. However, the user will only be able to access the coins deposited into the address with the private key that corresponds to the public key. It's like a lock and your own special key that fits that particular lock. If you lose your private key - a secret set of numbers - you lose access to your money. Also be careful when providing the address of your wallet, because if there is an error, the transfer will be lost.
Cryptocurrency exchanges also provide wallets to account holders. For the less technically savvy user, this could be a more convenient option, as opposed to researching third-party providers and setting up a wallet of their own. It also makes more sense to keep the coins on the platform if you want to buy and sell them regularly.
In the case of the exchange-provided wallet, you’re not in possession of the private key; instead, the platform keeps your coins, just like a bank or other financial institution would. However, if the exchange becomes unavailable for any reason or goes bankrupt, users will have a hard time accessing their coins.
To have full ownership of your coins, you might want to set up your own wallet. If you do so, make sure to check if the wallet of your choice supports the cryptocurrencies you want to trade.
Hot and cold wallets
Crypto wallets can be either hot wallets, connected to the internet; or cold wallets, which are offline (hardware-based or paper-based).
A hot wallet is an online tool, such as a mobile app or a desktop platform, that allows cryptocurrency users to store, send and receive crypto tokens. It’s easy to use and access, but it’s also more vulnerable to being hacked or otherwise compromised, in which case your coins could be lost. Make sure you have several layers of protection around your hot crypto wallet.
Cold wallets are also called offline wallets or hardware wallets - these can be for instance a pendrive or a code printed on a piece of paper. Because they are offline, they are considered a more secure crypto wallet option to keep your Bitcoin or other cryptocurrencies.
How to trade crypto?
Make sure you have sufficient funds set aside for trading, meaning money you can afford to lose. Don't invest all your life savings into crypto trading, and also don't rely on it as an exclusive income source. This helps reduce the emotional burden while trading, which is key for a successful trading strategy.
Beginners should start with only a smaller amount of money to test their skills and to practice. You will need a trading strategy that suits your personality and is in line with the time and effort you are willing to commit to crypto trading. A good strategy will also help you avoid buying and selling on impulse, which often leads to bad decisions.
Risk management and diversification
Risk management is a key aspect of trading. At a minimum, you need to decide how much of your account you are willing to risk on specific trades. To manage this, the easiest solution is to set up a stop-loss order. A stop-loss order means that the exchange will automatically sell your assets and close your position if the price falls below a certain point - protecting you from losing a big chunk of your money in case the price of an asset falls too steeply. Please note that not all crypto exchanges or platforms allow you to set up stop-loss orders.
Diversification is also important. Don't put all your eggs in one basket - meaning one asset or one asset class. Government regulation or changes in blockchain technology can take place any time, so it is not enough to diversify among various coins, because a negative shift in the industry’s fundamentals will likely have a negative impact on all coins.
What influences the crypto market?
Cryptocurrency markets move according to supply and demand, as there is no central authority that issues these digital assets and which can influence their supply on the market. Traditional economic indicators also do not have a direct influence on crypto assets, like GDP growth rates or unemployment data have on fiat currencies.
Crypto markets can be moved by the total number of coins and the rate at which new ones are released. In the case of Bitcoin, coin issues are set to a particular schedule, which of course also influences the price.
High volatility: friend or foe?
Media hype and speculation can also move the highly volatile cryptocurrency market. Large traders’ moves can influence the price of Bitcoin and other digital currencies to a significant extent, making it easier for people to manipulate the price of a particular asset.
It is important to keep an eye on developments in the crypto ecosystem if you want to trade successfully. Upcoming government regulation, new initial coin offerings or blockchain forks can all have an impact.
The cryptocurrency space is very volatile. You can make a lot of profit if you can correctly anticipate price movements. But for that, you have to have talent in sniffing out market sentiment; otherwise, losses can also mount quickly.
It is relatively easy to enter the cryptocurrency market: you can trade spot cryptocurrency 24/7, and the often unregulated landscape of cryptocurrency trading also creates less barriers for entry.
What kind of crypto trading strategies are there?
A trading plan is crucial for any trader to succeed, but even more so for cryptocurrency traders, because the market is so volatile.
How to analyse the market movements?
There are two main ways to analyse the market in order to make sense of (and possibly predict) an asset's price.
Fundamental analysis involves the study of macroeconomic factors, as well as underlying financial and business aspects - in the case of cryptocurrencies, this includes the latest developments in computer science (particularly blockchain technology) and government regulation.
Fundamental analysis is less useful for the crypto market because it is so much driven by speculation.
Technical analysis focuses on the price movement of a cryptocurrency and its historical patterns in order to predict its future direction.
Strategies to consider
Once you have analysed price movements and done your market research, here are some of the strategies you should consider when starting buying and selling cryptocurrencies.
Day trading generally means entering and exiting trading positions within one day to make a profit on daily price movements. This is a short-term strategy that involves intensive monitoring of your positions throughout the day, as you have to react to any possible changes very quickly.
Swing trading is a longer-term strategy, which involves a trader holding a position for longer than one day but less than a month. Swing traders try to benefit from short-term volatility waves spanning a few weeks, but are not concerned with longer trends.
Trend trading (or position trading) means waiting for even longer, perhaps several months, to make the most of an upward trend, while ignoring smaller fluctuations in the price.
Traders who follow a scalping strategy open and close positions in a matter of seconds. They usually hold larger amounts of crypto to make the most of these often very small profit percentages. This strategy is only for experienced investors; beginners may find themselves overwhelmed by the stress arising from high-speed price movements.
One popular strategy in the cryptocurrency community is "HODL", which basically means holding on to the currency for the long term. The name comes from a meme-inspired intentional misspelling of the word "hold". This approach could work for those who prefer "hands-off" investing without the need to worry about short-term price fluctuations.
Another passive strategy is index investing. This is done via “index funds” that track the value of several investable digital assets, just like e.g. the S&P 500 index tracks the performance of top US stocks. Here, investors seek to profit from the price movement of crypto assets that are included in a specific index.