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What is Cryptocurrency Trading? Learn How it Works and How to Start

At one point or another, investors had considered what is cryptocurrency trading or the best ways to make maximum profit doing so. Although certain risks accompany crypto trading that could make investors lose large amounts of funds should a trade go wrong, it still has not deterred more people from investing. 

One of the major challenges hindering newcomers from venturing into cryptocurrency trading is the lack of understanding of the industry and what it takes to get started. 

As more people continue to indicate interest in crypto, it is essential to understand trading clearly before going into it.  After all, “An investment in knowledge pays the best interest.”

Cryptocurrency Trading Explained For Dummies 

Cryptocurrency trading involves speculating digital currencies’ prices and exchanging one cryptocurrency for another. It involves trading a particular digital currency for another on a cryptocurrency exchange like Binance, KuCoin, BitMEX, Coinbase, etc. 

Not only can users convert their cryptocurrency for another, but they can also exchange these assets for fiat, including USD, EUR, GBP, among others.  

Types of Cryptocurrencies

Since the pseudonymous Satoshi Nakamoto created Bitcoin (BTC) in 2009, hundreds of thousands of other crypto assets have been created for many reasons. There are over 7,000 cryptocurrencies aside from BTC, including Ethereum (ETH), Litecoin (LTC), Ripple (XRP), and Monero (XMR), to mention a few.

Find the full list of cryptocurrencies (Source: CoinMarketCap)

Despite the long list of existing cryptocurrencies, not all of these assets are available on a single trading platform. The most common trading pair on exchanges is usually BTC and USDT against other cryptocurrencies. 

How Cryptocurrency Trading Works 

Cryptocurrency trading works by speculating the price of a particular asset over another.

For instance, should a user decide to trade XRP/BTC pair, the investor would exchange their BTC asset for XRP, hoping that the XRP coin’s value would increase more than BTC. When the user feels satisfied with the market value of the XRP coin against BTC, he or she can trade the former back to BTC. 

XRP/BTC Binance Cryptocurrency Trading

XRP/BTC trading pair on Binance

Using the above screenshot as an example, one may wonder where the 0.00001661 price comes from. An easy way to understand it is first to understand that all cryptocurrency trading pairs are denominated in Satoshis (the small units of Bitcoin).

Therefore 0.00001661 would mean 0.00001661 sats. To get the sats value, we divide the price of XRP against the price of Bitcoin. Using the press time price of 0.24 cents for XRP and $15,055 for Bitcoin, we’ll get the price of 0.00001661 which Binance shows for the trading pair.

You can apply this same formula across any pair you chose to trade to gets the sats value.

Entry and Exit Points in Cryptocurrency Trading

An entry point is a price at which you want to buy a cryptocurrency while the exit point is the price at which you hope to sell. Traders often use this metric to define how much profits they can make on a trade or the losses incurred.

Still using the above XRP/BTC pair example, an entry point could be 0.0001500 sats with the trader hoping to exit once the pair hits a 0.00001800 sats price. Successfully closing this trade would mean that the trader realized a 20% profit.

What Factors Move The Cryptocurrency Markets? 

The crypto market is almost similar to the traditional market. The forces of supply and demand determine the price of asset overtime. Although the crypto space is decentralized and is not controlled by a central authority, governments also contribute to the market value. Factors that move the market include: 

  • Demand 

This is the number of crypto investors willing to purchase at a particular price and a given period. When the asset price increases, its demand will drop and vice versa. 

  • Supply 

Supply is the total amount of a particular digital currency available to investors at a given time and price. 

  • Market Capitalization 

Market cap describes the value of all crypto in existence. The value must regularly increase as it helps convince new users that the industry is still booming.  

  • Regulation 

Another major factor that influences the crypto market is regulation. New sets of rules are published regularly to determine how users will interact with these assets and which crypto would fall under securities or commodities classification. Prohibition and recognition of digital assets go a long way to portray the market in a good or bad light. 

  • News

The amount and nature of coverage that the cryptocurrency industry receives from the media is another factor that moves the market. When the news is mostly negative, especially massive theft reports or a price plunge, it tends to scare new investors away, thus having an adverse effect on the market. 

  • Hacks

Attacks on crypto exchanges or projects usually cause panic in the market. When there is theft on a particular crypto trading platform or project, most users are usually in haste to sell off the assets to stay on the safe side, thus causing its market value to decline. 

Unless the market is in a bullish mode such as with a $280 million Kucoin exchange hack in 2020, market prices could be adversely affected by such news.

  • Coin Listing & Delisting On Top Exchanges 

Coins listing and delisting are among the major forces that move the market positively or negatively. When a coin gets listed on a top exchange like Binance or KuCoin, its value has the possibility of increasing once it goes live on the platform. 

On the other hand, when a coin gets delisted from a platform for whatever reason (case study: BitcoinSV delisting)  its value would drop significantly and spread panic among holders. 

How To Start Cryptocurrency Trading From The Scratch 

Here are the vital steps to get started with your journey.

  • Learn about cryptocurrency trading.
  • Create an exchange account.
  • Deposit funds
  • Place your first trade.

Learn About Cryptocurrency Trading

A common mistake most intending traders make is starting their journey without adequate training or guidance. Therefore, we strongly recommend that you spend quality time and perhaps money to learn about cryptocurrency trading.

Although, this article extensively explains what cryptocurrency trading is, you will need more than this information to reach the promised land. You will need to learn how metrics such as the Crypto Fear and Greed Index works and how to use it to your advantage.

Create An Exchange Account

As explained, exchanges provide the platform for crypto trading, but regardless of the trading platform a user chooses, the process is similar across all trading platforms. It begins first, with creating an account and confirming your email address.

Sign up on Binance

After successfully creating an account, users may sometimes need to complete a KYC (know-your-customer) process depending on the exchange. The KYC process helps verify your identity and to eliminate the use of a platform for nefarious activities. 

Typically you’ll need to submit the following to complete KYC on a cryptocurrency exchange.

  • Name, Phone Number, and Residential Information.
  • Means of identification (Passport, Driver’s License, Voters card).
  • Real-time selfie
  • Source of funds (for large traders).

Note that there are also a few crypto exchanges that let you trade on their platform without KYC. You can learn about anonymous crypto exchanges here.

Depositing Funds

Once your identity is verified, you have to deposit funds to the platform or purchase crypto directly from the exchange using the available payment methods.

Popular deposit options on cryptocurrency trading platforms.

  • Credit/Debit Cards
  • Bank Transfer (SEPA, SWIFT, Faster Payments).
  • Cryptocurrency.

Credit/Debit card transactions are usually instant, albeit attracting higher fees. You’ll receive the purchase amount of cryptocurrencies instantly on your exchange wallet and you can start trading.

Fiat or Bank deposit options typically require sending funds to a bank account provided by the exchange and having the amount added to your fiat balance on the exchange. You can then sell the fiat for BTC or any other coin you want to trade.

For Cryptocurrency Deposits, you’ll have to send funds from an external cryptocurrency wallet or another exchange you’re buying from. You need to get the address for the asset on your destination exchange and use it as a recipient address when sending funds.

For instance, you can copy your Bitcoin address on Binance and use it to receive Bitcoins from a purchase on Changelly or BC Bitcoin. Once the transaction is confirmed on the destination exchange (Binance), you can start cryptocurrency trading.

Placing Your First Trade

After careful observation and market research for your preferred digital asset, you set a buy order at a specific price and wait for the order to be matched. (See How Cryptocurrency Trading Works subheading above)

Immediately a ‘sell order’ aligns with your order, the exchange automatically matches your order, and the transaction is complete. To trade your crypto back to its initial asset, you will need to click on the sell menu located on the ‘trade interface’ and input the quantity and price you would like to sell.

Buy/Sell XRP/BTC pair

The exchange would complete your order by matching it with a corresponding buy order. 

Common Terms In Cryptocurrency Trading 

There are numerous terms used while trading, but we will explain just a few. 

  • ASHDRAKED: A situation where an investor loses all his money.
  • ATH: All-Time High.
  • ATL: All-Time Low
  • BAG HOLDER: An investor who buys and holds many coins hoping to make good profits in the future.
  • BEAR/BEARISH: Negative/downward price movement.
  • BTFD: Buy The Fucking Dip (an instruction to buy a coin when it has gone down a lot).
  • BULL/BULLISH: Positive/ Upward price movement.
  • Circulating Supply: The total number of coins or tokens in a cryptocurrency in the publicly tradable space.
  • DILDO: Long green or red candles on the chart.
  • DUMP: To Sell off an asset when its price drops.
  • DUMPING: Downward price movement.
  • DYORb Do Your Own Research.
  • FA: Fundamental Analysis (Any positive or negative news that can affect a coin).
  • FOMO: Fear Of Missing Out (A situation where a coin’s value is going up, and you believe it will increase more, so you buy despite when you see it’s high, hoping to make a profit).
  • FUD: Fear Uncertainty & Doubt.
  • HODL: To hold a position or a coin and not sell regardless of the market condition.
  • JOMO: Joy Of Missing Out on investing in an asset before the price drops.
  • LONG: Margin bull position.
  • MCAP: Market Capitalization.
  • MOON: Continuous upward movement of price.
  • OTC: Over The Counter.
  • PUMP: Upward price movement.
  • SAFU: Secure Asset Fund for Users or funds are safe.
  • SAJ CANDLE: Huge green candle.
  • SHITCOIN: A digital currency that does not have a potential value or use.
  • SHORT: Margin bear position.
  • SWING: Zig zag price movement of assets (Upwards and downwards).
  • TA: Technical Analysis.
  • REKT: When you have a terrible loss.
  • REVERSE INDICATOR: Someone who mispredicts price movements.
  • RSI: Relative Strength Index.
  • WHALE: Very Wealthy trader/Market mover.

Risks Associated With Cryptocurrency Trading

Despite the opportunities associated with cryptocurrencies, these assets get exposed to risks, and they include:

  • Volatility

The major risk of dealing with digital currencies is its increased volatility in nature. An asset’s value can go high within an hour, and the next minute it has lost more than 50% worth of value. Based on this reason, traders should understand crypto-related risks before putting funds into it. 

  • Hacks 

There are numerous cases where funds stored on exchanges get stolen. Even popular cryptocurrency trading platform, Binance once lost 7000 BTC ($41 million) to a security breach.

Crypto investors are often advised not to hold their assets on an exchange, except for the amount they’re actively trading. The best place to store your assets is in a non-custodial wallet. You can buy a Ledger or Trezor hardware wallet and learn how to use them since they’re the safest in the industry at this time.

Frequently Asked Questions (FAQs) About Cryptocurrency Trading

How Much Can I Make From Cryptocurrency Trading? 

There is no limit to how much money you can make from crypto trading. Crypto has the potential to turn an average income earner into an overnight millionaire. However, it depends on the number of funds you can commit and your level of experience with navigating the market and placing the right trades.

Can I Lose Money Trading Cryptocurrency?

Yes, you can. You could lose all your money if you don’t have the right strategy.

How Much Do I Need to Start Cryptocurrency Trading? 

An investor doesn’t need to purchase a whole token or coin before trading. Crypto trading has been made easier and affordable for everyone regardless of your financial status. Let’s take a look at BTC. bitcoin has 100 million satoshis, and an investor can decide to purchase the lowest fraction of the coin, which is 0.00000001 BTC ($0.00015).

That said, you’ll need a substantial amount to see a reasonable profit. You may want to start with a $50 trading portfolio at least or increase the amount based on the capital at your disposal.

Which Cryptocurrencies Should I Trade? 

Investors can trade any coin or token as long it is available on an exchange. You must conduct adequate research and analysis on an asset before investing to boost your chances of making huge returns, as the market has proven to be volatile in the past. 

What are the Best Cryptocurrency Trading Exchanges? 

Many cryptocurrency trading exchanges offer excellent services and features, ranging from maximum security to efficient customer service. The recommended exchanges that are currently in the market include Coinbase, Binance, BitMEX, Gemini, Bisq, and many more.  

How Many Cryptocurrencies Are In Existence? 

There are more than 7,000 coins and tokens in existence. As long as an asset is listed on an exchange, you can trade the asset. 

Are There Fees For Trading Cryptos? 

Yes. Minor fees are attached to trading, including buying, selling, deposit, and withdrawal fees. However, investors who are knowledgeable about how the traditional finance space works will discover that crypto trading fees are much lower.  Always check the fee schedule on an exchange before signing up.

Is There A Common Approach To Trading? 

It depends majorly on the individual’s preference. You may decide to trade based on your preferred style, risk appetite, and goals. 

How Do I Determine The Best Exchange? 

Several exchanges claim to be the best trading platform there is. However, traders should select an exchange based on certain factors, such as regulation, safety measures to protect users’ funds, professional customer service, and availability of multiple assets. 

Final Thoughts 

In this article, we discussed what cryptocurrency trading is, its associated risks, and the best available trading platforms, among others. We also answered frequently asked questions about cryptocurrency trading and some risks associated with doing so.

Cryptocurrency trading is a risky venture, and investors need to apply caution while trading. If possible, it is good to trade with your spare cash because despite cryptos having the potential of turning an average income earner into an overnight millionaire, it has a track record of making investors lose all their funds.  

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