Comprehensive Guide to Trading Cryptocurrencies
So, you’ve finally decided to jump in and get a share of the lucrative market that cryptocurrencies present, and you’re already thinking about accruing millions within the shortest time possible. There’s no doubt that this market is massively profitable and an exciting world for investors to plunge, unfortunately, trading here and understanding the market dynamics isn’t as easy as it has been made out to look.
In all seriousness, you can make lots of cash in this business, but you can also lose a lot too. The vital thing for people who have never traded cryptos is to understand the dynamics and fundamentals of the interchange. Trading in digital money is not just about buying and selling; there are numerous factors that you need to consider and equally plentiful ways to make cash in this market.
To break you into this world, this ultimate beginners’ guide will provide you with the vital backdrop for this entire industry taking you through some of the important things you need to know about trading in cryptocurrencies.
The Economics of Cryptocurrencies
Before even touching on trading, let’s first look at the basic economics of cryptocurrencies because they will be vital in explaining the trading part of it. While some of these economic concepts will be unique to digital currencies, you may have heard about some since they are abstracted from everyday investment markets.
Nonetheless, the main reason you should understand these concepts is that some of them affect the price movements of the cryptos, and thus, are very essential in trading. These concepts include supply and demand; market sentiment; and utility.
- Supply and Demand—starting with the essentials, supply, and demand greatly affect the price of cryptocurrencies. The world’s most popular crypto, Bitcoin (BTC), has a supply limit of 21 million, meaning the total number of bitcoins that will be in circulation [ever] won’t exceed 21 million. As of 2018, it was confirmed that about 80% of this total had already been mined.
Although it appears, we are nearly heading towards mining all the 21 million BTCs; there’s still a long way to go until all enter into circulation. In fact, as things stand , it is reported that the supply of new coins won’t be fully exhausted until 2140!
Back to supply and demand, the fixed supplies of cryptocurrencies mean digital scarcity. In investment terms, lower supply creates higher demands, thereby increasing prices. So, the lower the supply of a particular digital currency, the higher the demand, and the higher the prices. This explains BTC’s surge in price.
- Market Sentiments—if you decide to become a crypto trader, it is likely that you will switch between a number of marketing positions regularly. It, therefore, becomes essential that you keep yourself updated on the market sentiments surrounding your chosen position. As such, it is vital to conduct thorough research and read a bunch of recent crypto articles on the web. If you invest in a cryptocurrency that has negative market sentiment [for instance, constantly declining in value], you are likely to lose money than gain.
- Utility—in the context of trading, utility refers to the usefulness of a cryptocurrency; the more useful it is, the more valuable it is perceived to be, and therefore, the more likely it’s likely to be bought. For example, Ethereum is not just a digital currency; it encompasses a complete platform that allows people to build decentralized systems and applications on top of it. So, many people see Ethereum as more useful than most cryptos that are merely mediums of exchanges. Ethereum is perceived to possess higher utility, and as such, seen as valuable.
How to Start Trading
Once you understand some of these basic concepts of the cryptocurrency market, you can now start building your own crypto portfolio. Firstly, you need to find and access the marketplace from which you can buy and trade crypto currencies. There are very many exchange platforms you can choose from on the internet, but you have to have decided [based on factors described above] which crypto you want to try out first.
Since you are completely new to cryptocurrency trading, you would need to buy your first digital coins using fiat currency [such as US Dollars, Pounds, or Euros]. Some of the popular exchange platforms that buy your cryptocurrencies using your credit card include coinbase, Coinmama, Coinbase Pro, LocalBitcoins, and Luno among many others. You’ll need to sign up [and of course pay some fees] to these platforms to begin buying and trading your digital coins.
The best thing about some of these platforms is that they offer secure storage wallets for your coins, and would indicate your balance as you continue to trade. The wallet saves your private key and public address allowing you to store, send, or receive cryptos. They also even provide buyers with statistical illustrations and data showing the performance of the cryptocurrencies on offer.
There are also other external analysis tools and oscillators that help traders identify buy or sell signals. With such information and a little bit of more research, you can be able to make informed forecasts on what cryptos are best to buy, in terms of value now and in the future. Please note, you must follow a certain cryptocurrency thoroughly, and for a significant period of time, before you decide on investing.
The basic cryptocurrency trading principle is “Buy Low, Sell High,” which implies buy when your preferred crypto is not that expensive, and sell when the price goes up. Obviously, you have to invest in coins that have the potential to grow.
Crypto to Crypto Trading
Now with your own cryptocurrencies, you can start crypto to crypto trading. The basic idea of trading is still the same as explained above., but you may need to create another account with an exchange platform that allows this type of exchange. Some of the popular crypto-to-crypto exchanges include Binance, CryptoBridge, CoinSwitch, and others. Like with a fiat-to-bitcoin exchange, you will have to pay trading commission to the platform as well as the withdrawal fee if you wish to withdraw. Again, the basics in crypto to crypto trading entails checking the graphs, data, and all other relevant statistics to determine when to buy and when to sell.
As the title suggests, short term trading entails buying a cryptocurrency but only hold on to it for a short period of time before selling. This can be anything from minutes, hours, days, to a few weeks or months. You might buy a crypto if you think it will rise in value the near future, and then sell it when the value actually goes up. One of the advantages of this strategy is that it is a simple way of making quick profits in cryptocurrency trading.
Unlike fiat markets, such as equity and forex exchanges, crypto market values can skyrocket within a matter of minutes or hours, which can mean quick and massive profits. However, since the market is absolutely volatile, it can also mean losing your cryptos within minutes or hours. It is advisable to keep your emotions in control with this kind of trading, and one thing you will, for sure learn is that short-term trading does not always translate to wins!
Typically, long-term cryptocurrency trading means holding on to your coins for a year or more. The basic idea here is that although the market is volatile, the market values of cryptos are expected to increase in large amounts in the long run. If you had bought 10 BTC back in 2011 when each was worth about $0.35, you could have sold each of your coins for almost $20, 000 each in December 2017, making millions in the process-you do the math!
The main advantage of long-term crypto trading is that you will have plenty of time to understand trends and charts before you finally decide to make a trade. Unlike short term trading where you need to grasp all the complex charts, analytics, and data in a short period, you will only need to hold on to your coins as you study the market.
The only drawback here is that you might miss a good trading opportunity to make short term gains. Sometimes the coins can rise in value quickly, only to drop back again in a short while. A great example is still BTC; in December 2017 it nearly hit $20, 000, only to drop back to about $4000 shortly after.
Other Crypto Trading Strategies
Besides the basic, short term, long term trading strategies, there are numerous other strategies that can make your trading easy and worthwhile.
- Trade on Margin and Leverage—if you anticipate a shift in the value of a certain crypto, trading on margin can enable you to borrow money to increase your profit potential if your forecasts materialize. In this context, the margin is the amount of capital invested in a particular trade in relation to the entire position held by utilizing leverage. By example, if you take a leverage of 100x or 1:100 with an account balance of $200 it would mean that any profit made will be multiplied by 100 and thus, your position would increase to $20, 000 with a margin of just 1%.
The beneficial aspect here is that if the trade is unsuccessful, you will only lose the initial investment before the leverage was applied. There are numerous exchange platforms with varying rates and margin requirements. Some of the best include Prime XBT and BitMEX.
- Technical Analysis—this is pretty much what this guide has been emphasizing on. With technical analysis, you simply analyze the historical price charts to identify telling patterns. It is important to note that in crypto exchanges, history has a habit of repeating itself, and you may use this to predict the future price movements.
- Utilize News—this is particularly relevant for short-term traders. When news such as massive hacking or government regulations hit the crypto markets, prices tend to plummet. On the flip side, when government or huge corporates decide to join in in the market, prices tend to rise rapidly. This only means that keeping yourself up to date with relevant news can give you an edge over the market.