Cryptocurrencies are relatively new assets in the financial market. Since 2017 when the bitcoin boom began, thousands of coins have been created; the daily cryptocurrency market volume has now jumped to over $1 trillion. Just like forex trading, new traders need to grasp the basics of cryptocurrency trading to make profits.
A brief history of cryptocurrencies and trading
In 2009, the first bitcoin was created and used in a local transaction. Created by Satoshi Nakamoto (pseudonym), the coin didn’t receive much interest globally until 2013 when the demand shot up and forced its value up. After that, many creators and investors began to use the blockchain protocol to create new coins. Today, coins called altcoins (alternative to bitcoin) are traded across the market; the most popular being Ethereum, Litecoin, Dogecoin etc.
The original concept for crypto trading was to provide a means of exchange in a decentralized manner for peer-to-peer transactions. However, the rising demand and adoption of Bitcoin across the world created the price fluctuations that made the early cryptocurrencies tradable. By 2016, cryptocurrency CFDs began to appear on retail forex platforms and by 2017, some of today’s crypto exchanges came into being.
How Crypto Trading Works
Cryptocurrency trading, also called crypto trading, is the buying and selling of cryptocurrencies with the aim of turning a profit from the round trip transaction. Cryptocurrencies are traded in pairs. These pairs may be a crypto-fiat currency pairing (such as BTCUSD or ETHUSD), or it could be a crypto-crypto pair (ETHBTC or ADABTC).
Cryptocurrencies are traded in the decentralized exchanges as the native tokens, or they can be traded at the online retail forex platforms as contracts for difference (CFD) derivatives. Cryptocurrency trading goes on all day, every day and is the only market that operates on a 24/7 basis. Altcoins are only made available for trading via exchange listing, after the coin has been launched, passed through an ICO process and has met listing requirements.
There are two approaches to crypto trading.
- Buying and holding for appreciation: In this stage, the trader simply buys the base crypto coin using fiat currency or any of the main deposit cryptocurrencies. Due to the issues many exchanges have operating fiat bank accounts, Bitcoin and Ethereum have assumed a place as deposit cryptocurrencies. Any native tokens purchased in an exchange trade are stored in the exchange wallets and can be sold again when its value increases, making some profits for the trader.
If your goal is simply to buy and hold, then the first approach is enough. However, if you want to trade base and altcoins, the next stage is necessary.
- Trading on a retail forex platform: This form of trading involves the CFDs on the cryptos and not the native tokens themselves. Fiat currency options form the mainstay of deposits, though a few have started to add BTC and ETH to their deposit options. Trading crypto CFDs is a leveraged activity and allows the trader to go long to benefit from rising prices, or to short the crypto pair to profit when the prices are falling.
Things You Need to Trade Cryptos
Before trading, here are the important things to note and have:
- Crypto wallet: A crypto wallet is a software that encrypts and stores your cryptocoins. There are numerous wallets available but you have to find one that offers layers of security, low fees and easy access. Transactions using the blockchain protocol cannot be reversed so, keep your wallet safe by safeguarding the 12-word recovery phrase, your private key and activating extra account login security using 2-factor Authentication. You will need a wallet to store your crypto coins if you want to use cryptos as your deposit method. You can then transfer from your wallet to the exchange wallet, from where your account will be credited.
- Register on an exchange: There are many popular crypto exchanges. This is the option to use if you prefer to trade the native crypto tokens.
- Forex Brokers: Some brokers for forex market also offer cryptocurrency trading, where cryptos are traded as CFDs, If this is your preferred option, open a retail brokerage account with an FX broker that offers crypto trading.
Account verification on exchanges is only required if you are trading on a European exchange, a US exchange or if you want your transaction limits to be lifted.
There are numerous cryptocurrency pairs to trade in the crypto market. These pairs could be crypto/fiat or crypto/crypto. The most common and popular ones are: BTC/USD, LTC/BTC, ETH/BTC, ADA/BTC, ETH/USD etc.
Common trading terms
On your exchange, you can either buy coins or move coins from your wallet to trade. Select your preferred crypto pair and execute a trading order. The types of trading orders are:
- Market order: A market order is an instruction to the broker to buy or sell a crypto pair at the current price. Market orders are executed instantly, and when trading on exchanges, slippage is not usually an issue.
- Stop order: A stop order works like a stop loss in forex. It is used to exit and minimize losses in a trade when it enters a loss. When buying or selling, the stop order is set to above or below the current price respectively.
- Limit order: A limit order allows traders to set a cheaper price for order execution. A limit order sets a lower entry price than the market price for a long trade, and a higher entry price for a short trade. This helps to minimize losses and maximize profits. Simply put, the trader sets a price at which he is willing to buy or sell and the trade is executed when the price is reached.
- Fill or Kill order: This order is only valid if the trade order size can be fulfilled 100%. Any partial execution is null and will not be executed.
- Immediate or cancel order: Similarly, this order must be executed instantly, or not at all. Speed is essential to the execution of this order.
In crypto trading, fundamental and price analysis is important. Some of the parameters used for analysis include; price, daily and weekly price changes, daily and weekly volumes, supply and market cap as well as trends. Once again, indicators play a very important role in finding good entry and exit points. Unlike the forex market, the crypto market is not affected by sudden political or economic news. This makes it easier for analysis to be done. Advanced analysis requires knowledge of more indicators and charts.
All exchanges allow traders to carry out their trading on their proprietary platforms. These platforms are equipped with tools for trading and analysis. Other forex brokers that offer crypto assets also provide their own platforms for trading. Some even allow traders to use the MT4 and MT5 trading platforms.
Guidelines for trading
- Protect your capital: Your first responsibility is to protect your capital. Acquire all the knowledge that you can and only take trades with good reward to risk ratio. Only invest what you can comfortably lose, and do not expect huge profits immediately. Practice with demo accounts until you build confidence and knowledge.
- Your broker matters: The broker you choose will be a major factor in your success or failure as a crypto trader. Find brokers with a valid license, regulated by known bodies, multiple security layers, fast execution and customer support.
- Avoid trading on emotions: Just like forex trading, an unspoken rule in crypto trading is to take profits as they come. Some traders allow the fear of missing out on good deals to cost them their profits. Only take trades with sound analysis and exit when you have profits.
- Stay ahead of volatility: The crypto market is unregulated. This alone creates chances for massive gains or losses. You have to diversify your portfolio by keeping different coins to minimize the risk when crashes happen.
- Be careful with new coins: Every new coin is touted to grow and become more than bitcoin but in reality, only a few can boast of good prices even after three years. Before investing in a coin, take time to check out such things as the community and drive.