Learn everything you need to know before you start trading bitcoin, Ethereum or any other cryptocurrency.
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To the uninitiated, market trading may sound like something reserved for the financial elite, but with the proliferation of online currency exchanges and trading platforms, anyone can take part in market speculation. You just need to know how it works.
Compare cryptocurrency trading platforms
A word on riskMarket trading is a risky endeavor, and cryptocurrencies are very volatile. They rise and fall without warning. This means that a cryptocurrency’s past performance is not an indication of its future, and achieving consistent profitability is never guaranteed. As always, you should never trade with capital that you aren’t prepared to risk losing.
How cryptocurrency trading works
Trading currencies (whether fiat or cryptocurrencies) involves exchanging currency that you own into another kind of currency and then exchanging it back when the price changes – hopefully for a profit. In the world of fiat currencies, this is known as forex market trading.
What is forex market trading?
Foreign exchange (forex) market trading is the buying and selling of currencies between traders. In its simplest form, this involves exchanging a currency that you own into another, then exchanging it back at a later date. Forex market trading occurs “over the counter” between participants in the market, usually using online platforms.
How do you make a profit?
Let’s say on January 2, 2017, you owned $1,000 and exchanged it into euros (EUR) with another market trader at a rate of EUR€0.9565, leaving you with EUR€956.50. Then, on November 24, 2017, the value of the US dollar had fallen from EUR€0.9565 to EUR€0.8380, so you decide to exchange your euros back into US dollars. After finding someone willing to sell their US dollars for your euros, you carry out the exchange at the new price. Your EUR€956.50 is now worth $1,141.40, leaving you with a profit of a little more than 14%.
Trading cryptocurrencies works exactly the same, but instead of selling and buying fiat currencies, such as euros or US dollars, traders buy and sell cryptocurrencies, such as bitcoin, Ether (ETH) or Litecoin.
XBT vs. BTC
The fight over whether bitcoin’s currency code should be BTC or XBT is ongoing (as of November 2017). When bitcoin was first introduced, BTC became both the abbreviation for bitcoin and its currency code. As bitcoin gained momentum and recognition, a large portion of the community asked for a better currency code that adheres to the International Standards Organization’s rules on cryptocurrency codes, mainly that currencies not associated with a specific country should start with the letter X, hence XBT.
At the time of writing, most of the community, exchanges and services use XBT in bitcoin matters relating to finance and currency, and BTC colloquially or in non-finance-oriented discussions.
Just like forex market trading, cryptocurrency trading works by exchanging one currency into another and back. You will usually exchange a fiat currency into a cryptocurrency and then, at a later date, back into a fiat currency, although there are traders and exchanges that allow cryptocurrency-to-cryptocurrency trading.
For example, let’s take a look at the BTC to USD chart for 2017:
Bitcoin to USD price chart, November 2016 – November 2017
We can see here that as 2017 progressed, the value of bitcoin compared with the dollar grew from just under $1,000/BTC on January 1, 2017, to over $10,800/BTC in the last week of November 2017.
Two types of traders
There are two types of trading strategies available to traders interested in the cryptocurrency market:
Long-term traders buy and hold cryptocurrencies over a long period. They may hold a cryptocurrency for weeks, months or even years. Studying price trends over a long period allows long-term traders to make informed decisions and avoid suffering from short-term dips in value.
If you believe the value of a cryptocurrency will grow steadily over a long period and don’t want the stress that comes from short-term value dips, then this method might be your best choice.
Short-term trading eschews the stability of long-term trading for the possibility of taking advantage of short-term price swings and involves buying and selling cryptocurrencies over the span of a few hours to a few days.
If you’d rather take advantage of the characteristic volatility of cryptocurrencies by getting in and out of a trade quickly, then this method might be for you.
The advantages of trading cryptocurrencies
Trading cryptocurrencies, while similar to trading fiat currencies on forex, comes with its own set of advantages.
- Cheap fees and fast exchanges. For each trade, the exchange platform you’re using will take a small percentage as commission for the service it’s providing. This is inevitable. Where cryptocurrency trades differ from their fiat currency equivalent is in the size of this fee. Because the fees for transferring cryptocurrencies (typically via wallet payments) are cheaper than credit card and bank transfer fees, cryptocurrency-trading fees are cheaper than forex-trading fees.
- Extreme volatility. Traders make profits when the price of the currency takes large strides upwards, and cryptocurrencies often experience large price movements. While this increases the risk (large price movements happen downwards as well), you can often make a lot of profit with a relatively small bankroll.
- Open all week. You can only trade stocks and commodities during business hours, and you can only trade forex during weekdays. Cryptocurrencies, on the other hand, can be traded 24/7, anytime and anywhere.
Things to be careful of
If you’re not careful when it comes to cryptocurrency trading, you could find yourself gambling more than you’re trading, and eventually you might lose all your money. Trading is not a game, and just as there is real money to be made, there is real money to be lost. Doing your research and keeping the following concepts in mind when trading could help you avoid the pitfalls of cryptocurrency trading.
The No. 1 thing you’ll need to keep in mind when it comes to cryptocurrency trading is that the price is extremely volatile. Where certain trade techniques used in forex might take months to come to fruition, in cryptocurrency trading, it could only take hours or days. While this is beneficial when it comes to making a profit, it could also be your downfall if the price moves the other way.
In September 2017, Litecoin’s value fell more than 50% in two weeks. The recovery to its previous value took more than two months. Cryptocurrencies not only take large steps in value both up and down, but they also do so in very short spans of time.
Compare this movement to the chart of euros to US dollars for the same time period.
In August 2017, $1 was worth EUR€0.8457. In November 2017, $1 was worth EUR€0.8375. That’s a difference of only EUR€0.0082 per $1.
Patterns sometimes lie
Many market-trading books and guides cover certain chart-reading techniques and patterns used by professionals to predict the market. While the market does sometimes follow patterns, this is never a guaranteed outcome, and unless you limit your exposure, you could end up losing a lot of money over a pattern that does not exist.
Limit your exposure
Limiting your exposure comes down to two specific concepts:
- Never invest more money than you are willing to lose. You should consider any money you put into a trade as lost. If you’re uncomfortable with this notion, then you’re trading more money than you should be. Finding the point where you’re comfortable with this concept is key to helping you trade stress-free.
- Consider setting up “take profit” and “stop loss” orders. These limits are offered by many professional trading platforms and will help you avoid losing more money than you’re comfortable losing if the trade goes wrong, as well as help you avoid missing a cash-out opportunity. For more information,see this comprehensive guide by Investopedia.
Stay away from leverage
Leverage is money that a broker loans you. Unless you’re a professional trader, you should stay away from leverage until you’ve learned everything you can learn about making trades with your own money. While leverage can help you make greater profits with short cryptocurrency movements, it can also amplify your losses when the trade takes a wrong turn.
You decide to trade $2,000 to BTC. Additionally, you leverage another $10,000 from your broker. Now you can buy 1.6 BTC at $7,500/BTC. Later you sell at $8,500/BTC, return the $10,000 and you are left with $3,600, a profit of $1,600 on your initial $2,000.
Unfortunately, this works the other way around as well. If the price of bitcoin had fallen to $6,500/BTC instead, you would have lost $1,600.
Always remember that leverage amplifies your winnings and your losses equally. As a beginner, the risks presented when using leverage are just not worth the possibility of amplified profits.
Know when to cash out
What market trading really comes down to is knowing when to close a trade. This is the crux of the operation. Getting into a trade is easy, knowing when to get out is hard, and that is where you should focus most of your learning. This again involves two different aspects:
- Closing a trade in profit. It is important to take your winnings out of a trade. Cryptocurrencies move faster downwards than they do upwards, and you don’t want to be late cashing out of a trade. You also don’t want to be too early and miss out on extra profits. There are a lot of techniques to help you make this decision that are out of the scope of this beginner’s guide.
- Cutting your losses. Similarly, you want to be ready to cut your losses if a trade goes wrong while also not getting out too early in case the cryptocurrency recovers. Again, there are countless guides and books to help you make this decision.
Get started trading cryptocurrency
Now that you know how market trading works, you’ve decided on the type of trader you want to be, you know what you should look out for and you have studied the theory, you’re ready to start trading cryptocurrency. Let’s take a look at everything you’ll need to get started.
Step 1. Find a broker
A broker who provides an online platform for trading cryptocurrencies is a necessity. While many traders use cryptocurrency exchanges to trade cryptocurrencies, these exchanges were not built with trading in mind and usually involve high fees.
At the time of writing (November 2017), the following cryptocurrency brokers are most often recommended to new and experienced traders:
All these brokers provide cryptocurrency trading for the most common cryptocurrencies, but before you choose one, make sure you consider the following:
- Cryptocurrency options. Does the broker let you trade the cryptocurrency you’d like to trade? With that said, you should ideally start with one of the more common cryptocurrencies (bitcoin, Litecoin and Ethereum), as these are the most stable and the easiest to find a broker to trade on.
- Leverage. If you’re looking for a broker that provides leverage for your capital to help you take advantage of smaller price movements, then this is something to consider. However, if you’re a beginner, you should stay away from leverage until you’ve gained a bit of experience.
- Negative balance protection. As a beginner, this is a necessity. With negative balance protection, you will never lose more than you have invested.
- Starting capital. If you have a figure in mind regarding how much money you’d like to start with, make sure the broker you choose does not require a minimum starting balance that’s higher than what you’re comfortable with.
Step 2. Learn the platform
Cryptocurrency brokers usually offer their own trading platform, and each broker’s system will be slightly different from one another. You will need to put in the time to learn how the platform works, where each feature is and how to utilize it.
When you first access a broker’s trading platform, you might feel overwhelmed. This is normal. Spend some time with it and continue doing your research. You will get comfortable with it in no time.
Step 3. Is it the right time?
The old adage of “buy low, sell high” holds for cryptocurrencies just as it holds for any other sort of asset. Don’t buy cryptocurrencies when the price is at an all-time high, and don’t sell them when they’re at an all-time low. Cryptocurrency markets move up and down, and large movements up are often followed by sudden dips.
Step 4. Get in there
The best way to learn how to trade is to actually trade. There is no secret. Once you’ve learned all the theory, you’ll need to get your feet wet. Buy some cryptocurrency, set your limits and get started.
What affects the price of a cryptocurrency?
Cryptocurrencies are volatile by nature. They are not as stable as currencies that have had centuries to develop. Bitcoin is the oldest coin on the market, and it has only been around since 2009. Nevertheless, there are a number of things that can affect cryptocurrencies:
- Regulation. If a government makes a statement or pushes for a particular regulation that affects cryptocurrencies, you can bet that the price will react to it (sometimes positively, often negatively). When China banned ICOs, the price of Ethereum fell by 41% in 15 days (from $386.83/ETH to $228.06).
- Media influence. Just like government regulation, exposure in the media greatly affects a cryptocurrency’s price. Whenever a public figure makes a statement regarding cryptocurrencies or a major retailer starts accepting cryptocurrency as a form of payment, you will see the market respond.
- Changes to the technology. When a cryptocurrency’s core technology is affected (either via an update or the finding of a flaw), the cryptocurrency’s price is also affected.
Trading cryptocurrencies works almost exactly the same as trading fiat currencies, and it will benefit you greatly to learn the theory behind trading currencies. While profits are never guaranteed when trading, you can take steps to protect yourself from heavy losses and to improve your understanding of how markets move.
Cryptocurrency trading can be profitable, but only if you play your cards right. Unfortunately, cramming everything you’ll need to know about trading into this beginner’s guide is impossible, but hopefully you now know enough to get you started on this exciting adventure.