fbpx
How to Trade Cryptocurrencies: A Beginner’s Guide to Buying and Selling Digital Currencies

How to Trade Cryptocurrencies: A Beginner’s Guide to Buying and Selling Digital Currencies

Page Contents

What is Cryptocurrency Trading?

The act of speculating on the price movements of cryptocurrencies through a contract for difference (CFD) trading account, or of buying and selling the underlying currencies through an exchange, is known as cryptocurrency or cryptocurrency trading. CFD trading is a type of derivative that allows you to bet on the price changes of Bitcoin (BTC) without owning the underlying currencies. 

For example, you can go long (buy) if you think the value of a cryptocurrency will rise, or short (sell) if you think the value will fall. Both are leveraged instruments, meaning you only need a small deposit, known as margin trading crypto, to have full exposure to the underlying market. However, because your profit or loss is still determined based on the total size of your investment, leverage in crypto trading increases both profits and losses. 

Additionally, investors use cryptocurrency options to reduce risk or increase market exposure. Crypto options trading refers to the “derivative” financial instrument that derives its value from the price of another asset, in this case, the underlying cryptocurrency.

Before even thinking about venturing into cryptocurrency trading, it is important that one has a comprehensive understanding of the assets and technologies involved. Bitcoin is the soil from which thousands of other cryptocurrencies have grown. 

Related: Read “What is Bitcoin?” from Cointelegraph guide.

As with stocks and other financial markets, cryptocurrency trading can be complex, involving a variety of components and requiring knowledge. Bitcoin was launched in 2009 as the first crypto asset and remains the largest cryptocurrency in terms of market capitalization and prevalence. 

Over the years, however, an entire industry of other digital assets has emerged with tradable assets for profit. All other cryptocurrencies other than BTC are known as altcoins, the largest of which is Ether (ETH).

This guide will explain cryptocurrency trading strategies and familiarize you with cryptocurrency trading platforms and apps, the components of a trade, trading styles, and the role of technical and fundamental analysis in creating a comprehensive trading strategy.

How to trade cryptocurrencies for beginners

There are many different approaches in terms of how to trade cryptocurrencies. To start trading cryptocurrencies, a proper knowledge of the subject is first needed. It is also critical to be aware of the associated risks and laws that may apply depending on one’s jurisdiction, and decisions should be made accordingly.

Sign up for a cryptocurrency exchange

You will need to open an account with a cryptocurrency exchange unless you already have cryptocurrency. The best cryptocurrency brokers on the market include Coinbase, eToro, and Gemini. These three services have a simple user interface and a wide range of altcoins to choose from.

To open an account with a crypto broker, you will need to provide personally identifiable information just as you would with a stockbroker. When you create an account, you’ll need to submit your address, date of birth, Social Security number (in the United States), and email address, among other things known as Know Your Customer (KYC) requirements.

Fund your account

You will need to connect your bank account once you have signed up with a crypto broker. Most cryptocurrency exchanges accept bank deposits through debit cards and wire transfers. Wire transfers are usually the most cost-effective way to top up your account and are available on Coinbase and Gemini.

Choose a Cryptocurrency to Invest

Most cryptocurrency traders invest their money in Bitcoin and Ether. However, trading using technical indicators is possible because these cryptocurrencies move more predictably than smaller altcoins.

Many cryptocurrency investors invest a portion of their money in altcoins. Although riskier than large market cap cryptocurrencies, small mid-cap cryptocurrencies have more significant upside potential. 

Start trading

You can try automatic crypto trading with software like Coinrule if you are looking for a crypto trading strategy. Cryptocurrency trading bots implement a process designed to give you the most significant returns possible based on your investment goals. 

You can make money fast, keep your coins or diversify your portfolio with automated crypto trading, which can give you a conservative, neutral or aggressive way. You can even actively explore cryptocurrency trading on some sites while automating trading on others.

Store your cryptocurrency

If you are actively trading BTC, you will need to keep your funds on the exchange in order to access them. For example, you should buy a Bitcoin wallet if you are buying cryptocurrencies to hold them for the medium to long term.

Software wallets and hardware wallets are two types of cryptocurrency wallets. Both are secure, but hardware wallets provide the most protection because they keep your cryptocurrency on a physical device that is not connected to the internet.

Cryptocurrency Trading Basics

The value of Bitcoin is determined second by second and day by day by a market that never sleeps. As a self-contained digital asset whose value is determined by an open market, Bitcoin presents unique challenges around volatility that most currencies do not face. 

Therefore, it is important for newcomers to know a little about how the crypto asset markets work so that they can safely navigate the markets, even intermittently, and get the most value out of their share of the crypto trading economy. cryptocurrencies.

Bitcoin trading can range in scale and complexity from a simple transaction, such as cashing out in a fiat currency like the US dollar, to using a variety of trading pairs to tap into the market and grow your investment portfolio. Of course, as a crypto trade increases in size and complexity, so does a trader’s risk exposure.

First, let’s review some basic concepts.

Structure of a cryptocurrency

trade A cryptocurrency trade consists of a buyer and a seller. Since there are two opposing sides to a trade, a buy and a sell, someone is bound to win more than the other. Therefore, trading is inherently a zero-sum game: there is a winner and a loser. Having a basic understanding of how the cryptocurrency markets work can help minimize potential losses and optimize potential gains.

When a price is agreed between a buyer and a seller, the trade is executed (via an exchange) and the market valuation of the asset is established. For the most part, buyers tend to set orders at a lower price than sellers. This creates the two sides of an order book.

When there are more cryptocurrency buy orders than sell orders, the price usually goes up as there is more demand for the asset. On the contrary, when there are more people selling than buying, the price goes down. In many exchange interfaces, buys and sells are represented in different colors. This is to give the trader a quick indication of the state of the market at any given time.

You may have heard the common adage in trading: “Buy low, sell high.” This saying can be difficult to understand because high and low prices can be relative, although the adage provides a basic representation of the incentives of buyers and sellers in a market.

Simply put, if you want to buy something, you want to spend as little as possible. If you want to sell something, you want to get the most out of the deal. While this is generally good wisdom to follow, there is also the added dimension of longing for an asset versus shorting an asset. 

Going long an asset (longing) means buying an asset and making a profit based on its upward price movement. In contrast, going short on an asset (shorting) essentially means selling an asset with the intention of buying it back when its price falls below the point at which you sold it, profiting from a price decline. However, the short sale is a bit more complicated than this brief description and involves the sale of borrowed assets that are later repaid.

Reading the markets

To the layman, “the market” may seem like a complex system that only a specialist could understand, but the truth is that it all comes down to people buying and selling. How to trade cryptocurrencies may seem like an esoteric concept at first. However, once you start to understand it, the idea becomes much simpler.

The totality of active buy and sell orders is a snapshot of a market at any given time. Reading the market is the ongoing process of detecting patterns or trends over time, on which the trader may choose to act. In general, there are two market trends: bullish and bearish.

A “bull” market, or bull market, occurs when price action seems to steadily increase. These upward price movements are also known as “pumps” as the influx of buyers pushes prices up. A “bearish” market, or bear market, occurs when price action seems to steadily decline. These downward price movements are also known as “dumps” as the sell-off drives the price down.

Uptrends and downtrends can also exist within larger opposing trends, depending on the time horizon you look at. For example, a small downtrend can occur within a larger long-term uptrend. In general, an uptrend results in price action making higher highs and higher lows. A downtrend creates lower highs and lower lows.

Another state of the market called “consolidation” occurs when the price trades sideways or within a range. Consolidation phases are usually easier to spot on higher time frames (daily charts or weekly charts) and occur when an asset is cooling off after a strong uptrend or downtrend. Consolidation also takes place before trend changes, or at times when demand is thin and trading volumes are low. Prices essentially trade within a range during this state of the market.

Analysis

(TA) is a method of analyzing past market data, primarily price and volume, to forecast price action. While there is a wide variety of TA indicators, varying in complexity, that a trader could use to analyze the market, here are some basic macro and micro level tools.

Market Structure and Cycles

Just as traders can spot patterns in a matter of hours, days, and months, they can also spot patterns over years of fluctuating price action. There is a fundamental structure in the market that makes it susceptible to certain behaviors.

The cycle can be divided into four main parts: accumulation, profit margin, distribution, and decline. As the market moves between these phases, traders will continually adapt their positions by consolidating, pulling back or correcting as they see fit.

The bull and the bear are very different creatures and behave in opposition to each other within shared environmental conditions. It is critical for a trader to know not only what role they are in, but also which one currently dominates the market.

Technical analysis is necessary not only to position yourself within this ever-changing market, but also to actively navigate the ebbs and flows as they occur.

Chasing the whale 

Price movements are largely driven by “whales”, individuals or groups that have large funds with which to trade. Some whales operate as “market makers”, setting bids and asks on both sides of the market to create liquidity for an asset and profit in the process. Whales are present in virtually any market, from stocks and commodities to cryptocurrencies. 

A cryptocurrency trading strategy must be aware of the tools of the trade favored by whales, such as their preferred TA indicators. Simply put, whales tend to know what they’re doing. By anticipating the intentions of the whales, a trader can work in tandem with these moving experts to profit from their own strategy.

Psychological Cycles

With a zoo full of metaphors, it can be easy to forget that real people, for the most part, are behind these trades and as such are subject to emotional behaviors that can significantly affect the market.

This aspect of the market is represented in the classic “Psychology of a Market Cycle:” chart.

While the bullish/bearish framework is helpful, the psychological cycle described above provides a more detailed spectrum of market sentiment. While one of the first rules of trading is to leave emotion at the door, the power of the group mentality tends to take hold. The rally from hope to euphoria is fueled by FOMO, the fear of missing out, from those who have yet positioned themselves in the market.

Navigating the valley between euphoria and complacency is crucial to timing an exit before the bears take hold and people panic and sell. Here, it is important to look out for high volume price action, which can indicate the overall momentum of the market. The “buy low” philosophy is quite self-evident, as the best time to accumulate within the market cycle is during the trough that follows a drastic price drop. The higher the risk, the higher the reward. 

The challenge facing the serious trader is not to let emotion dictate their trading strategy amid the onslaught of hot shots and analysis from the media, chat rooms, or so-called thought leaders. These markets are highly subject to manipulation by whales and those that can affect the pulse of the market. Do your homework and be decisive in your cryptocurrency trading actions. 

Basic Tools 

Being able to spot patterns and cycles in the market is crucial to having clarity from a macro perspective. Knowing where you are positioned in relation to the whole is paramount. You want to be the experienced surfer who knows when the perfect wave is about to hit rather than nonchalantly paddling through the waters waiting for something great to happen.

But, the micro perspective is also crucial in determining your actual strategy. While there are a large number of TA indicators, we will only go over the most basic ones.

Support and Resistance

Perhaps two of the most commonly used TA indicators under the terms “support” and “resistance” relate to price barriers that tend to form in the market, preventing price action from going too far in any given direction.

Support is the price level where the downtrend tends to stop due to the influx of demand. When prices drop, traders tend to buy low, creating a support line. On the contrary, resistance is the price level where the uptrend tends to stop due to a sell-off.

Many cryptocurrency traders use support and resistance levels to bet on price direction, adapting on the fly as the price level crosses their upper or lower bounds. Once traders identify the bottom and top, this provides a zone of activity where traders can enter or exit positions. Buying at the bottom and selling at the top is the usual standard operating procedure.

If the price breaks these barriers in either direction, it gives an indication of the general sentiment of the market. This is an ongoing process, as new support and resistance levels tend to form when the trend breaks through.

Lines

While the static support and resistance barriers shown above are common tools used by traders, price action tends to go up or down with the barriers changing over time. A sequence of support and resistance levels can indicate a larger trend in the market represented by a trend line.

When the market is trending up, resistance levels begin to form, price action slows down, and price returns to the trend line. Cryptocurrency traders pay close attention to the support levels of an ascending trendline as they indicate an area that helps prevent the price from falling substantially lower. Similarly, in a downtrend market, traders will watch the sequence of falling highs to connect them into a trend line.

The central element is the history of the market. The strength of any support or resistance level and its resulting trend lines increase as they repeat over time. Therefore, traders will record these barriers to inform their ongoing trading strategy.

Round Numbers

One influence on support/resistance levels is the setting of round number pricing levels by institutional or inexperienced investors. When a large number of transactions are centered around a nice round number, as is generally the case with Bitcoin whenever its price approaches a figure that is divisible by $10,000, for example, it can be difficult for the price to break above this point, creating a resistance.

This frequent occurrence is a testament to the fact that human traders are easily swayed by their emotions and tend to resort to short cuts. Certainly with Bitcoin, if a certain price point is hit, it tends to produce an enthusiastic burst of market action and anticipation. 

Moving Averages

With a market history of support/resistance levels and the resulting rising/falling trend lines, traders often smooth this data to create a single visual line representation called a “moving average”.

The moving average nicely plots the lower support levels of an uptrend along with the resistance peaks along a downtrend. When analyzed with respect to trading volume, the moving average provides a useful indicator of short-term momentum.

Chart Patterns

There are several ways to chart the market and find patterns within it. One of the most common visual representations of market price action is the “candlestick”. These candlestick patterns present a kind of visual language for traders to anticipate potential trends.

Candlestick charts originated in Japan in the 1700s as a method of evaluating how traders’ emotions act as a strong influence on price action, beyond simple supply and demand economics. This market display is one of the most favored by traders as it can encapsulate more information than simpler bar or line charts. A candlestick chart features four price points: open, close, high, and low.

How does this relate to cryptocurrency trading? They are called candlesticks because of their rectangular shape and the lines above and/or below that resemble a wick. The wide part of the candlestick is where the price opened or closed, depending on its color. The wicks represent the price range in which an asset is trading during that set period of the candle. Japanese candlesticks can encapsulate different time frames, from a minute to a day and more, and show different patterns depending on the chosen timeline.

Fundamental Analysis

So how do we determine the potential of a particular crypto asset beyond or ahead of its behavior in the trading market? 

While technical analysis involves studying market data to determine one’s trading strategy, fundamental analysis is the study of the underlying industry, technology, or assets that make up a particular market. In the case of cryptocurrencies, a trading portfolio will likely consist of Bitcoin and altcoins.

How do you determine if an asset is based on solid fundamentals rather than hype, hype technology, or worse, nothing at all? For the fundamental analysis of new assets, several factors must be considered: 

Developers

Before investing in a cryptocurrency asset, it is imperative to assess the integrity and capability of the builders behind it. What is your history? What software companies have launched in the market in the past? How active are they in developing the underlying protocol of the token? Since many projects are open source, it is possible to directly view this activity through collaborative code repository platforms such as GitHub.

Community

Community is essential for cryptocurrency trading projects. The combination of users, tokenholders, and enthusiasts generates much of the driving force behind these assets and their underlying technologies. After all, there is always a social element to any new technology. However, with so much money at stake, and with the frequent presence of non-professional retail investors, the space is often subject to toxicity and warring factions. Therefore, a healthy and transparent discourse within the community is welcome.

Technical Specifications

Not to be confused with technical market analysis, the main technical specifications for a crypto asset include the choice of network algorithm (how it maintains security, uptime, and consensus) and issuance/issuance characteristics such as timings. Blockchain, Maximum Token Supply, and Plane of Distribution By diligently evaluating a cryptocurrency network’s protocol stack in conjunction with the monetary policy imposed by the protocol, a trader can determine whether such characteristics support a potential investment.

Innovation

While the intended use case for Bitcoin at its launch was electronic money, developers and entrepreneurs have not only discovered new use cases for the Bitcoin blockchain, but have also designed entirely new protocols to accommodate a wider range of applications.

Liquidity (and whales)

Liquidity is critical to a healthy market. Are there any reputable exchanges that support a particular crypto asset? If so, what trading pairs exist? Is there a healthy volume of operations/transactions? Are there large stakeholders present in the market and, if so, what is the impact of their trading patterns?

However, generating liquidity takes time, as an innovative new protocol may be active but not have instant access to liquidity. Such investments are risky. If the volumes are low and there are few or no trading pairs available, you are basically betting that a healthy market will eventually form around the draw.

Branding and Marketing

Most cryptocurrency networks do not have a central figure or company that facilitates branding and marketing around their technology, resulting in a brand that may lack a cohesive plan or direction.

This is not to discount branding and marketing emerging from a protocol over time. Indeed, a comparative analysis of the marketing efforts of leading developers, corporations, foundations, and community members can provide a detailed overview of how certain players communicate value propositions to the masses. 

Infrastructure

This quality of a crypto trade can be seen as the manifestation of the technical specifications of a project. Despite what is written in white papers or presented at conferences, what is the actual physical manifestation of the protocol in question?

It is worth identifying the stakeholders: the developers, the block validators, the merchants/companies, and the users. Additionally, it is critical to understand who the network administrators are, their role in network security (mining, validation), and how power is distributed among these stakeholders.

Chain analytics

Since all cryptocurrencies operate on blockchain technology at a basic level, a new type of analytics has emerged that relies on blockchain data: on-chain analytics. 

By looking at supply and demand trends, transaction frequency, transaction costs, and the rate at which investors hold and sell a cryptocurrency, analysts can make accurate qualitative and quantitative observations about the strength of the cryptocurrency blockchain network. a cryptocurrency and its price dynamics in a variety of markets. 

On-chain data also provides valuable insights into investor psychology because analysts can align various macro and microeconomic events with investor actions that are immutably recorded on the blockchain. 

Analysts look for crypto trading signals, patterns, and anomalies in buying, selling, and holding behavior in correlation to market rallies, selloffs, regulatory events, and other network-oriented events. This is to make forecasts of potential future price movements and investor reactions to upcoming events such as network upgrades, coin supply halvings, and actions taking place in traditional financial markets. 

Cryptocurrency Trading vs Stock Trading

Stocks and cryptocurrencies are two very different types of investment vehicles. While both are liquid assets that belong in your speculative portfolio, that’s where the similarities end. These are two completely different types of securities that should be kept in separate parts of your portfolio.

Stocks are the shares owned by a publicly traded corporation. Each share you buy earns you a percentage stake in the company. This ownership is proportional to the number of shares issued by a corporation.

An investor can profit by selling his shares to other investors. The difference between what you spend on the asset and what you get when you sell it is known as capital gains. Apart from that, the advantages of owning stocks completely depend on the company in question. Stocks can also gain value by providing dividends to their shareholders and by exercising voting power.

A cryptocurrency is a digital asset that exists only on the Internet. This means that it has no physical component and only exists as records in an online ledger that tracks ownership. This is in contrast to the United States dollar, which has both a physical component (you can withdraw and hold a dollar bill) and a digital component (you can own a dollar as nothing more than an entry in your bank account that records that ownership). The individual unit of a cryptocurrency is known as a token, just as the individual unit of a share is known as a share.

Cryptocurrency trading is risky

Risk management is also an important aspect of trading. Before entering a trade, it is important to know how much you are willing to lose on that crypto trade if it goes against you. This can be based on a number of factors, such as your trading capital. For example, a person might want to risk losing only 1% of their overall trading capital, either in total or per trade.

Trading is simply a risky endeavor in and of itself. It is almost impossible to predict any future market activity with any certainty. At the end of the day, it’s important to make your own decisions, using available information and your own judgment, as well as making sure you’re properly educated.

Also, trading strategies can differ greatly from person to person, based on preferences, personalities, trading capital, risk tolerance, etc. Trading carries significant responsibility. Anyone looking to trade should assess their own personal situation before deciding to trade.

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest