If you're an experienced trader, you've undoubtedly come across the concept of crypto trading by now. Cryptocurrencies have become quite the trend in a number of different industries during the past few years, giving rise to new markets in gaming, banking and even the art world.
The crypto buzz has also hit the financial markets, with traders across the globe actively buying and selling decentralized currencies like Bitcoin, Ethereum and Doge. With that said, let’s review what you need to know about cryptocurrency trading before you dive into it.
What is Crypto Trading?
Cryptocurrency trading possesses a lot of similarities to trading on the stock market, which you should already be familiar with, but there are also fundamental differences between the two. Both crypto and stock market trading is an attempt to speculate price movements with the intent to make a profit, either by buying and selling the underlying coins or via a CFD (contract or difference trading account). However, the crypto market is notoriously volatile.
Being decentralized currencies, crypto coins aren't regulated by a single authority in the way that fiat currencies like the dollar or pound are. The crypto industry is still very much in its early stages of existence, which naturally makes it a more unstable sector to invest in. Furthermore, since crypto prices aren't regulated, the cost of one coin can vary widely between markets.
This instability has opened up opportunities for eagle-eyed traders to enter in an attempt to turn substantial profits. Around the second Bitcoin boom of 2021, this approach worked phenomenally well, as the coin rose to over $67,000 in value. But the unpredictability of crypto means that when coins do fall, they do so by staggering amounts.
That's not to say that trading in crypto assets isn't a viable financial strategy. All investments carry with them degrees of associated risk, even the ones that seem to be the surest, and traders can undoubtedly reap the rewards of crypto trading when the markets are in their favour. Before venturing into it, however, it's important to develop a comprehensive understanding of precisely what's involved in trading cryptocurrencies.
A Flouring Industry
That understanding begins with researching the cryptocurrency industry. As it stands, crypto and blockchain tech is a flourishing industry that has seen several new sectors emerge in recent years.
Gaming with NFTs and cryptocurrencies, for instance, is now a booming trend thanks to the emergence of the Play-to-Earn (P2E) sector. Meanwhile, crypto gambling is on the rise, as platforms like Ignition Casino enable gamers to join with crypto.
Apart from this, you also need to develop a thorough knowledge of the coins and assets that make up the industry. Bitcoin (BTC) was the world's first crypto when it launched in 2009, effectively making it "the soil" in which thousands of other assets have grown. All other cryptocurrencies are classed as altcoins, the largest of which is Ethereum (ETH). Other altcoins that are gaining more prominence are Tether (USDT), Ripple (XRP), and Litecoin (LTC).
There are numerous approaches you can take to start trading cryptocurrencies, but you should never skip fundamental research. If you've assessed the market and have found a coin or coins you're interested in trading, the following steps will walk you through how to begin.
It's important to note at this stage that you should limit cryptocurrency investments to 5% or less of your overall portfolio, irrespective of your trading background.
Choose your Trading Style
As with trading on the stock market, you can choose to take a short or long-term position when trading crypto. When you decide to trade short-term, you're looking to take advantage of short-term price fluctuations by entering at the lowest range and exiting at the most profitable. Short-term trading on cryptos requires constant analysis of the market, but it does have the potential to offer larger and quicker returns.
Long-term trading, meanwhile, involves holding cryptocurrencies for a sustained length of time, be that a few weeks, months or even years. If you're convinced that the value of a cryptocurrency will mature in the long run, buying and holding crypto assets will be the most beneficial for you. There are no guarantees that a crypto will ever reach its forecasted price, but long-term trading has fewer associated risks than short-term.
Pick a Trading Method
If you decide to go down the short-term trading route (as opposed to simply holding your assets until they mature), there are several different methods to use when trading cryptocurrencies.
Each technique is different from the next, and some will suit you while others won't, primarily due to the risk levels involved. As mentioned above, stick with long-term trading if you're more risk-averse.
Trade cryptos against each other
- Trade multiple cryptos against each other or against fiat currencies
- Aim to make profits by buying low and selling high
- Involves timing the market accurately and extensive research
- A suitable method for avoiding excessive risks
Trade crypto derivatives
- Involves placing "bets" on crypto markets
- More flexible than buying and selling, as traders can use futures, options and perpetual swaps
- Open short-term positions to profit from price drops
- A good method for high-risk/high-reward strategies
- Not suitable for first-time crypto traders
Trade crypto contracts for differences (CFDs)
- Place "bets" on the price movements of assets
- Buying from and selling to trading platforms
- Can be similar to Forex trading
- A good method for leverage traders and fast gains
Sign up for a Crypto Exchange
With your research done and a financial strategy firmly in place, it's time to sign up for a crypto exchange to actively start trading. The most reputable brokerages for crypto trading are eToro, Coinbase and Gemini; all three have simple user interfaces and a broad range of currencies to invest in, including Bitcoin and numerous altcoins.
When you're choosing an exchange, think about the types of trades it allows, whether it offers leverage or derivatives and how fees could impact your profit margins.