Most people know what cryptocurrency is, but do you know how it is traded? Cryptocurrency is unique, and not everyone knows how to trade correctly. In this blog post, we’ll explore the various ways you can trade cryptocurrency and some other tips and tricks related to trading. Stay tuned!
Many people trade cryptocurrency for various reasons. Some people trade for profit, others to invest in a project they believe in, and some trade to acquire more crypto assets. No matter your reason for trading cryptocurrencies, you need to know how it is done.
[ez-toc]
What is Cryptocurrency Trading?
Cryptocurrency trading is the process of buying and selling cryptocurrencies. They are bought and sold on various exchanges worldwide. As a result, different cryptocurrencies’ prices constantly fluctuate in response to global events and supply and demand.
Crypto trading is similar to, but also a little different from, stock trading. However, we will later explore some key differences between cryptocurrency trading and stock trading.
How to Trade Cryptocurrency?
Now that we know what cryptocurrency trading is, let’s look at how it is done. There are a few different ways to trade cryptocurrency, each with its pros and cons.
Trading Crypto Via Exchanges
The most common way to trade virtual assets is through cryptocurrency exchanges- a trading platform. Exchanges are online platforms that allow you to buy and sell cryptocurrency. Many different exchanges are available, each with its listing of supported cryptocurrencies and features.
The two most popular exchanges are Coinbase and Binance. Still, there are also many cryptocurrency exchanges to choose from. If you are looking to buy and sell your cryptos via a cryptocurrency exchange, there are a few things you should take into account:
- The first thing to consider is the exchange rate. Make sure to compare the rates of different exchanges before trading.
- Another thing to consider is the fees charged by the exchange. For example, some exchanges charge a flat fee for all transactions, while others charge a percentage of the total transaction value.
- You should also consider the security of the exchange. Make sure to check whether the exchange has implemented adequate security measures.
- When selecting an exchange, do your research to ensure that the exchange is reputable and has a good track record.
Cryptocurrency Trading steps
- Choose an exchange: As we mentioned, there are many exchanges, but you need to find an exchange that meets your needs.
- Create an account: Once you have selected an exchange, you will need to create an account. It is usually a simple process requiring you to provide your email address and create a password.
- KYC: Most exchanges will require you to undergo a Know-Your-Customer (KYC) process. That usually involves providing a government-issued ID, such as a passport or driver’s license.
- Deposit funds: Once your account has been created and verified, you will need to deposit funds. You can usually deposit funds (FIAT) via bank transfer, credit/debit card, or even PayPal in some cases.
- Start trading: After you have added funds to your account, you can start buying and selling crypto assets. To do this, you will need to place buy or sell orders on the exchange.
- Withdraw your funds: once you have finished trading, you can withdraw your funds from the exchange. Again, this can usually be done via bank transfer or credit/debit card.
Direct Trading
Another way to trade cryptocurrencies is through direct trading. Direct trading involves trading cryptocurrencies directly with another person without using an exchange, either in person or online. Direct trading has a few advantages over trading on an exchange. For example, in person trading allows you to trade directly with another person to avoid some fees associated with exchanges.
However, direct trading also has a few disadvantages. First, finding another person who wants to trade crypto with you can be difficult. Second, you are not protected by the same regulations as you would be on an exchange, so there is a higher risk of being scammed.
Mining
Mining is another way to acquire cryptocurrency. When you mine cryptocurrency, you use your computer to verify transactions on the blockchain. And are rewarded with cryptocurrency for your efforts. Mining is a great way to acquire cryptocurrency if you have the resources and expertise.
CFD (Contract for Difference) Trading on Cryptocurrencies
A Contract for Difference (CFD) is a type of derivative trading that allows you to speculate on the price movement of cryptocurrencies without actually owning them. With CFD, you can take a long or short position, depending on whether you think the cryptocurrency price will go up or down.
Some of the benefits of CFD trading include:
- Leverage: With it, you can trade with leverage, which means you can open a position with less capital than you would need to buy the cryptocurrency outright. That allows you to potentially make a more significant profit (or loss) on your trade.
- Shorting: It also allows you to short sell, which means you can bet on the price of a cryptocurrency going down. That can be useful if you think the financial markets are about to crash.
How do CFDs Work?
CFDs are a type of derivative, meanings their value comes from a substantive asset. In the case of crypto CFDs, the substantive asset is the cryptocurrency’s price.
When you trade a CFD on a cryptocurrency, you are speculating on the price movement of that currency. You can take a long position (betting that the price will go up) or a short position (betting that the price will go down). You will profit if the crypto price moves in the direction you predicted. If it does not you will make a loss.
Your profit or loss is calculated by taking the difference between the price you opened your position and the price you closed it at, multiplied by your position size. For example, let’s say you open a long position on Bitcoin for $10,000 with a position size of 1 BTC. The price of Bitcoin rises to $11,000, and you close your position. Your profit would be: ($11,000-$10,000) x 1 BTC = $1,000
If the price of Bitcoin had fallen to $9,000 when you closed your position, your loss would have been: ($9,000-$10,000) x 1 BTC = -$1,000. However, CFD trading is also not legal in many countries. So, check your local laws and regulations before you start trading.
How does Cryptocurrency Trading Work?
Crypto trading works similarly to Forex or stock trading. You buy a cryptocurrency when the price is low and sell it when it goes up. However, there are some key differences between cryptocurrency trading and other forms of trading, including:
- Volatility: The cryptocurrency market is much more volatile than other asset classes, which means they can experience significant price movements in a short space of time. That can be both good and bad, as it can lead to large profits (or losses) in a short period.
- Lack of regulation: Cryptocurrencies are not regulated by any government or financial authority, which makes them a risky investment. But also on the brighter side, it offers huge opportunities to make profits, making it a good investment.
What is the Spread in Crypto Trading?
The spread is the difference between a security or asset’s buy and sell prices. When you trade cryptocurrencies, you’ll need to consider the spread when you open and close trades.
For example, let’s say the current price of Bitcoin is $10,000, and the spread is $100. That means you’ll need to pay $100 more than the current price if you want to buy Bitcoin, and you’ll receive $100 less than the current price if you want to sell Bitcoin.
The spread size can vary depending on the cryptocurrency you’re trading and your exchange. It’s essential to compare the spread of different exchanges before you begin trading, as it can significantly impact your profits (or losses).
What is Leverage in Cryptocurrency Trading?
Leverage is a term you will often hear in crypto trading. But what exactly is it? Leverage is a way of using borrowed money to magnify your profits (or losses). For example, let’s say you’re trading with a leverage of 1:2. That means that for every $1 you invest, the broker will loan you $2. So if you make a profit of $10, your total gain would be $20 (including the $2 you borrowed).
However, leverage can also magnify your losses. So if you make $10, your total loss would be $20 (including the $2 borrowed). Leverage can be a valuable tool, but it’s also very risky. So make sure you understand the risks before you begin trading with leverage.
In simple terms, leverage is using borrowed capital to gain a more prominent exposure to an asset. You can do this to increase potential profits, but it also comes with the risk of amplified losses.
What is Margin Cryptocurrency Trading?
Margin cryptocurrency trading is a type of trading where you trade with a margin account. It means you can trade with more money than you have in your trading account.
For example, let’s say you have a margin account with a balance of $1,000. That means that you can trade for up to $2,000. So if you make a $500 profit, your total gain would be $1,000 (including the $500 you borrowed). However, margin trading also comes with the risk of amplified losses. So if you make a loss of $500, your total loss would be $1,000 (including the $500 that you borrowed).
Cryptocurrency margin trading is risky, but it can be profitable if you know what you’re doing. However, if you’re new to margin trading, learning the basics is essential before you trade with any real money.
The margin size can vary depending on the cryptocurrency you’re trading and your exchange. Therefore, it’s essential to compare the margin of different exchanges before you start trading, as it can significantly impact your profits (or losses).
What is a Pip in cryptocurrency trading?
A pip is the smallest unit of measurement in crypto trading. A pip usually equals one-hundredth of a percent or 0.01%. For example, if the price of Bitcoin increases by one pip, that would be equivalent to a 0.01% increase. Pips are used to measure price changes in trading. They are also used to calculate profits and losses. When you enter a trade, you will see the number of pips that you stand to gain or lose.
Pip values can vary depending on the cryptocurrency that you are trading. For example, a one pip move in Bitcoin is worth more than a one pip move in Ethereum.
To calculate your profits or losses in pips, you need to know the pip value for the cryptocurrency you are trading. You can find this information on the cryptocurrency trading platform. In general, you will make more money if the price of the cryptocurrency you are trading moves in your favor by a larger number of pips. However, you will incur greater losses if the price moves against you with more pips.
Pip values can also vary depending on the time frame that you are trading. For example, a one pip move on a 1-minute chart is worth less than a one pip move on a 1-hour chart.
When you start to trade cryptocurrencies, it is essential to trade in a time frame that you are comfortable with. Then, as you become more experienced, you can begin to trade on shorter time frames and take advantage of smaller price movements.
Pips are an essential part of cryptocurrency trading. Understanding how they work can better manage your risks and maximize your profits.
Styles of Crypto Trading
There are six most crucial trading styles that you should know about:
Day Trading
It is perhaps the most well-known style of crypto trading. Day traders hold their positions for a short period, usually no longer than a day. They profit by taking advantage of small price movements in the cryptocurrency market.
Day trading can be a very profitable crypto trading strategy, but it also comes with a higher level of risk. Day traders need to be able to identify opportunities quickly and act on them immediately. They also need the discipline to stick to their trading plan and not let emotions get in the way.
Swing Trading
Swing is a style of trading that attempts to capture profits over days or weeks. Swing traders hold their positions for longer than a day, but not as long as trend traders.
Swing trading is a popular trading strategy for many cryptocurrency traders as it balances short-term gains and long-term stability. Swing traders usually set up their positions at the beginning of a trend and hold onto them until the trend reverses.
Trend Trading
Trend trading is a style of trading that tries to take advantage of long-term price trends. Trend traders hold their positions for extended periods, usually months or even years.
Trend trading is a popular strategy for many investors as it can offer substantial profits if you can ride a long-term trend. However, it is also a risky strategy as you are exposed to the possibility of significant losses if the trend reverses.
Position Trading
Position trading is a style of trading that seeks to profit from the market’s long-term direction. Position traders hold their positions for extended periods, usually months or even years.
Position trading is a popular strategy for many investors because you can substantially profit if you correctly predict the financial market’s long-term direction. However, it is also a risky strategy as you are exposed to the possibility of significant losses if your prediction is wrong.
Scalping
Scalping is a style of trading that seeks to profit from small price movements in the market. Scalpers hold their positions for a short time. They make their profit by taking advantage of small price movements in the market.
Scalping is a popular strategy for many day traders as it offers the opportunity to make quick profits. However, it is also a risky strategy as you are exposed to the possibility of significant losses if the price moves against you.
News Trading
It is a type of trading based on the release of economic news. News trading generally refers to trading the markets around major economic releases. Major economic releases can move the markets and create profitable opportunities to trade cryptocurrencies. The pros of news trading are that it can be a very beneficial way to trade the markets, and it can also be a relatively easy way to trade. The cons of news trading are that it can be difficult and it is also very time-consuming.
Understanding Bull and Bear Markets for Cryptocurrency Trading
As a cryptocurrency trader, it is essential to understand the difference between a bull and a bear market. Each one can present different opportunities and challenges.
Bull Market
In a bull market, prices rise, and trader sentiment is generally optimistic. Therefore, it is typically a good time to buy cryptocurrencies (if you are at the bull market’s beginning) as you expect prices to continue to rise. However, it is vital to be aware of the risks of a bull market as well, as prices can sometimes rise too high, and a correction can follow.
Bear Market
In a bear market, prices fall, and the sentiment is generally negative. Therefore, it can be an excellent time to sell digital currencies (if you are at the beginning of a bear market), as you expect prices to continue to fall. However, bear markets are also associated with a great time to buy because you can buy at a discount.
To make money trading cryptocurrency, you must take advantage of both bull and bear markets.
Crypto Trading vs. Stock Trading
When it comes to investing, there are a lot of options out there. But two of the most popular choices are cryptocurrency trading and stock trading. So, which one is better?
Well, that depends on a few factors. For example, trading crypto might be better if you’re looking for short-term gains. However, stock trading might be better if you seek long-term stability.
Another factor for trading crypto to consider is the risk as it is regarded as a more risky investment than stock trading. That is because the cryptocurrency market is more volatile, and prices fluctuate much more. However, this also means the potential for more significant gains. So, which one is better for you? It depends on your individual goals and circumstances.
How are Crypto Sales Taxed?
If you are a crypto trader, one of the most important things you need to be careful about is the taxes. Cryptocurrencies are taxed in various ways depending on the country and type of currency involved. In the United States, for example, cryptocurrency is considered property and is subject to capital gains taxes. In other countries, like China, cryptocurrency is not recognized as legal tender and is instead treated as a commodity. That means that cryptocurrency sales in China are subject to value-added taxes.
When paying taxes on cryptocurrency sales, keeping good records of all transactions is vital. Doing so will help ensure that you accurately report your income and pay the correct amount of tax. Good record keeping will also come in handy if you ever need to file a dispute with the IRS or other tax authorities.
Tips for Cryptocurrency Trading
There are a few things that every crypto trader should keep in mind to be a successful trader. Some of the basic ones are:
Have a Clear Purpose for Trading
It is always good to have a clear purpose when you start trading.
- Are you looking to make short-term gains, or are you in it for the long haul? That will help you determine what strategy to use and when to enter and exit the market.
- Can you handle the losses?
- Are you trading for fun or trying to make a living off it?
These are a few essential questions that need to be answered before you trade.
Do Not be Greedy and Take your Wins
It is essential to take your profits when you can. The market is constantly changing, and what goes up can come crashing quickly. So, taking your profits when you can and not being greedy is essential. However, this does not mean that you should sell everything as soon as you make a profit. You still need to have a clear purpose and strategy.
Have Patience And do Not Fall for FOMO
The cryptocurrency market is very volatile, and prices can fluctuate a lot. That can be frustrating at times, but it is essential to have patience. Do not make rash decisions and do not listen to FOMO (fear of missing out). Just because the prices are going up does not mean you need to buy everything. There will always be another opportunity to buy at a lower price.
Diversify your Portfolio
When it comes to investing, it is always important to diversify your portfolio. That helps to mitigate risk and ensure that you are not putting all of your eggs in one basket. The same goes for cryptocurrency trading. It is essential to diversify your portfolio by investing in a variety of different coins. This way, you will not lose everything if one coin goes down in value.
Be Careful With Leverage
Leverage can be a double-edged sword. It can help you make big profits but also lead to big losses. So, be careful with leverage and only use it when you are confident that you know what you are doing.
Learn to Manage Risks
Risk management is one of the most important things you need to learn to be a successful trader. You need to know how to manage your risks to protect your capital. There are a variety of different ways to do this. Still, some of the primary methods include stop-losses and limit orders.
Keep your Emotions in Check
Emotions are probably the most important thing on this list. Emotions can ruin your trading strategy and lead to significant losses. So, keeping your emotions in check is crucial, and not letting them influence your decisions.
Do Not Catch the Falling Knife
It is a prevalent mistake that a lot of cryptocurrency traders make. They see a coin decreasing in value and think they can make a quick profit by buying it. However, this is usually not the case, and they lose money. So, waiting for the right opportunity is essential.
Understand Long-Term Investments
When trading cryptocurrency, it is crucial to understand that you are investing not just in a coin but in blockchain technology. So, you need to have a long-term outlook and not just focus on the short-term gains.
Also, know at least cryptocurrency’s basics before starting your trading journey.
Conclusion
Cryptocurrency trading can be an engaging and profitable activity, but it is essential to remember that it is also risky. So, you need to be careful and not let your emotions get the best of you. Try to learn as much as possible before starting to trade with small amounts. If you can do this, you will be well to becoming a successful trader.
