What is cryptocurrency?
Cryptocurrency is the result of computer calculations, and electronic registries that store information about how much cryptocurrency a user has and to whom he transfers it. Cryptocurrency is stored in a blockchain and is accessed through special electronic wallets.
Since the advent of the Internet, there have been occasional attempts around the world to create digital money. However, no one trusted these projects, and they did not gain popularity because they were too easy to counterfeit. The first cryptocurrency, Bitcoin, was able to solve this problem by using blockchain. This system is compared to a big book containing all the records of what happens with cryptocurrency. Each cryptocurrency owner "in hand" has an independent but identical copy of this book.
The creator of the blockchain network and the first cryptocurrency Bitcoin is considered to be a person under the pseudonym Satoshi Nakamoto, whose identity has not yet been revealed. It was he who created the code and formulated the principles of the future cryptocurrency network.
Cryptocurrencies have widespread popularity and value, and this has made their financial assets that can be bought and sold for profit. No wonder every day there are more and more people who want to understand cryptocurrency trading and make money from it.
How to make money from cryptocurrency?
To make money from cryptocurrencies, various methods are used: mining, long-term investments and trading. In the near future, we'll be breaking down trading in detail, but for now, let's briefly talk about what mining and long-term investments are.
Mining is the production of cryptocurrencies using the power of computer equipment. The idea behind mining is that computers located around the world make calculations and thus generate new blocks of the blockchain. For processing the information, the owner of the computer resource receives a reward in the form of a commission paid by the owner of the virtual money for the transaction, or in the form of a part of the cryptocurrency produced in the process of mining
Those who want to make money from cryptocurrency sometimes start with mining, but today it can be called a waste of time. Due to the popularity of cryptocurrency and the increasing number of those who mine it, the profitability of mining digital currency is getting lower. It is also important to understand that this niche has long been divided by large mining farms consisting of thousands of computers. Therefore, mining at home will even be unprofitable in some cases.
Speaking of long-term investments, suffice it to say that the principle here is the same as in any other investment of money. The investor buys a cryptocurrency at a certain price and waits, most often for several years, until its price rises, in order to profit in the form of the difference in value between then and now.
What is cryptocurrency trading?
Crypto trading is speculation on the price movements of digital currencies. In other words, it is the exchange of one coin for another, buy, sell, trade cryptocurrency, and exchanging fiat money for cryptocurrency.
To answer the question of how cryptocurrency trading works, it does not differ significantly from trading precious metals, currencies or stocks. The main objective remains the same: to buy as cheaply as possible, sell at a higher price and make a profit. The main difference between cryptocurrency trading and trading any other assets is the high volatility of crypto. Many traders dream of profits in the thousands of percent of the transaction, but in the stock market, they have to wait years for such an opportunity, buying shares of little-known companies in anticipation of an increase in their capitalization. At the same time, high-yield deals are common in crypto trading.
A cryptocurrency trader is a person who constantly and professionally buys and sells digital assets. The trader's task is to choose a coin, analyze it with the help of various analytical tools and make a decision to buy with the possibility of further growth of the asset's price and, accordingly, to sell. This is what does it mean to trade cryptocurrency.
Let's take a closer look at how trading in cryptocurrency market trading differs from trading in traditional currency and stock markets.
- High volatility. Coin prices can change very dramatically in a short period of time. In addition, factors affecting the value of a digital currency can be very different and often unpredictable.
- Low entry threshold. A novice crypto trader can make his first transaction with a small amount of money in his account. However, keep in mind that this does not apply to knowledge.
- Cryptocurrency exchanges operate 24/7 without interruption. You can trade at any time that is convenient for you.
As mentioned above, trading cryptocurrency requires at least a minimal level of knowledge. For example, what is the crypto market, as well as the basic concepts of "classic" trading - diversification, liquidity, technical indicators, etc. If you are new to exchange trading and want to learn how to understand the cryptocurrency market and become a crypto trader, you should first learn the basic terms and principles of trading any asset.
There is a basic set of analytical tools that, along with the basics of cryptocurrency trading, every trader should know. The more and better you know them, the better your chances of becoming a successful trader and making good money. These include
- Technical analysis. It is necessary in order to predict the price of a cryptocurrency in the short term based on the previous behavior of its rate. The most important of all technical analysis tools is the Elliott Wave Theory which interprets the behavior of finance through visual patterns (waves). It is necessary in order to predict the behavior of the cryptocurrency trade market.
- Fundamental analysis. This is an analysis of the general situation in the world, the dependence of one factor on another. It is worth paying attention to, as it can be decisive in determining the price. For example, due to the outbreak of the pandemic, the Bitcoin rate fell, although the previous method says the opposite.
How to start trading cryptocurrency
How to buy and sell crypto? First of all, you need to decide where best to trade. The most common way is to trade on cryptocurrency exchanges. They contain all the tools a trader needs, allow you to track the progress and history of transactions, place and redeem orders, and deposit and withdraw funds. When choosing a cryptocurrency exchange, you should pay attention to the following factors:
- Trading volumes on the exchange. For fast transactions (scalping) it is recommended to choose exchanges with high trading volumes.
- Language support and interface. A cryptocurrency exchange is the main trader's tool. It should be understandable and easy to work with.
- Deposit and withdrawal methods should be available to the trader.
- Trading pairs. Not all cryptocurrencies are traded on exchanges, and even trading pairs of popular altcoins may differ. Some platforms provide the ability to trade between fiat currencies and cryptocurrencies, some are limited to digital assets only. When choosing an exchange, be sure to study the trading pairs presented on it.
After choosing a crypto exchange, you need to decide what exactly to trade. And this question is quite difficult to answer unambiguously. Of course, there are big names like Bitcoin, Ethereum and Litecoin - market leaders, but common sense in investing says that you should not put all your eggs in one basket, just like you should not put all your investments into one crypto-asset. When evaluating the prospects of cryptocurrency, you should pay attention to the following aspects:
- What idea the cryptocurrency was created for and how in-demand it may be.
- The speed of transactions and the convenience of working with tokens.
- Level of expertise of the development team.
- Demand and popularity.
The combination of these factors ensures the growth of cryptocurrency capitalization and, accordingly, its value.
Cryptocurrency trading strategies
To trade cryptocurrencies successfully, it is necessary to understand how does the crypto market works. Trading digital assets require a trader to make assumptions about the movement of the cryptocurrency market in the future. Unlike stocks, the value of cryptocurrencies is not as much affected by unpredictable economic and political issues in the world that may affect the markets. Although there have been cases when some of Elon Musk's tweets could significantly affect the rise or fall of some coins, cryptocurrency exchange rates most often move in accordance with supply and demand.
Many novice crypto traders make a common mistake: they invest all their savings in trading without thinking about the risk. Such a move will lead you to losses. Determine a starting amount for yourself and open trades with free funds that you don't mind losing. Start practising on small trades, gradually increasing your budget. And you definitely shouldn't borrow money or take out a credit to trade on the exchange. Crypto trading explained long ago with concrete examples that this is a bad idea.
There are several basic strategies popular in crypto trading, let's look at each of them.
Trading by trend
Quotes on any exchange, financial or cryptocurrency, always move in accordance with the trend, which can be either upward or downward. This is exactly how do cryptocurrency markets work. Therefore, to benefit from this strategy, a trader needs to buy a cryptocurrency when the trend is upward and sell when the trend is downward.
According to stock trading theory, there are several trends in any market:
- Primary (global, long-term) develops over the years, showing the most general trend.
- Intermediate (medium-term) has a duration of several months to several years.
- Short(short-term) shows the fastest, often speculative market movements, lasting from a few days to a few months.
All trends are present in the market simultaneously. As a result, the price movement is uneven and has local highs and lows. Traders use such situations to open positions and fix profits.
The most difficult thing for novice investors is to determine the trend. To solve this problem, there are various technical analysis tools and entire software suites. The easiest and most obvious way to determine the trend is a visual analysis of the price movement on the chart. It is important to note how the highs and lows are located. Depending on this, you can determine the type of movement - upward, downward or sideways.
You should also remember that big players can artificially influence the rate of cryptocurrency. The value of digital currencies is essentially supported only by demand. If in one moment everyone refuses to accept bitcoin as a means of payment, its price will collapse. So keep an eye on the news. When a big trader (whale) starts buying up assets massively, the price goes up. The opposite action will reverse the situation in the other direction.
This is a classic strategy of cryptocurrency trading. Its essence is that positions for the transaction remain open for a short time - a few minutes or even seconds. This strategy allows you to reduce the risks associated with the increased volatility of digital currencies.
Let's explain with a simple example how does buying and selling cryptocurrency work in scalping. You buy a cryptocurrency at $500 and sell it at $510 to make a quick profit without waiting for its value to drop. You usually open multiple trades using several cryptocurrencies to increase your profits. Scalping doesn't make much profit, but you don't waste a lot of time and minimize risk.
The essence of this strategy is that popular tokens are traded on almost all crypto exchanges. At the same time, their rate on different exchanges often varies. For example, a bitcoin costs $6,700 on one exchange and $7,200 on another. You buy cryptocurrency on one exchange and sell it on another one, but at a higher price. Although this method looks simple, it has a few nuances that you should definitely consider.
- Exchange commissions. You pay up to 2% for the withdrawal of funds to an external wallet.
- Transaction fees. In order for the miners to quickly process the payment, you will have to pay a lot of commission, especially if we are talking about expensive cryptocurrencies, such as bitcoin. If the amount is small, you probably won't make a profit - the cost of the transaction may exceed the transfer amount.
- Volatility. As you transfer funds from your exchange to your wallet, and then from your wallet to another exchange, the value of the cryptocurrency may change dramatically not in your favour.
Therefore, if you choose an arbitrage strategy, calculate the additional costs in advance.
Building a cryptocurrency portfolio
It's even simpler here. You need to buy several coins - both popular and little-known, but promising altcoins - and wait for their growth. This is a long-term investment. The risk of this method is reduced by having different altcoins in the portfolio - if one token falls in value, the others can rise decently and compensate for the losses, as is often the case.
Creating a well-balanced portfolio is not easy. You need to consider all the risks, determine the desired level of return and choose investment strategies. At the same time, you cannot simply copy the portfolio of a successful investor or trader. All cryptocurrency market players have different goals, risk tolerance and investment horizon.
It is a value that means the difference between the selling and buying prices of the same asset at a certain point in time. If we explain in simple words what is spread in cryptocurrency trading, we can say that each cryptocurrency has two variants of the market price: the one for which it can be sold and the one for which it can be bought.
For example, if a trader can buy Bitcoin for $9,985 and sell it for $9,981.5 on any crypto exchange, the difference of $3.5 is the spread.
For successful trading, it is necessary to know and take into account the spread. It is especially important for traders who deal with scalping as even a small difference may become an obstacle for receiving the profit and sometimes even cause losses.
Recommendations of experienced market participants
- If the value of the cryptocurrency in a pair has risen sharply, do not give in to temptation and do not start buying with all your money. Buying currency at a time of peak growth is likely to result in a loss. Any beginning trader has been burned by such a situation.
- Do not risk large funds. Don't think that this way you can earn faster and more, especially if you have no experience. You will only let professional traders earn.
- Start with an amount that you are not afraid to lose.
- Accept the fact that not all deals will be successful.
And, perhaps, the last piece of advice. If you bought cryptocurrency, after analyzing the situation, and tomorrow you will find out that it went down in price - do not panic. The best strategy during this period is not to be nervous and wait calmly. Practice shows that in 90% of cases the price starts going up again. So try to put all emotions aside and treat trading responsibly.
Now you know what does trading crypto mean. In conclusion, it can be said that cryptocurrency trading offers a wide range of opportunities for making money. You can start trading on the exchange with minimal investments, but for profitable trading, you will have to make a lot of effort and take time for an in-depth analysis of the cryptocurrency and the market.