Over these past few years, there has been a surge in investors interested in how to trade cryptocurrencies. It all started with a seemingly laughable yet revolutionary 9-page Bitcoin whitepaper written by the mysterious and pseudonymous Satoshi Nakamoto in 2008.
However, it’s only been in the last five years that people have started taking notice of digital currencies. This technology has disrupted the traditional financial system and has influenced many other sectors like healthcare, travel, retail, tourism, travel, and more.
Despite many detractors, we can be confident that digital currencies are here to stay. Here we present a crypto trading guide for beginners to get you started.
What is crypto trading?
A crypto (short for cryptocurrency) is a digital currency built and maintained by a decentralized computer network. Banks and governments do not determine the creation of crypto as with ordinary fiat money.
Instead, most digital currencies rely on an electronic ledger or database called a blockchain that uses complex cryptography to:
- Control the supply of new tokens
- Ensure that transaction records are accurate
- Verify coin ownership
In the early days, when people were discovering the best ways to trade crypto, digital currencies were only capable of one function: payments. The best current examples are Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), and Ripple (XRP), among others.
Nowadays, of course, things have gotten a lot more advanced. While you can use any coin as a medium of exchange, this is usually a secondary purpose. Here is a list of other prominent types of digital currencies and their brief functions:
- Application-building coins: These digital currencies are capable of several things. They centre around building decentralized applications, smart contracts, and paying computer operators on their respective networks.
Such projects form part of the second-generation of blockchains first pioneered by Ethereum (ETH). This era simply describes how we use crypto for other things besides settling payments.
Other prominent examples include Solana (SOL), Cardano (ADA), Tron (TRX), and plenty of others.
- DeFi coins: DeFi (decentralized finance) is an industry of various platforms like lending services, exchanges, and marketplaces that function without a traditional middleman. Ethereum is another prime example here. However, other well-known coins include Uniswap (UNI), Avalanche (AVAX), Aave (AAVE), etc.
- Stablecoins: A stablecoin is a volatility-free coin pegged to another asset (like the US dollar) on a 1:1 basis to maintain a stable price, e.g., Tether (USDT), USD Coin (USDC), Binance USD (BUSD).
- Meme coins: A meme coin is a token based on a popular internet meme, online community, influencer, pop culture phenomenon, or a combination of all four. In simple terms, it’s a digital currency created as a joke, e.g., Dogecoin (DOGE), Shiba Inu (SHIB), Dogelon Mars (ELON)
- Storage coins: These are tokens offering a financial incentive for people with unused disk space to lease it on a decentralized cloud storage marketplace, e.g., Filecoin (FIL), Siacoin (SC), Storj (STORJ).
- Privacy coins: These are coins that we use to pay for goods or transfer to others, the exception being that they have features to anonymise senders and receivers, e.g., Zcash (ZEC), Monero (XMR), Dash (DASH).
- Exchange utility coins: The best way to trade crypto is through an exchange. Many of these platforms provide utility tokens, which are special coins where you can receive exclusive benefits like lower trading fees, free withdrawals, voting power, and other perks.
Binance Coin (BNB), FTX Token (FTT), Cronos (CRO) are just a few of the well-known exchange coins.
- Content creation coins: Nowadays, crypto trading has given people a way to earn from their content, whether through social media, video streaming, music streaming, gaming, advertising, or building a virtual world.
Examples of this sector include The Sandbox (SAND), Decentraland (MANA), Axie Infinity (AXS), and Theta (THETA), among others.
Now let’s look at the trading part.
Trading is the speculative buying and selling of the price differences in crypto pairs to make a profit.
Traders go long (buy) if they are confident that the price of a coin will rise against another market or go short (sell) if they believe it will decrease against another market. Your decisions to buy or sell are guided by technical analysis and fundamental analysis (more on this later)
As you learn crypto trading over time, you’ll quickly realise that a simple tweet from a high-profile person is enough to skyrocket or plummet a coin’s price.
Digital currencies are a bit of a rollercoaster. They are a highly volatile market where you can witness massive price drops in a short space of time.
Types of crypto trading
When you study how to trade crypto, you can trade it in two ways: through a CFD (contract for difference) or by purchasing the underlying coin. A CFD defines trading a market without taking physical ownership of the traded asset.
It’s also called a derivative because its value is taken or derived from an underlying market. Let’s look at Bitcoin. When you buy actual BTC from an exchange, that is the real coin that you can store in a wallet, use to buy goods, or transfer to others.
However, when you trade the same asset as a CFD, it’s simply a representation of its price. You don’t own real bitcoin.
Crypto trading through CFDs is best for aggressive short-term speculation. This is because a key component of CFDs is leverage, a mechanism present with all CFDs across other markets. The idea is to ‘gear’ your account to open much larger positions than your balance normally handles.
Your broker or exchange simply needs a small deposit called a margin. If you’re trading cryptocurrency for profit in the short term, leverage is necessary to amplify your gains. However, any reckless misuse can blow your account since it works both ways.
On the other hand, traders who hold for the long term (months or years) have no access to leverage. They need to offer the full value of their investment. This is unlike CFDs, where only a small portion is needed thanks to leverage.
Another key difference, as you’re grasping how to crypto trade, is that CFDs allow you to go long and short. Yet, when you own the real coin, you can only buy. The selling only happens after you’ve purchased. However, you can sell without having bought the coin (and vice versa) with a CFD.
Lastly, CFDs have more costs attached, like commissions and overnight fees. Conversely, you only incur a commission when you trade the real coin.
The difference between a crypto trading exchange and broker
As you read up more on buying and trading cryptocurrency, you may see writers using the terms ‘exchange’ and ‘broker’ together. However, they are not quite the same. It’s all about what happens behind the scenes.
When you are trading with a broker, you deal directly with them. They may act as an intermediary by transferring your positions to another dealer or taking the other side of your orders (i.e., buy when you sell or sell when you buy).
When trading with an exchange, they simply match your orders with other buyers and sellers on a publicly viewable platform through a matching engine or order book.
An exchange is more transparent because you can see the order volume at incremental price levels. With a broker, this information is unavailable to the public; only they can view the matching engine.
Here’s an example of an order book from Binance, one of the largest crypto trading exchanges globally.
Another difference is that exchange prices are determined by actual market forces, while a brokerage decides its own. However, in most cases, the differences are minor.
So, which should you choose? If you want to buy real cryptocurrencies, exchanges are the way to go. Yet, over the past few years, exchanges have beefed up their CFD options, providing the best of both worlds. Also, they often offer a more comprehensive coin selection.
On the other hand, crypto trading brokers are best if you’re looking to speculate in other non-crypto instruments like forex, stocks, and metals that many exchanges don’t provide.
Lastly, exchanges are superior when it comes to market hours as they provide 24/7 trading. Meanwhile, most brokers are only limited to 24/5.
How to start trading cryptocurrency
Let’s go over the steps in mastering how to trade cryptocurrency successfully.
Study the best projects for crypto trading
CoinMarketCap lists over 21 000 coins presently (which will only continue growing). One thing is for sure: the market is over-saturated, making it difficult to cut through the noise.
This is why it’s essential to follow only the best projects with the highest chance of surviving and thriving long-term. Here are some questions to consider.
- What is the value proposition?
- Are there any existing competitors?
- Does the coin have deflationary tokenomics?
- Who are the developers behind the project?
As you learn to trade crypto, a useful organizational tactic is to divide this large piece into different market cap categories. Market capitalization is a figure derived from the current price of a coin multiplied by its circulating supply (the number of publicly available coins)
For example, if a token is worth $2 and has a circulating supply is 500 000, the market cap is $1 million. Below are the main segments for market cap in crypto:
- Large-cap: over $10 billion
- Mid-cap: between $1 billion and $10 billion
- Small-cap: less than $1 billion
Of course, market cap doesn’t always indicate potential value. However, it’s a way to group different projects based on risk, volatility, trading volume, stability, and competition.
Understand the basics of online trading
- Learn to use charting software so you can understand order types, indicators, chart types, time-frames, opening and closing a position, etc.
- Study the differences between the spot, futures, perpetual swaps, and options
- Understand the fees/commissions charged by crypto trading platforms
Arguably, the most vital part is to learn the differences between technical analysis, fundamental analysis, and sentiment analysis. These help you forecast the potential direction of crypto markets at varying time horizons.
Combining at least two of them is always good for finding the best opportunities likely to yield a profit.
Technical analysis (TA) is about studying chart structures and indicators by observing historical price action to predict future movements. TA is beneficial for the short term since traders like to make the most profit in the shortest time available.
Yet, TA is known for being a lagging dynamic in all financial markets, meaning it’s not always reliable. Hence, investors tend to look at fundamental analysis when trading cryptocurrency, which can offer better clues on price movements before they happen.
Fundamental analysis (FA) involves assessing a coin’s intrinsic or essential value by incorporating various economic, political and social factors. Unlike other instruments, FA in crypto is not yet fully developed.
There isn’t an official list of elements to observe. Therefore, the scope can be broad. However, popular components to observe include:
- On-chain metrics (top coin holders, number of addresses, number of addresses, hash rate, transaction count, etc.)
- Financial metrics (tokenomics, market cap, liquidity, etc.)
- Project metrics (developers, whitepaper, value proposition, competitors, etc.)
FA aims to find moments where a project may be undervalued or overvalued even when the short-term price picture suggests otherwise. Therefore, using this analysis is best for long-term projection.
Sentiment analysis is less commonly used in many markets, but this doesn’t downplay its usefulness. It is about studying the sentiment or emotions of market participants and the crowd psychology around a particular crypto.
When the sentiment is positive, we expect bullish prices; when the sentiment is negative, we anticipate bearish prices.
The most popular sentiment indicator for trading cryptocurrency is the Crypto Fear & Greed Index (FGI). The FGI is updated daily and measures the level of fear and greed by computing data points from Bitcoin dominance, Google Trends, volume, volatility, and social media.
Experts believe any market is constantly shifting between moments of fear and greed. Fear represents buying opportunities as traders worry about the future and missing out.
Greed signals that people are booking profits, causing pullbacks. Analysts view these scenarios as opportunities for selling.
Develop your strategy and trading style
There are many ways to skin a cat as you learn how to trade crypto. Let’s look at the most popular strategies:
- Trend-following or mean-reversion
- Reversal trading
- Breakout trading
- Range trading
It’s not only about the system but also the type of trader you are. Do you want to be a scalper, day trader, swing trader, or position trader? Or perhaps trade with a robot (check out our guide here on the best bots)? Regardless of your decision, defining who you are and your strategy is important.
The best way to trade cryptocurrency is the method that suits your experience, skills, and preferences. At this stage, spending considerable time demo trading is crucial. This will allow you to test as many different techniques as possible without real money.
Here, you should back-test your strategy for at least a year until it produces a profitable track record. Once you are confident that you can make money consistently, move on to the next stage.
Pick a suitable crypto trading platform
So you’ve learned about understanding cryptocurrency trading; now you need a platform. Here are the things to consider as you are looking at different options.
- Security: If you’re trading through a broker, ensure that it is regulated. For exchanges, aside from regulation, they should also implement offline cold storage and strong two-factor authentication.
Cold storage is critical, given that even the biggest exchanges have been hacked.
- Coin selection: The more, the merrier. One advantage of digital currencies is the broad range of coins available. So, the wider the choice, the better, allowing you to get everything under one roof.
- Trading costs: It’s good to compare the fees across different crypto trading platforms to get the best bang for your buck.
- Payment methods: Exchanges are the way to go if you prefer to deposit and withdraw using digital currencies. With less focus on crypto, brokers tend to stick with traditional payment options like cards and e-wallets. Regardless, the more available choices, the better the convenience.
- Customer service: Nowadays, a live chat service is a must for a crypto trading platform where you can get your queries answered swiftly. However, also consider the quality and availability of phone and email support.
Benefits of crypto trading
- High volatility: The depth of price movements means a greater reward potential in a short period. However, the same volatility, coupled with leverage, can lead to massive losses if you don’t treat it carefully.
- Decentralization: Once you learn to trade cryptocurrency, you’ll realise the freedom that comes with it, particularly with exchanges. For instance, crypto withdrawals are much quicker compared to traditional financial institutions.
- Around-the-clock trading: Crypto is the only financial market where you can trade 24/7. For this reason, several forex traders have switched to crypto since there are always opportunities, even during weekends and public holidays.
- Broad market selection: As we mentioned before, there are literally thousands of coins to follow when you navigate how to get into crypto trading.
Risks of crypto trading
- Lack of regulation: Decentralization does come with downsides, which is why governments in many countries have banned crypto. It is common to witness many scams and crimes using digital currencies.
As you start knowing how to trade cryptocurrency for profit, it’s crucial that you don’t fall victim and know how to protect yourself.
- Security risks: If you are not trading CFDs, there is always the possibility of someone hacking your wallet private keys through an exchange. Also, if you incorrectly transfer funds to the wrong address, it is usually difficult to recover your funds.
Holding crypto is different from ordinary money. So extra precautions are always necessary.
- Unknown long-term potential: Digital currencies are still a relatively untapped technology. Yet, because of regulation, security, and usefulness concerns from investors, no one knows how long your favorite coin will be relevant.
Phew! It’s perfectly fine if you feel we’ve gone through a lot in how to start trading crypto. Like any financial market, it is a daunting task and a long road with many concepts to master.
In many ways, it’s similar to acquiring a tertiary qualification. And even after completion, there is always new stuff to learn.