Cryptocurrency Trading – The Ultimate Guide
Cryptocurrency trading has become a popular way of growing money. The relatively new niche in the financial market allows users to grow their money quickly through trading digital assets. This article offers an easy-to-understand cryptocurrency trading guide, suitable for users of all experiences – including beginners.
Understanding Cryptocurrency Trading
Cryptocurrency trading involves buying and selling digital tokens through exchanges, or speculating on the price of crypto assets through a contract for difference (CFD) trading accounts.
The crypto market operates in a slightly different way compared to other markets. First, it is dealing with decentralized assets, rather centralized assets. It operates through a system of peer-to-peer transaction validation rather than a central server. The decentralized network supports the creation, storing, and transfer of digital assets. This means that the crypto market behavior is influenced by individual users rather than the actions of centralized authority. The prices changed based on the interplay of demand and supply. This feature partly explains why the crypto market can be very volatile. Any action or information that changes the opinion of the general market users on the specific token affects the prices of these assets. Such factors could be anything from blockchain forks to breaking news and government regulations.
The volatility of the cryptocurrency asset may sound a discouraging factor to investors, yet it is the same reason digital assets can earn investors quick money. For example, Bitcoin, the leading cryptocurrency in terms of market cap, sold at $28,900 in January 2021. Just four months later, in April of the same year, the digital asset hit a high of $68,500 – translating to a 120% increase. Assume you bought the asset at the beginning of the year and sold it at the pick of the April bull run, you would have more than doubled your investment. This feature makes bitcoin more attractive to investors, especially those who are eyeing high returns within a short time.
Cryptocurrency CFD Trading
CFD trading involves betting on the price of the cryptocurrency. It is a contract in which traders agree to exchange the difference in the crypto prices from when the position first opens to when it closes. In CFD, you do not take ownership of the cryptocurrency, rather you simply speculate on the market price. If you open a long position and the crypto increase in value, you will make profits. However, if the price falls, you make losses. On the other hand, if you open a short position, you make profits when the prices go down and losses when the prices go up.
For example, if you believe that the price of Binance Coin (BNB) – the token for the Binance network – is going to fall in value, and decide to go short by selling BNB against USD. The current market price is 300, and you buy 5 contracts (each equivalent to 1 BNB) to open the position at this price. If the prediction turns out correct, and the prices fall against the USD, your trade would profit. Let us assume that the new market price is 200, you can close the position and redeem your profit by buying 5 contracts to close the position at a buy price of 205 – the additional 5 above the market is due to the spread. Because the market has moved 90 points in your favor, your profit will be 5 × 95 = $475. However, if your prediction turns out incorrect, and the value of BNB rose against the USD, the position will close at a loss. Let us say the market is in a bull run and you decide to exit when the market has risen by 50 points to 300. This means you will buy back the five contracts at 352, which translates to a loss of 5 × 52 = $260.
Crypto traders can also use cryptocurrency options trading to reduce risk or increase market exposure. Crypto options involve the use of “derivative” financial instruments that derives value from another asset – the underlying cryptocurrency in this case.
Buying and Selling Cryptocurrency
An alternative approach you can use to invest in cryptocurrency is buying assets through crypto exchanges. This approach means taking ownership of a portion of the digital currency, to hold it and profit if it later increases in value.
Exchanges are online cryptocurrency brokers that allow users to buy and sell cryptocurrencies. These platforms work similar to stockbrokers – giving users tools to trade digital currencies. The best cryptocurrency platform allows easy buying and selling of digital assets that a user wants with low fees and strong security features.
Day trading and HODLing are some of the common cryptocurrency investment methods that involve buying actual digital assets.
Day trading involves buying and selling digital tokens on a daily basis, to make profits on price swings. Day trading can be a great way to make money online, considering the volatility of digital assets. Cryptocurrency prices can swing significantly in minutes. You can earn as high as 5% to 10% of profit in a day. Day traders buy crypto tokens and sell them when they reach their speculated targets to take profits within a day. Day trading requires a lot of carefulness since you can easily lose your money quickly. It may require in-depth knowledge of technical analysis as well as when to enter and exit a trade, to at least minimize the risk of losses. However, the use of support tools such as news services and market analysis tools can help even beginners to have a successful day trading experience. Day trading may also demand a lot of time as the users have to be aware of news and other events in the crypto space.
HODLing is a long-term investment in the cryptocurrency space. The acronym stands for hold on for your dear life; however, it involves buying digital assets and holding them for a long time (a year or more). HODLers hope to buy crypto at a low price and sell them later at a higher price. HODLing is relatively easier compared to day trading. It is less risky and does not require much knowledge. You only need to know, which cryptocurrency you want to invest in and how to buy and sell it. HODLing gives you enough time to research the token you want to invest in before committing your tokens to the project. You should only invest in a digital coin when you are comfortable with the functionality and the technology behind it. Long-term investment can earn massive profits. For example, in 2021 alone, the cryptocurrency had about a 68% increase in price. Other altcoins even did much better. Cardano went up with more than 1000%, Dogecoin 10,000%, and HEX 100,000%. Contrary, other projects also failed along the way leading to the loss of investors’ funds. Therefore, it is important to do proper research to help you make a good long-term investment in crypto. You can use third-party projects that offer crypto research resources to help you understand the market and make good investment decisions.
Buying crypto tokens will require you to have a cryptocurrency wallet and an account with a cryptocurrency exchange. Crypto wallets are digital wallets that allow you to receive and manage your digital tokens.
Every digital wallet has two types of keys, the public key, and the private key. The public key is the address that you can share with others to use in sending you digital tokens. In an email messaging setup, it would be like an email address. You can share this address with anyone you trust – there is little risk when you share it. Private Key, on the other hand, is what allows you to access your digital coins and send them to other wallets. This key should be kept secret since anyone who has it can easily transfer tokens from your wallet anytime.
The crypto wallet comes in two types: custodial and non-custodial. The main difference between these wallets is on who controls the private keys.
For custodial wallet, the platform that offers the wallet keeps the private key and provide backup and security for the users’ tokens. Custodians strive to offer users the most convenient way to store their digital assets. Some users may be looking for secure and customer-friendly solutions, which give easy access to their assets – at the click of a button. Custodial wallets have a few exclusive features that give them an advantage over non-custodial wallets. For example, Custodial wallets enable backup and recovery possibilities; therefore, even if you lose your data, you can request a third party for help to regain the wallet. While custodial wallets lessen the responsibility of maintaining the wallet, it requires trust in the third-party custodian that keeps the funds, usually cryptocurrency exchange. Any mistake or attack on the wallet service provider may lead to the loss of the users’ funds. Examples of Custodial wallets are MetaMask, Binance, Blockchain.com, BitMex, Bitgo, Coinbase, and Free Wallet.
On the contrary, with non-custodial wallets, users have sole control of their private keys. Therefore, as a user, you have full control of your funds. Most non-custodial wallets are hard wallets – physical devices that offer cold storage (offline storage). Therefore, they are less vulnerable to hacks compared to the hot custodial wallets (online storage wallets). Additionally, the transactions involving non-custodial wallets are fast – almost instant. Examples of non-custodial wallets are Trezor one, Trezor T, Exodus, Ledger Nano X, Ledger Nano S, Electrum, and Zengo.
A Step-by-step Guide to Cryptocurrency Trading
- Deciding on how you want to trade crypto
You can choose to trade crypto CFDs or buy the tokens. You can also choose long-term trading (HODLing) or short-term trading such as day trading. Factors to consider when choosing the method of trading include risk involved, the capital needed, skills required, and time.
If you are looking to earn a quick profit, you will go for day trading. As a day trader, you must spend more time and resources analyzing the market to get the details of the constant market movements correctly. You need to scan the market actions and news and make quick decisions that will allow you to capitalize on the short-term opportunities that arise. Such a task may be difficult to conduct manually. However, you can use automated platforms such as Algory.
Alternatively, you can opt for HODLing crypto if you are not in a hurry of making profits from your investment. This strategy has lower risk compared to trading. However, you must wait for quite some time to get your profit. Additionally, it might not be as highly profitable as trading. For example, while Bitcoin gained an average of 68% in 2021, it experiences some huge market runs within the year that surpasses the annual average price change. For example, the digital asset experienced a bull run during the first quarter, in which the price of the token more than doubled over four months. The opportunities brought by such market runs may not benefit HODLers since they cannot leverage the short-term price swings.
- Open an account
Buying cryptocurrency on exchanges will require you to open an account with an exchange and connect a functional digital wallet to receive and store your tokens. Most exchanges have an inbuilt wallet, hence making the whole process a little bit simpler. You can comfortably use these wallets when you are day trading, and not dealing with a huge amount of tokens. Exchange wallets will ensure that your transactions reflect in your wallet faster, enabling you to quickly enter and exit positions. However, if you are a seasoned trader who is investing a huge amount of tokens, then cold storage becomes the safest option. Such wallets are offline hence more secure.
Opening a position when trading cryptocurrency is much easier than when buying crypto assets. You do not need an account with any exchange or a digital wallet to trade crypto CFD. All you need is an account with a leveraged trading provider. In most cases, you will be able to open an account within minutes.
If you are using an exchange, you must ensure that the platform you have opted for is legit. Popular and reputable platforms such as Coinbase, Binance, KuCoin, eToro, and Kraken are less risky compared to less known platforms.
Other factors you should consider when choosing a crypto exchange include:
- Jurisdiction – does the platform support the country or state you want to operate from?
- Ease-of-use – how familiar are you with the platform, and how easy can you learn how to use the platform?
- Liquidity – can the platform allow traders to make a trade at any time without moving the market too much?
- Asset choice – does the exchange support trading of your preferred crypto asset?
- Security – what are the security features that the platform has put in place to ensure that the users’ data and funds are safe from hackers and other malicious internet users?
- Trading fees – is the platform affordable to use?
- Customer support – how quick and helpful is the platform’s customer service. You can get this by checking the customer reviews.
- Tech infrastructure – does the platform has enough matching engines that allow users to have a seamless experience while placing orders.
- Deposit and withdrawal limits – does the exchange put limits on how much you can withdraw or deposit in a given timeframe?
Just like any other investment, it is important to have a trading plan when dealing with cryptocurrency. The market is highly volatile – which is a double-edged sword. You can make huge profits when you have smart trading moves. On the other hand, you can make huge losses when the market goes against your position. This is the reason you need a good trading plan.
- Build a trading plan
Your trading plan should include factors such as your goals, the type of cryptocurrency you want to buy, methodology for entering and exiting positions (trading strategy), the outline of your goals, and the amount of capital and time you want to spend trading. The plan should also include the crypto market analysis resources and tools. You should also have a method of market analysis – technical or fundamental analysis.
The technical analysis considers market movements of digital assets and their historical patterns. Fundamental analysis, on the other hand, considers external factors and microeconomic data impacting digital crypto assets. While the technical analysis may be a bit straightforward, fundamental analysis may be slightly complex to handle manually. With the latter, you are trying to determine the real value of an asset using the publicly available information about the cryptocurrency to determine how financially rewarding it can be. News about the crypto asset or the industry at large can significantly reshape fundamental analysis-based estimates. Therefore, it is important to get all the important news about the industry as soon as they come out. Using a quick news streamer can help you get various important news about the market quickly. Algory is one of the platforms that you leverage. It aggregates relevant news from thousands of sources hence allowing you to stay up-to-date.
- Open, Monitor, and Close your Position
Once you have opened your account, you are ready to transfer funds into your account and begin trading. Different platforms may support different payment methods. Use the supported payment method to fund your account.
The next step would be to select the asset you want to trade. Examples of cryptocurrency assets include Bitcoin, Binance, Ether, Litecoin, and other altcoins. Decide the size of your investment. If you are on CFD trading, you will select the size of your position, and then select whether you want to buy or sell. However, if you are trading on an exchange, you will enter the amount of crypto you want to buy/sell and the platform will automatically calculate for you the amount of money you should pay/receive depending on the current exchange rate. After entering the position, you can monitor the market movements and close the trade when it has hit a certain limit.
Risk management in crypto trading
Risk management is an important aspect of cryptocurrency trading. The management begins with ensuring you are not taking unnecessary risks by using authentic trading platforms and investing only, in what you can afford to lose.
When it comes to managing risks during the trading process, you can use different tools to ensure that you can exit the trade before you lose too much. Many platforms will allow you to add stops and limits to close your trade once it has reached a certain level – as a way of managing risks.
Stop-loss is a price limit that you can enter to enable you to close the position when a certain limit is reached to prevent further losses. A take profit also works in the same manner only that it automatically closes the position once you have reached a certain profit target to lock in the profits.
Trading Support Tools
The cryptocurrency industry has become so competitive and sophisticated that you need support from trading tools to succeed as a trader in the market.
Most platforms have technical analysis tools that trace the historic price actions to help traders predict how the market is likely to behave in the future. Such tools include On-Balance-Volume (OBV), Accumulation/Distribution Line, Average Directional Index (ADX), Aroon Indicator, Moving Average Convergence-Divergence Indicator (MACD), Relative Strength Index (RSI), and Stochastic Oscillator.
When it comes to fundamental analysis, many exchanges do not have effective tools to help users analyze the market environment. This is the part that calls for a lot of work from the investor. You have to search for all the available news and other microeconomic factors that may impact the asset price. Since cryptocurrencies are decentralized, many factors influence the asset prices in the industry.
Algory – Helping you have the best Position
Market analysis can be complex. However, the Algory platform offers a solution to crypto market analysis. The platform will help you scan all the cryptocurrency actions and crypto market news to help you make the right trading decisions. The automated platform makes use of real-time data streams of more than 800 cryptocurrencies from different crypto exchanges to provide you with the right information to make informed trading decisions.
To help save your time, the platform allows you to custom your own scanner or use built-in crypto libraries to filter all important data hence helping you to easily find the best trading opportunities. Algory supports more than 100 filters/alerts from 15 exchanges on one platform. They include volume filters, volatility alerts, and advanced alerting.
Algory also offers News Scanner service, which is the most advanced News Streamer in the Cryptocurrency industry. It helps users get real news updates from more than 800 sources.
Algory platform can make your life easier when it comes to crypto trading, whether you are a seasoned trader or a newbie. Sign up with the platform for free and boost your chances of success in the cryptocurrency trading industry.