The cryptocurrency market is most liquid and lucrative compared to traditional financial markets. Therefore, in this article, we will also help you choose a cryptocurrency trading platform besides imparting a basic understanding of the cryptocurrency market.
Cryptocurrency trading is when you buy or sell the underlying coins or speculate on the price of a cryptocurrency through a CFD account.
Contract of Difference (CFD) trading on cryptocurrencies:
CFDs are derivatives used while trading cryptocurrencies in the crypto market. Instead of owning the underlying asset, the price or the value of the cryptocurrencies are speculated and traded. If the value of the cryptocurrency appreciates, the trader goes long (buy) and will go short (sell) if the trader thinks it will fall.
As these are leveraged products, the trader only needs a small capital called margin to access volatile exposure of the underlying asset. Profit and loss are calculated as per the size of the position. Since profits tend to magnify due to leverage, so are the losses; thus, it would help if you remembered that leverages are double-edged swords, and using them cautiously will help you go a long way.
Buying and selling cryptocurrencies through an exchange:
Cryptocurrencies are bought through an exchange, and you must open up an account to do the same. Then, after verifying your identity, you can buy cryptocurrencies. Then, you can store them on the cryptocurrency e-wallet either on the exchange (online) or on hardware (offline). Then, once the cryptocurrency’s price appreciates, you can sell them at a profit.
Exchanges require you to master new technologies and learn how to interpret the data that is offered to you; therefore, there are learning curves involved. In addition, since maintaining an account is expensive, many exchanges also let you set deposit restrictions. Consequently, you should be aware and cautious as these little things can change your trading experience as you exchange on a crypto trading platform.
Since there are no regulatory authorities like government intervention due to the cryptocurrency market’s decentralized nature, they instead distribute across a computer network, verifying every transaction recorded on the blockchain.
Unlike traditional or fiat currencies, cryptocurrency transactions are recorded on a ledger in the form of a blockchain. Since the entire cryptocurrency operation runs on a blockchain, the technology is also called blockchain technology. A trader sends cryptocurrencies to the recipient’s digital wallet. That’s how a transaction between the two traders takes place. The transaction’s validity is continuously verified by miners who create and add a new block through the mining process. This is how new crypto coins or tokens are minted.
What moves cryptocurrency markets?
Economic and political factors that affect the traditional or financial stock market do not affect cryptocurrency. However, as cryptocurrency is decentralized, different factors are responsible for the frequent price fluctuation.
Demand and supply: The price of the cryptocurrency rises as the demand for it rises; thus, when the supply increases, the price of the cryptocurrency falls.
Supply: the price of the cryptocurrency is also based upon the total supply of cryptocurrency available- after they are released, lost, destroyed, or minted
Market Capitalisation: Users’ perceptions of the value of cryptocurrencies in circulation keep evolving.
Social media platform: These platforms significantly impact how a cryptocurrency is projected or covered. These platforms are also responsible for the price fluctuation of the cryptocurrency.
Integration: The simplicity of integrating cryptocurrency into current infrastructure like payment systems in e-commerce.
Key events: Important events, including regulatory changes, security breaches, and economic setbacks.
Working of cryptocurrency trade
Derivatives can be used while trading a cryptocurrency in the market. Instead of owning an underlying asset, you can trade on the value or the price of the underlying asset. Thus, you are exposed to the underlying asset’s volatility without owning it. A fiat currency like the USD determines the cryptocurrency’s value.
You can magnify your profits by using Contract of Difference or CFDs, a derivative financial product. Since you need little capital, called margin, you can increase your chances of profit by many folds. However, your chances of profit can increase X times, so are you exposed to X times losses.
What is the spread in cryptocurrency trading?
The disparity between a cryptocurrency’s buy and sell prices is known as a spread. Opening a long position implies that you have bought the cryptocurrency at a specific price. And opening a short position implies that you have sold the cryptocurrency at a specific price.
As a thumb rule, you will open up a long position when the price of the cryptocurrency is low, and you will go short when the price of the cryptocurrency is high. Thus you will make a profit.
What is a lot in cryptocurrency trading?
A lot is generally the size or the number of individual cryptocurrencies. Since cryptocurrencies have high volatility, most traders usually trade in a single unit rather than in a batch or lots. However, some traders do trade in huge lot sizes.
What is leverage in cryptocurrency trading?
Leverage means you get exposed to the underlying asset’s price instead of owning a cryptocurrency. In leverage, you require a small amount of token money called margin money. Therefore, leverage has the potential to increase your money by many folds. However, as the opportunity to increase your money exists, so do the risks of losing your money. Thus one must exercise caution while using leverage.
What is the margin in cryptocurrency trading?
Margin is the amount of money you need to deposit while using leverage. This amount is usually less than the underlying asset’s price, as you will be speculating the underlying asset’s price and not the asset itself. Depending upon brokers or the exchanges, the margin money will vary.
Suppose Bitcoin (BTC) is trending at $30,000 and requires 10% of the total value for opening up a position; instead of depositing $30,000, you pay a margin of $3,000.
What is a pip in cryptocurrency trading?
A pip is the smallest unit measurement of the difference between the buy and sell spread. The movement of a single pip is measured in a single dollar. For example, Bitcoin is trending at $32,000, and the price ranges to $32,050; then, it is said that its price has increased by 50 pips.
As you can buy a single cryptocurrency as a whole or in fractions, so can you have pips measured in cents or fractions of cents?
Thus it is in your best interest that you understand how the pips would be measured before you place a trade on a cryptocurrency trading platform.
What are crypto trading bots?
Crypto trading bots are essentially a crypto trading tool that runs on algorithms based on historical data to make calculated reasoning to trade on your behalf. This tool is excellent when you are busy at work or sleeping, or any other activity that occupies your attention when you wish to devote the time to cryptocurrency trading.
Advantages of having a trading bot:
Processing huge amounts of data is humanly impossible while the crypto market runs continuously for 24 hrs a day. Chances of a professional, seasoned trader making mistakes are more compared to these crypto trading bots. These trading bots run on algorithms based on historical data and charts with higher accuracy than their crypto traders. These bots are known to make fewer mistakes than an average crypto trader.
Chances of you experiencing FOMO or Fear of Missing Out or the anxiety that you can potentially lose out on a good trade are almost negligible while using a crypto trading bot.
Disadvantages of having a trading bot:
Predicting the price swing of the cryptocurrency market is quite challenging due to the inherent volatility. No matter how accurate the crypto trading bot is, there are times when human intervention is required. When the market might suddenly become bullish or bearish or when a crash occurs. If the bot is not programmed as per your trading style, then the risk of ruining your well-balanced portfolio cannot be ruled out.
In addition, these crypto trading bots can be programmed to generate small profits. It is certainly a recipe for disaster if you were to hand over your entire portfolio to them.
Different types of bots
Different types of crypto trading bots exist, each specialized in its specific trade.
Arbitrage: These trading bots monitor prices across various cryptocurrency exchanges and make money by executing trades between them. Even though these price differences may only amount to a few hundred dollars, carrying out numerous little deals over time produces a significant profit.
Market making: You can take advantage of the spread with the help of market-making bots that frequently place buy and sell orders. The spread is the distinction between the highest bid and the lowest offer for a coin. A market-making bot will consequently regularly purchase a coin at a low price and sell it to a higher bidder.
You can make a profit if you understand the crypto market and conduct thorough research before you start trading on a cryptocurrency trading platform. In addition, measures to mitigate the risks will ensure that your overall profit margin increases.