Key findings
Cryptocurrency trading is similar to betting on the price changes of digital assets like Bitcoin (BTC) and Ether (ETH), hoping to buy low and sell high.
Most cryptocurrency transactions are done on a cryptocurrency exchange.
Understanding that cryptocurrencies are highly volatile and knowing technical and fundamental analysis is important for success.
Cryptocurrency trading is risky and traders should only invest what they can afford to lose.
What is cryptocurrency trading?
At its core, cryptocurrency trading involves buying and selling cryptocurrencies, just like any other type of trading you're familiar with, such as stocks, commodities, and currencies. Traders try to make money by guessing the price movements of volatile digital assets. They exchange fiat money or other digital assets for cryptocurrencies on a cryptocurrency exchange, typically buying when the cryptocurrency's value is low and selling when it peaks.
Trading, as we understand it in the form of stock markets, has been around since the 17th century, but cryptocurrency trading began with Bitcoin in 2009, the first and still the most well-known cryptocurrency. Since then, many other cryptocurrencies with unique features have emerged and are being traded.
Before entering the world of cryptocurrency trading, it is important to understand the assets and technologies involved and be clear about the risks involved. The volatility and largely unregulated nature of cryptocurrency markets make cryptocurrency trading quite different from trading stocks or commodities.
This guide will explain the basics of cryptocurrency trading and the different cryptocurrency trading strategies. It will also introduce cryptocurrency trading platforms and apps, the components of a trade, trading styles, and the role of technical and fundamental analysis in trading strategy.
Stock Trading vs Cryptocurrency Trading
Trading stocks is like investing in established companies, just as you would invest money in a well-known restaurant chain. You can expect steady growth and reliable profits.
On the other hand, cryptocurrency trading is like investing in a trendy new pop-up restaurant. It's riskier and more volatile, but also exciting and can yield huge profits quickly. Cryptocurrency prices have the same potential to rise or fall quickly as emerging ones, which can become the next big thing or disappear overnight.
Below is a table summarizing the differences between stock and cryptocurrency trading:
How to trade cryptocurrencies for beginners
There are several ways to trade and invest in cryptocurrencies. This cryptocurrency trading guide focuses on how to get started trading cryptocurrencies through a centralized cryptocurrency exchange.
So how do you start trading cryptocurrencies? First, you need to be aware of local regulations and tax laws, as they can vary greatly around the world. From there, you can follow these steps.
These are the basic steps on how to start trading cryptocurrencies.
Basic steps in cryptocurrency trading
Step 1: Register for a cryptocurrency exchange account
It is essential to choose a cryptocurrency trading platform carefully. The most popular type of trading platform is a cryptocurrency exchange. Traders usually check the reputation, compliance, security, features, and cryptocurrencies listed on these exchanges.
Opening a cryptocurrency exchange account requires personal information and passing Know Your Customer (KYC) verification. KYC in cryptocurrency means verifying your identity by providing personal information to comply with regulations. Accounts should be set up with strong passwords, two-factor authentication (2FA), and other available measures.
Step 2: Add funds to an account
Funds can usually be added to a cryptocurrency exchange account via bank transfer, debit or credit card, or by transferring a cryptocurrency balance from an existing cryptocurrency wallet. Once you have funds, it’s as easy as purchasing certain cryptocurrencies and holding them on the exchange until their price changes enough for you to sell them, hopefully for a profit.
Step 3: Select a cryptocurrency to trade
Many experienced cryptocurrency traders carefully choose a cryptocurrency based on technical and fundamental analysis. Think of cryptocurrency trading like buying a car. Technical analysis is like checking the car’s speed, engine performance, and mileage to predict how it will perform in the future, while fundamental analysis is like looking at the car’s brand, reviews, and safety features to determine its overall reliability and value.
While both approaches help determine whether the purchase is worthwhile, they focus on different factors: performance data and the intrinsic value of the car. Now, let’s understand these differences in the context of cryptocurrencies:
Technical analysis: With cryptocurrency technical analysis, traders look at past price movements, trading volumes, and other market data to identify patterns and trends. They use charts and technical indicators, such as moving averages and candlestick charts, to predict future price movements. Their goal is to make short-term trading decisions based on trends identified through charts and market sentiment.
Fundamental Analysis: When traders perform fundamental analysis of cryptocurrencies, they evaluate the asset’s intrinsic value (i.e., the actual value of an asset based on its fundamentals) by looking at factors such as the development team, practical uses, the technology behind it, market adoption, partnerships, regulatory compliance, and the overall health of the blockchain. Their goal is to determine the cryptocurrency’s long-term potential and strength as an investment.
While many traders choose to speculate on
$2,622.76Others prefer altcoins or newer tokens. These smaller market cap coins can be even riskier and more volatile, making technical analysis less reliable, but they can also offer higher returns.
Step 4: Make an exchange
To make a first trade or purchase, a currency pair (e.g. USD/BTC) needs to be selected, meaning fiat US dollars are exchanged for bitcoins. Traders must also choose the order type (either a market order or a limit order) and the amount before confirming the order.
Step 5: Storing Cryptocurrency
Traders hold their cryptocurrency funds for immediate trading on the exchange. Cryptocurrency balances that are held for a longer period of time are stored more securely in a cryptocurrency wallet, with a hardware device being the safest option.
Cryptocurrency Trading Basics
Cryptocurrency prices are incredibly volatile and determined by supply, demand, market sentiment, and other factors. There are no government or third-party controls that provide stability or consumer protection.
Therefore, beginners need to understand how crypto asset markets work in order to safely navigate cryptocurrency trading. Cryptocurrency trading can be as simple as cashing out a fiat currency like the US dollar or using multiple trading pairs to grow an investment portfolio. As trading volume and complexity increases, so does a trader’s risk exposure.