Cryptocurrencies are virtual currencies that are end-to-end encrypted using cryptography. In other words, the encryption algorithms make cryptocurrencies hack-free and tamper-proof. Thus, they cannot be double-spent or counterfeited. The other names that are often interchangeably used for cryptocurrencies are crypto assets, digital assets, digital money, or digital tokens.
Moreover, cryptocurrencies are decentralized blockchain networks that harness Distributed Ledger technology(DLT) to record digital money transactions in online ledgers. These networks contain a large number of computer systems spread across the globe.
The first cryptocurrency to hit the market was Bitcoin that was launched in 2009. Since then, many altcoins have proliferated the crypto market. The high speed, throughput, security, and scalability of blockchain networks have led to a massive rise in crypto trading in the past few years. Moreover, digital currencies are considered a technology-backed superior store of value thereby encouraging users to trade cryptocurrencies on a larger scale than before.
A cryptocurrency trade is a speculative act just like a stock or derivative trade based on the market price movements of the underlying cryptocurrency. Due to the complex nature of crypto assets, trading cryptocurrencies may look daunting at first glance, especially if you are a novice. Understanding a few things while trading cryptocurrencies may help you master the art of crypto-trading faster. We will discuss the same in the consecutive sections.
Ways to trade cryptocurrencies
There are two routes to trade cryptocurrencies. They are as follows:-
1. CFD(Contract For Differences): This is an advanced trading strategy that allows you to trade cryptocurrencyprice movements/directions without taking ownership of the underlying digital tokens. Under CFD trading, the differences in the settlement prices of open and close trades are cash-settled. If you are bullish about cryptocurrency, you may open a long position. Conversely, if you are bearish, you may open a short position. Depending on the price movement of the concerned cryptocurrency, you may gain or lose.
It is a leveraged trading strategy. Hence, you have to deposit a small amount known as margin with your broker. This allows you to get 100% exposure to the underlying crypto market. However, the flip side of this trading strategy is that leverage will not only magnify your gains but also your losses.
2. Crypto exchanges: Most investors prefer trading cryptocurrenciesvia exchanges. Kraken, Binance, OKex, Gemini, etc are a few popular crypto exchanges. Akin to a stock exchange, a crypto exchange is a virtual marketplace for buying and selling cryptocurrencies. You may buy a cryptocurrency, hold it in your wallet, and wait for an opportune time to sell it. Exchanges also allow you to trade one digital currency for another. For example, you may trade Ethereum(ETH) for Cardano (ADA), or Ripple(XRP) for Litecoin(LTC), etc.
You may open an account with any crypto exchange and electronic wallet of your choice to trade cryptocurrency.
Functioning of Crypto Markets
Crypto markets function differently from regular stock markets. They are decentralized networks meaning no central authority or federal bank controls or regulates them. Putting it differently, all-digital money transactions are peer-reviewed and not audited on central servers.
Moreover, the cryptocurrencies you purchase or sell exist as digital ledger entries in a blockchain. Every digital currency transaction is verified and added to a blockchain through a process called “mining”.
Now, you may wonder what is a blockchain? A blockchain is an electronic record of cryptocurrency transactions shared and accessible by all computer systems on the network. It is an e-register of a cryptocurrency’s transaction history.
Putting it simply, all transactions are recorded in a block. Once the transactions in a block are validated, a new block is added. Miners solve complex mathematical problems to authenticate a block before adding it to the existing blockchain. These blocks are bound together by cryptography.
Since cryptocurrency transaction records exist on multiple systems, blocks cannot be modified or hacked. Human or software errors are also eliminated. Any attempt to change the transaction data will break the cryptographic links and all the computers on the network will detect fraudulent/erroneous activity.
Terms Pertaining to Crypto-Trades
A. Spread: It is the difference between buy and sell prices of a cryptocurrency. If you want to go long, you will trade at the quoted buy price. Conversely, if you want to go short, you will trade at the quoted sell price. Usually, the buy price is greater while the sell price is lower than the market price.
B. Lots: Usually, digital currencies are traded in lots. Lots are nothing but batches of digital tokens for standardizing trade size. Most cryptocurrency lots are small – just one unit of the base digital asset. However, they may be traded in bigger lots as well.
Cryptocurrency markets are very volatile. Hence, having a structured trading plan helps you trade cryptocurrencies effectively and maximize your gains from the same. An ideal trading plan may include your long-term and short-term financial goals, risk optimization techniques, comparative analysis of various cryptocurrencies, the cryptocurrencies you wish to trade in, and entry and exit trading strategies.
Like stocks, you may analyze cryptocurrencies too using fundamental and technical analysis techniques. A cryptocurrency’s fundamentals include blockchain project details, its financials, the team behind it, use cases, number of registered members, etc. However, a thorough knowledge of technical analysis tools may help you trade cryptocurrencies in a better manner by gauging market momentum. Some of the commonly used technical analysis indicators are:-
A. MACD (Moving Average Convergence Divergence):This indicator shows the relationship between two moving averages of a cryptocurrency’s price. Two lines are plotted – MACD and signal. The MACD line represents the difference between 26-day EMA (Exponential Moving Average) and 12-day EMA. The signal line represents a 9-day EMA. When the MACD line crosses above the signal line, you may buy a cryptocurrency and vice-versa.
B. RSI(Relative Strength Index): The RSI helps you understand the demand and supply conditions in the crypto market. It is a momentum and divergence indicator. The RSI values are expressed in percentages.
Any value above 70% indicates the cryptocurrency is overvalued and overbought whereas a reading below 30% indicates the cryptocurrency is undervalued and oversold. Corrective actions include trend reversals, price pullbacks, or short rallies. During bearish market conditions, the RSI would frequently peak near the 50% region and fall back.
C. Fibonacci Pivots: This is a technical analysis tool that calculates pivot point, support, and resistance levels using high, low, and closing prices of past trading sessions. During bearish phases, the price will fall below the pivot point and subsequent support levels. Conversely, during bullish phases, the price will surpass the pivot point and break out of the subsequent resistance levels. Accordingly, you may time your entry, exit, stop-loss, or profit-booking activities.
Apart from the above, being up-to-date on current happenings in the crypto markets, macro-economic conditions, and external factors that may impact crypto markets, enable you to maximize profits from crypto trades.
The rise in cryptocurrency trades has given birth to a large number of robust cryptocurrency trading platforms. Coinbase, Poloneix, Kucoin, Binance, etc are a few well-known online platforms for trading cryptocurrencies.
You may choose a trading platform of your choice. Most of them provide you with customized alerts, 24/7 backend support, market news, educational materials, interactive charts, risk-management tools, and built-in technical indicators to study market movements. They are also compatible with smartphones, tablets, and desktops. Thus, you may trade cryptocurrencies “on the go” with these mobile trading platforms
Usually, trading fees are charged on a per-transaction basis. Thus, the trading charges for buy and sell transactions may differ. Trading costs may also vary based on the digital tokens you are trading. Generally, exchanges charged fixed trading fees. Some of them follow the variable-fee model based on price fluctuations in the cryptocurrency market.
However, an important point to be noted here is that the more advanced the trading platform or features provided by an exchange, the higher may be the trading fees charged by it. But, you may not be turned off by the high fees as such exchanges may enable you to execute transactions faster and more easily.
You may choose a popular exchange for trading cryptocurrencies as they have high liquidity. In other words, high trading volumes will help you buy or sell at competitive prices. Moreover, popular exchanges also offer a wide range of cryptocurrencies to trade-in. Plus, most of them even offer storage wallets and insurance policies to protect your crypto holdings.
On the other hand, if you wish to take large positions in the crypto market, you may open a CFD account with a renowned broker. However, CFD trading is not permitted in all countries.
In a nutshell, crypto markets are subject to large-scale fluctuations. They are easily moved by cryptocurrency supply, burning rate, market capitalization, press releases, integration with digital payment systems, and key economic events. However, irrespective of market conditions, with relentless practice and discipline, you will be able to trade cryptocurrencies like a professional.