What Is Cryptocurrency Trading For Beginners
Welcome to Option Invest’s guide to cryptocurrency trading for beginners. In this guide, we will explain cryptocurrency and how to trade it for complete beginners.
If you have never traded them or don’t understand how cryptos work, fear not! We will keep this guide simple and short so you can grasp cryptocurrency trading quite easily and start trading with ease.
So what is cryptocurrency? What can you use it for? How do you trade them? How do you make money trading them? Find out the answers to these by reading this guide.
What Is Cryptocurrency Trading?
We will attempt to explain cryptocurrency trading in the simplest way possible. It is quite natural that they may appear confusing to those not familiar with it.
Cryptocurrencies are digital assets that are software-based. You cannot touch or feel it as they don’t have any physical form.
Nobody has central ownership or authority over these so no one single entity can control or manipulate its value.
Cryptocurrencies use blockchain technology to record, verify, and prove these transactions so everyone on the blockchain has the same information. You need to understand how a blockchain works to understand crypto transactions better
The blockchain is basically a publicly available distributed database. It contains millions of computers connected to each other. The information on the database is heavily encrypted using cryptography.
Even if one node gets compromised or hacked, the whole system won’t fail. If all the other copies of the database don’t match, any changes made to the compromised system will be rejected.
Thus a blockchain database is both cheaper and more secure than the traditional server system.
Each cryptocurrency has its own blockchain (not in the case of tokens). So for example, all transactions of Bitcoin until now are recorded on the Bitcoin blockchain.
Now that we know what cryptocurrency and blockchain is, we can understand cryptocurrency trading better.
Cryptocurrency trading involves selling and buying cryptos, exchanging one crypto for another, or exchanging fiat into crypto.
So how is it any different from trading currencies? They are actually quite similar but with some key differences.
The biggest difference is perhaps, the lack of a middleman in crypto trading. In the case of forex trading, bank, brokers, or some financial institutions act as the middlemen.
With crypto, you can send and receive crypto funds directly without any outside intervention allowing you more privacy and freedom.
Forex trading has been going on for centuries while cryptocurrency trading has just reached a decade.
The daily turnover rate on an average for forex is over $5 trillion USD. Compare that to less than a few billion daily volume for crypto trading.
Forex is also more liquid than crypto. The most liquid crypto is Bitcoin and other cryptos are yet to reach its liquidity level.
So we can see, crypto still has a lot of catching up to do. Once people start realizing trading with crypto compared to fiat carries less fees and are actually faster, we can see crypto taking over.
So we got the basics of cryptocurrency covered, now we can learn where and how to trade cryptocurrencies.
How Does Cryptocurrency Work?
If you want to make handsome profits from crypto trading, you need to understand how crypto trading works.
As mentioned above, you can start trading crypto by exchanging it for fiat. Naturally, when you’d be starting out, you won’t own any crypto.
So in exchange of fiat, you can purchase your crypto. But you cannot just purchase any crypto you desire.
The cryptos that you can directly purchase using fiat are known as base currencies. These currencies are used to quote all other cryptocurrencies.
So if you wished to purchase altcoins, you’d have to purchase a base crypto with fiat and then use the base currency to convert it to the altcoins that you prefer.
So what are the base currencies in crypto? Bitcoin is the major base currency. Other cryptos are quoted in terms of bitcoin.
Other base currencies include Ethereum, Litecoin, and Bitcoin Cash. Ethereum and Litecoin actually offer faster confirmation times and are cheaper as well (in terms of transaction fees).
As a beginner trader, we would recommend you to purchase only the major cryptocurrencies such as bitcoin, ripple, ethereum, etc.
They are popular, and widely used. Their market movement is constantly followed by top traders so you can get trading advice from them on when to buy or sell.
So you don’t have to worry about altcoins just as of yet. First, let us understand how to send crypto to someone. This will help you understand how crypto payments are made.
Consider two friends, Bob, and Mike. Bob wishes to send 0.03 BTC to Mike. Bob gets Mike’s public key and enters this amount. He uses his private key to authorize this transaction from his wallet to Mike’s wallet.
Once Bob hits send, this transaction needs to be verified and added to the blockchain. This makes crypto transactions transparent. There is no way to reverse this payment once its been done.
Miners verify and add these transactions to the blockchain. They get paid in crypto for their effort. This is a basic explanation of crypto transactions and how it works.
We can know learn what do you need to start crypto trading.
What Do You Need To Start Crypto Trading?
In this section, we will describe the basic requirements to start crypto trading. You basically need two things:
Choose a Crypto Exchange/Broker
A crypto exchange is where you can buy and sell cryptos. All you need to do is register by opening an account, provide the necessary information and start trading.
When choosing an exchange, make sure you choose a reliable and trusted exchange. So it crucial that you research the available exchanges and find the best one for you.
Some of the popular exchanges are Coinbase, Binance, Poloniex, Kraken, etc.
Crypto brokers allow you trade on cryptos without owning them. You trade them as Contract For Differences. Trading crypto as CFD has its advantages.
You can trade on margin and enjoy high leverage on crypto assets. You can speculate on its price movements without owning the underlying asset.
So the choice is yours. You can directly trade crypto or bet on their price movements without owning them.
Choose a Crypto Wallet
A crypto wallet is digital wallet that used to store and send cryptocurrencies. It is secured using private keys that only the owner has access to. There are 5 types of wallet:
Online wallet: These are online wallets that can be accessed on the web. Online wallets are subject to hackers and cyber-crimes often.
Mobile wallet: Mobile wallet is a hot wallet that comes in the form of a mobile app. Convenient for those who want to transfer crypto on the go.
Desktop wallet: Similar to a mobile wallet except it runs on a desktop
Paper wallets: Paper wallet contains the bitcoin address and private key printed on it along with a QR code to scan. These aren’t used much nowadays as they are vulnerable to being burned, or exposed to water.
Hardware wallets: These aren’t free and come at a premium price. But if you are someone who owns a lot of crypto, it would be worth the investment as they the most secure wallets out there.
They are secure offline devices, so there are no chances of it being hacked.
Well, that’s all you need to trade a crypto is a broker/exchange and a wallet. In the next section, we will take a look at how to trade crypto profitably.
Basics of Crypto Price movement
Crypto trading can be a daunting task for beginner traders. The price movement of crypto assets is quite volatile.
With that being said the potential for profits in quite high. Chances are the first people that jumped into the bitcoin bandwagon are probably multi-millionaires now.
Consider the following situation: If you had bought bitcoin when it was dirt cheap and held on to it and sold at the top, you’d be quite rich.
For example, the price of bitcoin took parity with the US Dollar in February 2011. This means 1BTC = $1. If you bought 100BTC at that time, your total investment would have been $100.
Fast forward to 2014 where the price of btc reached $1000 for the first time. You still have your 100BTC and consider now is a good time to sell it.
You’d earn $100,000 by selling those 100 btc’s. That’s a 1000x return. You now realize how profitable they can be.
What’s interesting bitcoin peaked at $19783 in December 2017. Currently, the price of one bitcoin is $11,848.25.
So you can see the price of bitcoin fluctuates a lot. And it’s not bitcoin. All cryptos have an erratic price movement that cannot be predicted through guesswork.
If you just buy and sell because the hype for a coin is high and not taking other factors into consideration, you’d be in trouble and most probably will lose money.
What Affects The Price Of Cryptocurrencies?
You need to know the factors that affect the price of cryptocurrencies so you can adjust your strategy accordingly. Here are these factors:
Supply and Demand: Supply and demand dictates the base price of the crypto. Cryptos are not unlimited. They have a limited supply. And that supply gets scarcer. As it gets scarcer, its price increases accordingly.
Mining Difficulty: This applies to those coins that can be mined. The coins that are based on proof-of-work have a direct correlation between mining and price. Harder the mining difficulty gets, the more expensive the coin gets.
News: Media plays a big role in shaping the crypto price movement. News feeds can spread FOMO and FUD and the same time spread hype.
Therefore, they have the ability to spike up a coin’s price or cause a drop. For example, the news of ICO ban in China spread like wildfire and caused bitcoin to drop from $5000 to $3000 in a short span of time.
Use case: With so many cryptos in existence now, it becomes hard to choose which ones to invest. Therefore, we tend to look at what real life solutions they provide.
If a crypto doesn’t have a solid usefulness, it value may not be considered to be high. This is why cryptos like Bitcoin, Ether, and Ripple are so widely used and have a high market cap.
Cryptocurrency Trading Strategies
As a beginner crypto trader, your focus would be to determine your trading style first.
Do you prefer long term trading, or prefer to keep it short? Are you a HODL’r or a swing trader?
When you determine these, then you can start formulating your strategy. In the next section, we will compare the two so you can choose which one is the best for you
But here are some beginner tips and strategies that you can apply no matter what your trading style is:
Technical analysis is extremely crucial for crypto: In fact, crypto experts recommend focusing on technical analysis more than fundamental analysis when it comes to trading crypto.
Focus on the market volume: Changes in volume can directly be correlated to change in trend. This is not always true, but you should pay close attention to volume changes.
Volume shows how many people are opening positions and at what price levels. This gives you a clear idea on the market behavior.
Use any volume based indicator and find out breakouts to make the most of the market.
Use Stop-losses: Stop loss is a risk management tool and is used only in crypto. However, given the volatility that crypto assets go through, it is wise to add a stop loss to your position to minimize your losses.
Avoid FOMO: FOMO simply means fear of missing out. It is the major reason why new traders fail in crypto trading.
They go along with the hype and overbuy. Eventually, due to oversupply, the price drops and you are in loss.
Don’t fall for shady ICO’s: ICO stands for Initial Coin Offering. As a new crypto trader, you will see a lot of ICO’s that offer you low prices and promise to sell them at a higher price in exchanges when it goes public.
Do your research and see if the coin has any real life applications and research on the company.
There have been many exit scams and pump and dump ICO’s in the past. Stick to stable coins if you are not well equipped to deal with ICO’s.
Short Term Cryptocurrency Trading Strategy
Short term trading strategies are mainly practiced by day traders and swing traders. These are traders that are ready to take their trading profit on a daily basis or on a weekly basis.
In short term crypto trading, traders look to capitalize from small price changes and aim for consistent small profits.
The plan is not to hold coins for a long time. It is indispensable to identify which coin is suitable for short term trading.
There are few advantages to trade with short time trading strategies:
- Quick Money: Traders can make money faster. The forex market moves slower than the crypto market and hence you can earn profits quicker.
- Free up Capital: Although the risk is high in short term trading, but traders do not need to invest their money for a long time. They can easily free up their main capital shortly and invest in other coins.
- More trading opportunities: You can trade on every upswing and downswing and there are more opportunities for making money.
However, there are few disadvantages of short term trading strategies:
- Volatile Market: Because of the market volatility, the coin price changes very frequently. New traders may often lose track of their path when short-term trading.
- Control Emotions: It is hard to control emotions in the trading time. Despite the market conditions, you cannot win all your trades and failure may affect your psychologically.
- Time consuming: Traders need to focus on their trading chart all the time. Short term trading demands attention. You have to check the price movement all the time or else you will lose money.
- Well versed in technical analysis: Traders will need to use multiple indicators to find breakouts and identify trends. And this needs to be done in a short time. This may discourage new traders to trade short-term.
Long Term Cryptocurrency Trading Strategy
Long term crypto traders holding their position for a long time. The duration of buying and selling coins ranges within few months or few years.
Those who are new in cryptocurrency trading and middle way of trading cryptos both are familiar with the word “HODL”.
HODL means to hold on to your coins for an extended period of time.
There are few advantages to trade with long time trading strategies:
- Less Stressful: Trading for long time is less stressful. Even, you don’t need to understand the complex trading formulas to invest for long term.You can ignore the prediction of future market as well as the current market.
- Time Saving: Traders can save their time by using long term trading strategies. They don’t need to sit down in front of the trading device all the day. You just need to buy the coin cheap and wait for the price to increase.
- Tax: Long-term traders can save themselves from big taxes. Those who are trading for short term need to pay higher amount of tax.
There are few disadvantage while trading with Long-term trading strategies.
- Missed opportunities: Traders can miss out on potential profits by holding on to their coins.
- Control Emotion: If you wont be able to control your trading emotions then, long-term trading is not for you. You have to resist This is necessary to accept the trading risk in the long-term trading.
- Patience: You need to be very patient when trading long-term. You can start by practicing with a demo account. You have to resist FOMO and keep holding on to your coins.
Golden Rules Of Cryptocurrency Trading
Successful traders are always following these rules to make profit. Rules are made based on the trading fundamentals, trading habits and trading experience.
- Invest only that much of money that you can bear to lose.
- Always pay attention on Most of the Altcoins accept bitcoin as the base currency
- Never put your all investment in one trade. Try to invest in different coins to minimize the risk
- Focus on small profits. Greed is harmful for your trading
- Before investing, please know about the coin you are going to trade. Do not invest blindly
- Try out social trading if you are not confident with your trading skills.
- Use “stop-loss” but not for all trade. Stop-loss can help you to cut your losses.
- Choose your altcoins wisely
- Invest only what you actually understand
- Learn technical analysis properly before trading
- Leave your emotions out of your trading
- DYOR. Do your own research. Do no blindly follow ‘experts’.
It is never too late to get into crypto trading. When people ask when is the best time to enter the crypto market, I say “Now is the best time”.
The hype for crypto gets unreal and every bull run we see new traders emerging. The sad reality is they fade out by the time we enter the bear market.
Don’t be that trader. Be in the crypto game for the technology, for the volatility, for the real life solutions it provides.
We have described cryptocurrencies for beginners. Hopefully after reading this guide, you can start trading crypto with confidence and earn profits.