Since the inception of the first cryptocurrency in 2009, the crypto space has attracted millions of traders in pursuit. In 2019, the cumulative market cap of the cryptocurrency market exceeded the $237 billion market, a value expected to spike in the coming years. Today, there are thousands of cryptocurrencies (crypto coins) trading on the crypto market, providing investors with a wider scope of investment opportunities. If you decide to trade digital currencies you must be familiar with the basics of cryptocurrency trading. This article explains the basic concept of cryptocurrency trading, its benefits, how to trade cryptocurrencies, and the best websites to trade crypto coins.
What is Cryptocurrency?
Cryptocurrency, also known as digital currency, is a digital asset that uses cryptography to secure transactions. Cryptocurrency, particularly Bitcoin, was initially designed to be a virtual form of money, which could be used as a payment cryptocurrency. A payment cryptocurrency is a channel through which customers transact with businesses digitally for goods and services. Over the years, however, different types of cryptocurrencies have seen their way into this market, providing users with an advanced capacity to undertake more roles. Today, we have digital currencies that act as utility tokens, protocol coins, and privacy coins.
What is Crypto Trading?
When Bitcoin was first released in 2009, it was the only cryptocurrency in the market, and crypto trading was absolutely impossible. However, as more cryptocurrencies joined the market, people started trading them. By definition, crypto trading is the speculation of movement in the price of a given cryptocurrency through a crypto exchange. Basically, crypto trading operates in the same way as forex trading. This means that traders purchase crypto coins using a specified currency, hold the coins for a given timeframe, then sell them at either a profit or loss.
How the Crypto Market Works
The crypto market is currently decentralised. This means that trading of cryptos is not regulated or controlled by a given central authority, country, or central bank. However, cryptos can be purchased and sold through an exchange. Users can also store them in what is known as crypto wallets. Transfer of crypto coins between traders takes place in these wallets, awaiting verification through a blockchain. The crypto market is powered by the blockchain technology, through which digital ownership of crypt coins and storage of the same is facilitated.
Common Terms Used in Cryptocurrency Trading
Before you decide to trade cryptocurrencies, you need to familiarise yourself with the following terms;
Blockchain refers to a digital register comprising of a series of records of data managed by multiple computers. Each blockchain record contains a historical of how the ownership of each unit of a crypto coin has changed over time. In simple terms, when a crypto coin is transferred from one user to another, a transaction is said to have taken place. Transactions are then clumped into blocks, which are then added to a public register known as the blockchain.
This is a technology that applies computer science and complex mathematics to link blocks in a blockchain. Alteration of data in a blockchain causes a disruption in the cryptographic links holding the blocks together. The network of computers managing the blockchain identifies this disruption as a fraudulent act.
This is the process of verifying the authenticity of the past crypto transactions and adding new blocks to the blockchain. Every time a transaction is expedited, crypto miners will verify its authenticity, and have it added to the blockchain. Usually, the mining process involves solving complex mathematical problems using cryptographic functions that are linked to the block having the data for the completed transaction.
Blockchain files are readable by every individual within the network of computers (nodes) that manage the crypto blockchain. When nodes agree on the authenticity of a transaction, a network consensus is said to have taken place.
An exchange is a marketplace where investors trade crypto coins. Platforms do not all offer traders with the ability to exchange any type of coin. Some exchanges will support a wider range of coins whereas others offer trading in the popular coins, such as Bitcoin, Ethereum, Bitcoin Cash, and a few others.
This is the change in the rules and protocols of a given crypto coin. This can either be hard or soft forks. A hard fork is permanent, and the changes made result in a new blockchain with entirely new rules.
Benefits of Cryptocurrency Trading
Cryptocurrency trading comes with plenty of benefits. Here is a highlight of some of the reasons why you should invest in cryptocurrency trading.
High Returns on Investment (ROI) – According to a recent report by the Blockchain News, cryptocurrencies offer the highest ROI compared to other financial assets. Based on this report, the leading crypto coin known as DASH has currently registered an ROI of 25457.0%. With this rate of return, investors can rest assured of higher yields from their investment, especially when choosing the ideal crypto coin to trade.
Crypto Volatility – Following the substantial amounts of short-term speculative interest that the crypto coins attract, the cryptocurrency market has experienced extreme levels of volatility. For example, in a span of one year between 2017 and 2018, bitcoin prices spiked to $19,378 and also fell to $5,851. Although most of the other cryptocurrencies are more stable than bitcoin, digital coins are prone to high levels of volatility.
The high rate of volatility experienced in cryptocurrencies is what makes the crypto market attractive to investors. The rapid variations in the movement of crypto prices provides traders with a wide range of investment opportunities. Investors can either go short or long in their intra-day trading for profitable speculation. However, crypto volatility increases the risk of losing significant amounts of money, which is why you should have efficient risk management strategies when trading cryptocurrencies.
Lower Transaction Costs – Cryptocurrency exchanges do not charge transaction fees, as the crypto miners are paid by the network. The only costs that investors are likely to incur when trading crypto coins are the third-party charges. These are fees that traders will pay a third party to open a trading account or the crypto wallets. The good news is that these charges are relatively lower compared to what investors spend when trading other financial securities.
Leveraged Trading – Trading cryptocurrencies offers investors an opportunity to open a position on a margin. A margin refers to a deposit that is only a small proportion of the full trade value. This means that crypto traders can initiate trade while only investing a significantly low amount of their capital. The profit or loss generated by a position is relative to the full value of that trade. Leveraged trading, therefore, enables you to make substantial profits from a small investment. However, you must be cautious when initiating this form of trading, as a possible loss could eat up on your initial deposit and beyond.
24-Hour Trading – The crypto market is entirely decentralised. As a result, the market is open for trade for 24 hours a day, seven days a week, and for 365 days a year. Crypto transactions between individuals can be initiated and completed at any time of the day throughout the world. However, when forks are being implemented or when an infrastructural update is taking place, the crypto market may encounter spans of downtime.
How to Trade Cryptocurrencies
The process of trading cryptocurrencies can be quite intimidating. For most people, especially beginners in the market, investing in digital currencies is a complex and complicated endeavour that can be quite exhausting in the long run. However, trading crypto coins does not always have to be sophisticated. In this section, you will find a step by step guide on how you can trade cryptocurrencies without much hassle.
Step One: Account Opening
Like any other form of electronic trading, you will need to open an account to trade crypto coins. Today, there are plenty of brokerage companies that offer trading accounts to crypto traders. Identify the ideal broker and activate an account in their trading platform. Most of these platforms will require you to provide some basic information, such as username, password, email address, and even your phone number. An official government ID may also be needed to confirm your identity.
Before you get fully registered, a broker may require you to confirm or verify your account by sending you a link via email. It is on clicking on this link that your account gets activated officially. Traders should also add their payment method of choice when signing up. This will be the means through which you will purchase crypto coins. You do not have to worry about providing your debit/credit card details, as the numbers are usually encrypted.
Step Two: Funds Deposit
For you to buy or sell crypto coins using your activated account, you will need to deposit some funds to it. Most trading platforms allow traders to purchase crypto coins directly from their MasterCard or Visa credit cards. On the other hand, depending on the broker you choose, you can deposit crypto coins to your account from other cryptocurrency wallets.
The process of depositing funds into your account is easy. Click on the ‘Funds’ tab on the trading platform, scroll down to ‘Deposits,’ and then click on your preferred crypto coin. A deposit address for your crypto coin (for example, Bitcoin) will be generated immediately for you to copy. Once you enter the amount of crypto coins, you want to purchase, paste in the deposit address and click on ‘Send.’ Your account will be funded in minutes.
Step Three: Placing an Order
This is the phase where the actual trading takes place. Here is a breakdown of you are likely to encounter to place an order on a trading platform.
Select the coin you want to purchase and identify its right market. For example, if you are going to buy ADA coins, then you will enter ADA and click on the pair ADA/BTC.
Scroll down the trading screen and look for ‘Buy ADA.’
Before you initiate a trade, you will need to place limits on your trade. The two common limits include the Market Order and Limit Order limits. The Market Order limit is where you place your trade at the current market price available on the trading platform. The Limit Order, on the other hand, is where the trader chooses the price that they want to place their trade at.
- Enter the amount of ADA coin that you want to buy, and then click on ‘Buy ADA.’
- You should receive a confirmation that your trade has been executed successfully.
- The same process applies when you wish to sell crypto coins. The only difference will execute a ‘Sell’ order instead of ‘Buy’.
Websites Where Cryptocurrency Accounts Can Be Opened
There are a number of sites where investors can trade cryptocurrencies. The sites listed below are exchanges, however there are also peer-to-peer platforms where the exchange occurs with little to no assistance from an intermediary. Here are a few examples of crypto trading platforms. Each platform has it’s own fee structure as well as security procedures when it comes to protecting trader’s assets. You can transfer your coins from an exchange to your own personal crypto wallet if you feel the exchanges do not provide the level of security you require.
Since its entry into the market in 2017, Binance has been the dominating cryptocurrency trading giant. In 2018, the platform became the largest crypto exchanges across the world as far as trading volumes are concerned. Binance is accessible globally, and it is ideal for use by both trading novices and advanced crypto traders. Trading on Binance will cost you a base fee of 0.1%. However, this can be cut down by 25% if you use their BNB tokens. Binance also features a mobile trading app, which is available for both iOS and Android devices.
This is one of the oldest crypto exchanges having been founded in 2012. Bitfinex deals in fiat currencies, including GBP, USD, and EUR. This platform is especially popular for its large trading volumes, with the current records indicating a volume of over $118 million. You can also trade on Bitfinex via phone through its advanced mobile applications. The trading fees for Bitfinex range from 0.1% to 0.8%.
Coinbase is also a popular crypto exchange accessible to over 32 countries across the world. Founded in 2012, Coinbase has achieved a user base of over 13 million traders. Coinbase features various crypto coins, including Bitcoin, Litecoin, and Ethereum. The platform is rated as having very high fees, ranging from flat fees, variable, and spread fees.
BitMEX was founded in 2014, and the platform is run by professional developers, algorithm traders, and economists. The platform also deals in fiat currencies, such as the Yen, USD, and the Chinese Yuan. Investors can trade a wide range of crypto coins on this platform, including Ripple, Bitcoin, Ethereum, Cardano, and Bitcoin Cash. The trading fees for BitMEX are 0.025% and 0.075% for makers and takers, respectively.
Bittrex was started in 2013, becoming one of the largest crypto exchanges worldwide. Over the years, Bittrex has had trade volumes amounting to over $1. The trading platform is suitable for both beginners and advanced traders, following its low fees and a wide range of coins. Investors can trade crypto coins, such as Ethereum, Bitcoin, DigiByte, Cardano, and Dash coins. The trading fees of Bittrex stand at 0.20%, which is almost in line with the market average of 0.25%.
Risks Associated with Cryptocurrency Trading
Although trading cryptocurrencies offer investors with extremely high returns on investment, the crypto market also poses risks that can cause them a fortune. Some of these risks include the following;
Crypto Cyber Crime and Hacks – Crypto traders have had to deal with high levels of crypto cybercrime experienced over the past decade. Today, such scams as fake cryptocurrency tokens and cryptojacking have seen investors lose millions worth of investments. Fortunately, there is a wide range of crypto tools that investors can use to mitigate these scams.
Regulatory Issues – The lack of control and regulation of the crypto market poses unprecedented risks to traders. Central banks and governments are yet to establish an ideal fiscal policy to regulate crypto trading. As a result, there is a risk that the taxation status, trading rules, and outright legality could change by the day.
Price Fluctuations – While volatility remains to be the attractive spot of crypto trading, the extreme fluctuation of crypto prices can result in massive losses. This particularly happens when the market moves in a direction against your speculation.
Metrics to Use When Trading Cryptocurrencies
To help establish the value of various cryptos and mitigate risks associated with crypto trading, traders should consider using the following metrics.
Decentralisation of Nodes
This metric shows the number of nodes in a blockchain network. The higher the number of nodes decentralised in a network, the safer it is.
This is the degree of transactions that a cryptocurrency can maintain daily. If a cryptocurrency cannot meet a specified threshold in a day, its value is likely to decline significantly.
This is the measure of the number of wallets that are used annually for a given crypto coin. This metric is the best way to identify the number of active users in a network.
This is the measure of computational power used by a network. The higher the network hashrate, the safer the network.
Cryptocurrencies are rapidly becoming an investment priority for most investors. The popularity of the crypto market is associated with the high ROIs that come with trading crypto coins. If you decide to invest in cryptocurrencies, however, you should undertake an extensive research on the market. This is to keep you posted on the dynamics, risks, and basics of crypto trading to leverage your investment.