Are you interested in trading cryptocurrencies, like Bitcoin, Ethereum, or Dogecoin? If your answer is yes, you should gather as much information about digital currency as possible before deciding on an exchange or trading platform.
In the world, today cryptocurrency is one of the most profitable markets for investors, but success does not come easily.
Don’t worry we got you covered, we are here to guide you with steps to take before you start trading. This article on understanding cryptocurrency trading will teach you everything you need to know.
What is cryptocurrency and why is it important
Cryptocurrency is any digital currency that is protected by cryptography or secure communications and is used as a medium of exchange for peer-to-peer transactions.
Bitcoin, the first blockchain cryptocurrency, is a type of digital currency created in 2009 by an anonymous founder who went by the pseudonym, Satoshi Nakamoto. Cryptocurrencies are not managed by a bank or a government agency. Instead, transactions involving cryptocurrency tokens are typically recorded on a public blockchain, which is made up of digital data stored in a database.
href=”https://uncleblockchain.com/blockchain-technology/” target=”_blank”> target=”_blank”> Blockchain technology is used to keep an online ledger of all transactions, and it provides a secure data structure for the ledger.
Unlike fiat money, which is controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority.
Currently, there are over a thousand cryptocurrencies in existence, each with its own set of security protocols and value propositions, but Bitcoin is the most well-known. Ethereum, Litecoin, and Cardano are some top cryptocurrencies.
Although cryptocurrency is a relatively new phenomenon, it has the potential to transform the financial system and the way we think about money. Cryptocurrency is a new asset class at the heart of the crypto economy – a completely new set of financial services, commerce, and global payments. Read: What is Cryptocurrency? How it works, Types, Benefits | Full Guide
Why Cryptocurrency is important
The benefits of using Cryptocurrency are:
- Enables pseudonymity
- Peer-to-peer purchasing
Purchasing goods and services with cryptocurrencies is completely online and the identity of buyers are kept anonymous. However, a major misconception about cryptocurrencies is that they guarantee completely anonymous transactions.
They provide pseudonymity, which is a state of near-anonymity. They enable customers to make purchases without disclosing personal information to merchants.
A transaction, on the other hand, can be traced back to a person or entity in the eyes of law enforcement. Nonetheless, if concerns about identity theft and privacy persist, cryptocurrencies can provide benefits to users.
Another advantage of cryptocurrencies is that they do not require the involvement of financial institution intermediaries.
The absence of a “middleman” reduces transaction costs for merchants service . If the financial system is hacked or the user does not trust the traditional system, there is a huge advantage for consumers. For example, if a bank’s database was hacked or damaged, the bank would be completely reliant on its backups to restore any lost data.
Even if a portion of a cryptocurrency is compromised, the amount left will still be able to confirm transactions.
Cryptocurrency trading is the process of monitoring the change in cryptocurrency price using a CFD trading account or by buying and selling coins via an exchange.
CFD trading is a form of derivatives trading that allows you to trade on the price movements of cryptocurrencies without storing the coins. You can go long (‘buy’) if you believe a cryptocurrency’s value will increase, or short (‘sell’) if you feel it will decrease.
Both are leveraged instruments, which means that a tiny investment – known as margin – is the only requirement to acquire full exposure to the underlying market. Due to the fact that your profit or loss is still determined by the entire size of your position, leverage magnifies both earnings and losses.
Buying and selling crypto on different exchanges
When you buy cryptocurrencies via an exchange, you are actually buying coins. To begin , you’ll need to create an account with an exchange platform, make a deposit, and store the tokens in your wallet until you’re ready to sell.
Exchanges have a high learning curve, since you’ll need to become familiar with the technology and have an understanding of how to evaluate the data. Numerous exchanges also have deposit limitations, and maintaining an account may be rather costly.
In summary, cryptocurrency exchanges are online marketplaces where users may swap cryptocurrencies for other assets such as digital and fiat currencies.In essence, cryptocurrency exchanges serve as a middleman between a buyer and a seller, earning money through commissions and transaction fees.
On common cryptocurrency exchanges, $100 can be exchanged for an equivalent amount of bitcoin, and vice versa. Similarly, a bitcoin worth $100 can be exchanged for an equivalent amount of Ethereum. The same concept can be applied to various assets depending on what the exchange has to offer.
Types of cryptocurrency exchanges
The major types of cryptocurrency exchanges are:
- Centralized exchanges
- Decentralized exchanges
Centralized cryptocurrency exchanges, as the name implies, act as a middleman between a buyer and a seller. Almost all crypto transactions go through centralized exchanges because they are more reliable. Centralized cryptocurrency exchanges include Coinbase, GDAX, Kraken, and Gemini.
Decentralized cryptocurrency exchanges enable users to conduct peer-to-peer transactions without the involvement of a third party. Moreover, DEXs do not permit the exchange of fiat currencies for cryptocurrencies. Examples of decentralized cryptocurrency exchanges include Uniswap (V2), Tokenlon, 0x Protocol, and Venus.
Short-term cryptocurrency trading
Short-term crypto trading is when you buy a cryptocurrency to only hold it for a short period. This can range from minutes to hours, days to weeks, and months too!
You may choose to purchase a cryptocurrency because you believe its price will rise shortly. If you thought the price was going to drop again, you would sell it for a quick profit!
Let’s take a look at some of the benefits of short-term cryptocurrency trading.
The main benefit of short-term cryptocurrency trading is that it provides a great opportunity to make large percentage gains. Unlike fiat currency markets, where prices rarely move more than 1% per day, cryptocurrency prices can nearly double overnight!
Because cryptocurrencies have grown in popularity, there are now over 1,500 different cryptocurrencies to trade. That means there will be more opportunities to make huge profits. Not only that but there are large trading volumes for a variety of coins.
Large trading volumes are important because they guarantee that you will always find a buyer or seller! Simply put, it means that a large amount of money is flowing in and out of that cryptocurrency.
Long-term cryptocurrency trading
Have you heard the term “HODL”? If not, we’ll assume you’re a brand newcomer to the cryptocurrency world! It’s not a word in the dictionary, but you’ll hear it in crypto forums and community chat groups!
“HODL” is a slang term that refers to holding a cryptocurrency for a long period rather than selling it. It means “Hold on for dear life.” Long-term crypto trading typically entails holding a coin for a year or more.
The idea is that, while there will always be volatility, the price will rise massively as time goes by.
One of the primary benefits of long-term cryptocurrency trading is that it is simple and takes little time. You don’t need to understand complicated trading charts or graphs because you’re only interested in holding your coin for the long term.
Unlike short-term trading, which requires you to always monitor cryptocurrency prices, you can do it in your spare time. It’s simple; once you’ve purchased your coin, all you have to do is wait!
Another advantage of long-term cryptocurrency trading is that you won’t have to start with large capital. You can buy small amounts whenever you have some spare cash and let it grow over time. This also allows you to avoid the stresses of market volatility because you are not concerned with short-term price movements.
How to trade cryptocurrency for profit
If you’re thinking about trading cryptocurrencies, consider whether buying or trading will best suit your needs. Here are some tips that will help.
- Decide whether you want to buy or trade
- Set up your account
- Decide which currencies you want to buy and sell
- Decide on your trading strategy
- Map your strategy by placing trades
Decide whether you want to buy or trade
You can choose to own cryptocurrency units or to speculate on the price of the cryptocurrency. Trading allows you to speculate on the price without ever acquiring ownership by utilizing derivatives trading instruments known as cryptocurrency CFDs.
You must pay the full price of the asset with a unit of cryptocurrency. You only need to put up a small portion of your total position size when trading. This enables you to take a leveraged position on the price, gaining more exposure than would otherwise be possible with your investment amount.
This method is cheaper, as investors do not have to pay deposit or withdrawal fees to access the currency, for example.
Trading has a number of tax advantages over investing. You do not have to pay capital gains on profits from cryptocurrency trading, whereas you do if you profit from direct purchases and sales of cryptocurrency.
On the other hand, if your strategy is flawed, the trading approach can magnify your losses.
Set up your account
Purchasing cryptocurrency can only be done on an exchange. This involves creating an exchange account and storing the cryptocurrency in your digital ‘wallet.’
Instead of directly accessing the underlying exchange, if you just want to trade cryptocurrency, you only need a brokerage account. A broker will trade on your behalf in the market. This is usually faster and easier to set up.
Decide which currencies you want to buy and sell
You will not be able to trade all 1,500 cryptocurrencies in reality. However, you should be able to trade all of the major currencies, including bitcoin, bitcoin cash, Ethereum, Ripple XRP, and Litecoin, and new currencies are constantly being added. With so many options available, it may be best to focus on those you are familiar with and become an expert in their price movements, rather than taking a broad approach.
Decide on your cryptocurrency trading strategy
You must ensure that you know and understand your market. The value of cryptocurrencies is determined by a variety of factors. Concerns about government regulation, media coverage of the sector, and the fortunes of the US Dollar – as well as statements from influential business people or government ministers – have all influenced prices in the last year. The more people who invest in cryptocurrencies, the more powerful these various factors will become.
Map your strategy by placing trades
After you’ve decided on a trading strategy, you’ll need to define your ‘close’ conditions or the point at which you’ll exit a trade. This can be a very useful discipline. Cryptocurrencies are highly volatile, and holding large open positions is dangerous. When a position has reached its target or you have reached your maximum loss, you must close it out. These filters can be set to occur automatically. Starting small or testing your knowledge with a demo/practise account can help you gain an understanding of how these markets work and what influences them.
Key terms to note when trading cryptocurrency
Below are important terminologies to note while trading cryptocurrency:
- Initial Coin Offering (ICO)
I did not misspell hold. The term has become the battle cry for early cryptocurrency adopters who are holding onto coins regardless of price volatility, and it can be traced back to a drunken, profanity-laced misspelling in a forum posting.
A cryptocurrency-wallet-easy-guide/” target=”_blank”>cryptocurrency wallet is where you keep your private and public keys, which are required to send and receive coins. There are hardware wallets, software wallets, and paper wallets. Hardware and paper wallets are generally thought to be more secure than software wallets, though each has advantages and disadvantages. If you lose your private key and are unable to access your wallet via backup methods, you will never be able to recover your coins, and they will be removed from circulation.
You can share your coin-specific address, much like an e-mail address, so that others can send coins to you. People, unlike e-mail, can have multiple addresses, and it’s usually recommended that you generate a new one for each transaction.
The term href=”https://uncleblockchain.com/best-altcoins-to-hodl/” target=”_blank”> altcoin , which is short for alternative coin, is commonly used to describe any cryptocurrency other than bitcoin.
A distributed ledger that is cryptographically protected and is made up of blocks that contain transaction history. As the blockchain grows in length, it becomes more difficult to change older transactions.
A software fork occurs when a change is made to the original program, which can result in a split of the original blockchain and the creation of a new coin—Bitcoin Cash and Ethereum Classic are two examples of fork-created coins. There are three types of forks: hard forks, soft forks, and accidental forks.
Initial Coin Offering (ICO)
An ICO, also known as a token sale, is a type of crowdfunding in which a company offers a new coin in exchange for fiat currency (for example, US dollars) or digital currency (Bitcoin, Ether, Litecoin, etc.) The funds they receive are typically used to develop the new concept, and the token they issue will be used to transact on their network once it is launched. Both China and South Korea have banned ICOs, and the SEC has stated that depending on the circumstances of the offering, they may be considered the offer and sale of securities.
Meaning of spread in cryptocurrency
The spread is the difference between a cryptocurrency’s buy and sell prices. When you open a position on a cryptocurrency market, you’ll be presented with two prices, just like in many other financial markets. To open a long position, you trade at the buy price, which is slightly higher than the market price. To open a short position, you trade at the selling price, which is slightly lower than the market price.
What lot means in cryptocurrency trading
Cryptocurrencies are frequently traded in lots, which are groups of cryptocurrency tokens used to standardize trade size. Because cryptocurrencies are so volatile, lots are typically very small: most are only one unit of the base cryptocurrency. Some cryptocurrencies, on the other hand, are traded in larger lots.
What is a pip in cryptocurrency trading?
Pips are the units used to measure price movement in a cryptocurrency and refer to a one-digit price movement at a specific level. In general, valuable cryptocurrencies are traded at the ‘dollar’ level, so a change from $190.00 to $191.00, for example, would indicate that the cryptocurrency has moved a single pip. Some lower-value cryptocurrencies, on the other hand, are traded on different scales, where a pip can be a cent or even a fraction of a cent.
Before you place a trade, read the details on your chosen trading platform to ensure you understand the level at which price movements will be measured.
Is trading cryptocurrency a good investment?
Because cryptocurrencies such as Bitcoin have historically shown almost no price correlation with the US stock market, owning some can help diversify your portfolio. If you believe that cryptocurrency usage will grow in popularity over time, it makes sense to buy some crypto directly as part of a diversified portfolio. Make sure to have an investment thesis for each cryptocurrency you invest in that explains why that currency will stand the test of time.
If purchasing cryptocurrency appears to be too risky, you can consider other ways to profit from the rise of cryptocurrencies.
You can buy stock with bitcoin or invest in stocks such as Coinbase, Square, and PayPal, or you can invest in an exchange such as CME Group, which facilitates crypto futures trading. While investments in these companies can be profitable, they do not have the same upside potential as cryptocurrency investments.
Can I get rich with crypto long-term investment?
Many cryptocurrencies, such as Bitcoin and Ethereum, are launched with lofty goals that may be realized over long time horizons. While the success of any cryptocurrency project cannot be guaranteed, if a cryptocurrency project meets its objectives, early investors may be richly rewarded in the long run.
To be considered a long-term success, any cryptocurrency project must achieve widespread adoption.
Cryptocurrencies are not going away; they are here to stay, very soon all transactions will be cryptocurrencies. However you are not too late, you can begin your cryptocurrency journey today.
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