Just as the Internet was the hottest topic in some years ago, today, everyone is talking about cryptocurrencies, blockchain and the opportunities these new platforms present. The major area that captures the attention of many people is the monetary aspect, which is known as cryptocurrency trading. The majority of the people that talk about cryptocurrency trading don’t understand what it really entails. Should you be in this category, this article will put you through on what cryptocurrency trading is all about.
What is Cryptocurrency Trading
Cryptocurrency trading entails speculating and predicting the value and price of various cryptocurrencies, by buying and selling such cryptocurrencies from a spot market on an exchange, or by speculating on the price movement of these coins or tokens through contract for differences (CFD) accounts on a derivatives market.
How the Cryptocurrency Market Work
Cryptocurrencies are decentralized in the sense that no central body controls what goes on with these coins or tokens. This simply means that, anybody can venture into cryptocurrency trading in most countries, without taking permission from government agencies. However, there are countries which do not allow their citizens to partake in cryptocurrency trading. For this reason, many cryptocurrency exchanges never fail to outline countries that they won’t offer their services to. So, before you sign up with any exchange for trading, make sure you find out if your country of residence is allowed to use such an exchange.
Cryptocurrency markets offer the platform that enables individuals buy, sell, or speculate on the price movement of various cryptocurrencies. Unlike traditional physical markets where physical products are bought and sold, cryptocurrencies exist as digital records of ownership on the blockchain network. When one buys a cryptocurrency on the exchange, it simply means buying a digital record of ownership.
There are two ways these cryptocurrencies can be traded in the cryptocurrency markets. One of the ways is by trading them on the spot market, while the other way is the cryptocurrency futures market.
Cryptocurrency Trading on the Spot Market
A spot market is a platform where cryptocurrencies are traded for immediate exchange of the traded cryptocurrency to cash, or another cryptocurrency. We can simply say that trades are made on the spot on a spot market, and prices are known as spot prices. On the spot markets, you can exchange cryptocurrencies for cash or for another cryptocurrency.
Trading cryptocurrencies on the spot market is very easy and simple. It doesn’t require much to start. The major things you need to start cryptocurrency spot trading are: a device with internet connection, an account with a cryptocurrency exchange, trading capital, and patience. In the spot market, traders buy cryptocurrencies which they believe will increase in price within some time, and set a sell order at a higher price which will yield them some profits.
The goal here is to buy low and sell high. Any cryptocurrency a trader buys on the spot market that is not sold back immediately, is stored temporarily on the trader’s unique exchange account’s addresses, until it is sold or transferred out to a personal wallet or to another exchange. Cryptocurrency spot traders are classified into short-term traders and long-term traders.
The short-term traders (day traders and swing traders) buy and sell cryptocurrencies within a short period of time such as a day, few days, few weeks or few months. These traders are after the accumulation of small profits. The long-term traders are investors who believe in making it big. They buy a particular cryptocurrency they believe has a good prospect and hold it for a long time, in order to yield maximum profit. In the spot market trading, traders gain only when the price of their cryptocurrencies rise, but lose when the price drops.
Cryptocurrency Trading on Futures Markets
The futures market is a type of market where futures contracts and commodities are traded for delivery on a specified future date. This is another form of cryptocurrency trading. Here, the cryptocurrencies are not traded directly as obtainable on the spot market. Rather, traders speculate on the price movement of various cryptocurrencies, without the need to own the underlying cryptocurrencies. Examples of market where you can trade crypto futures include BitMex FTX, Binance Futures, etc. In this futures market, you can buy(long) when you think that such a coin or cryptocurrency is bullish(that is, the price is increasing or set to increase).
On the other hand, when you believe that the market or price of a particular coin you are trading is bearish( that is, prices are falling), you can sell(short) the market. In the futures market, leverage comes into play. Leverage trading is a form of trading where a trader deposits a small capital known as “Margin”, but gains full exposure to the underlying market. This is possible because your initial deposit is multiplied by the leverage you choose. The available leverages are x1 to x125.
For instance, when you make a deposit of $100 and choose to trade on the x20 leverage, your market exposure will be 100 x 20 = $2000. Trading with leverages magnifies your profit and at the same time, magnifies your losses.
How the Price of a Cryptocurrency is Determined
The price movement of cryptocurrencies is controlled by demand and supply. Like we stated above, no central body has full control of cryptocurrencies, since they are decentralized. However, there are some factors that influence the price movement of various cryptocurrencies. These factors include:
Each cryptocurrency has a specified maximum supply, total supply and circulating supply. Maximum supply of a cryptocurrency is the total units of that cryptocurrency that will ever exist. Once this number is reached, no other unit of that crypto can be minted again.
Total supply refers to the total units of a cryptocurrency that have been minted or are available at a given time. This number increases as more of the coins are minted from the maximum supply. The circulating supply is the total units of the coin that are unlocked. That is, those in individuals’ wallets and on the cryptocurrency exchanges.
The rate at which more coins are added to the circulating supply through more minting and more unlocking, and the rate at which the circulating supply is reduced through coin burn or loss of access by some users, both affect the coin’s price movement.
This refers to the value of a particular coin in circulation times the current price. Market capitalization of a coin, can be determined by multiplying the current price of the coin to circulating supply. For instance, Bitcoin market capitalization = Bitcoin current price times circulating supply.
Many traders consider the use case and the solution the project behind a particular cryptocurrency is bringing to the society. Most of the cryptocurrencies are in their infancy, and as such,they do not possess any tangible real world use case. Though the potential is there. However all of these comes into consideration and affects people’s trading reaction(s) to them.
The Fundamental Drive
Currently, the price of cryptocurrencies is heavily driven by press releases and major other announcements, such as exchange listing, mainnet launch, partnership deals, etc. When a project comes up with good news about its project, the price of its native token or coin always responds positively to the news. The opposite happens when there is any bad news about a particular coin. This is to say, the value of cryptocurrencies largely depends on price speculation.
Useful Terminologies in Cryptocurrency Trading
Order book: In cryptocurrency trading, an order book contains the list of buyers and sellers on a particular cryptocurrency.
Bid/Ask: The list of buy orders on the order book is known as bid, while the list of sell orders on the order book is known as ask.
Order History: This contains the record of completed trades on an exchange.
Spread: This is the difference between the bid price and ask price.
Arbitrage trading: This is the process in which a trader takes advantage of price differences on different cryptocurrency exchanges. For instance, a trader can buy a cryptocurrency on an exchange at a lesser price, and sell the same cryptocurrency on another exchange at a higher price.
Margin: The is the term used for the initial deposit a trader makes into a futures market.
Leverage: This is the process of using a borrowed fund to increase a trader’s position on the market.
Exchange: This is a platform where traders carry out trades on different cryptocurrencies. There are centralized exchanges which are controlled by a central body, and there are decentralized exchanges which have no central control.
Long: This is a term used to indicate a buy position.
Short: This is used to refer to a sell position.
Bullish/Bearish: A coin or token is said to be bullish when it is increasing in price, while it is regarded as bearish when its price is falling.
Quick Facts About Cryptocurrency Trading
Trading in cryptocurrencies is considered risky due the volatile nature of these coins. As such, one should seek proper guidance before investing. The following are vital pieces of information which every trader must bear in mind.
- Cryptocurrencies are highly volatile in the sense that their prices might experience a major increase in a day, and equally experience a drastic fall. For this reason, traders are expected to trade with the amount of money they can afford to lose.
- Traders are always advised to understand how cryptocurrency works, before venturing into crypto trading.
- Cryptocurrency trading should not be seen as a get-rich-quick-scheme, but it should be traded with patience.