What is crypto trading?
Ever since Bitcoin hit it big in 2017, the trading world has been obsessed with crypto. Today, we’re looking at what exactly crypto trading is, the pros and cons of dabbling in it, and a few of the methods that successful traders may use.
Author - TradeZella Team
Cryptocurrencies have been around for decades, but it’s only in the past few years that trading them has picked up steam.
The most famous cryptocurrency, Bitcoin, launched in 2009 – but it wasn’t until 2017, when one unit passed $11.5k for the first time, that regular people started to pay attention. It even got mentioned on The Big Bang Theory.
Now, everyone and their grandma knows what crypto is. At least, kind of. And when it comes to trading this asset, pretty much everyone has an opinion, too.
Some have an optimistic outlook and see it as an excellent way to make a lot of money quickly, while others say it’s too volatile to ever bring predictable returns.
So, who’s right?
The answer is probably somewhere in the middle. While it’s unlikely you’ll make millions of dollars overnight, it’s also unlikely that you’ll lose it all in one fell swoop.
That is, as long as you’re trading responsibly. Like trading any asset type, your chances of success will increase if you have a plan and you stick to it.
When it comes to crypto trading, there’s a lot of information out there. It can be overwhelming. Especially with all of the doom-mongers saying one thing and enthusiastic podcast bros saying another.
If you’re wondering whether trading cryptocurrency is right for you, we’re bringing it back to basics. In this article, we’re giving an overview of what crypto trading is, and some of the most popular ways to get started.
First things first: what is crypto trading?
Crypto trading means buying and selling different digital coins (aka cryptocurrencies) to make a profit.
Cryptocurrencies work like regular money – you can use them to buy goods and services, usually online – although a few enterprising real-world stores offer the opportunity to pay in crypto.
The difference between crypto and other currencies is that they’re not controlled by a financial institution or government, they’re completely decentralized.
They work on blockchain technology – a secure way to record transactions and keep things and transparent.
Crypto has a few other similarities to cash. Despite the blockchain record, if you lose your crypto, there’s no way to get it back.
You need to have your key in order to prove ownership – and these autogenerated strings aren’t exactly memorable.
That’s why longer term investors prefer to keep their coins in a secure, offline ‘wallet’ rather than on the exchanges, as it’s safer from hackers. J
ust don’t lose the private key, or the physical storage method you’ve transferred your crypto on to.
How does the crypto trading market work?
Cryptocurrency markets are decentralized and run on a global network of computers. Because there’s no central exchange like Wall Street, crypto markets are open all the time: 24/7. On the plus side, this means you can make spot trades whenever you feel like it.
On the down side, you might miss out on some big market swings while you’re asleep.
Cryptocurrencies don’t exist in a tangible form. They’re simply a digital record of ownership which sits on a ‘blockchain’. They’re exchanged between digital wallets – this is either an account on an exchange, or an external wallet that’s more secure.
The transaction is finalized once it’s been verified and added to the blockchain.
What is a blockchain, and why is it essential to crypto trading?
While you don’t need to be a blockchain expert to trade cryptocurrencies, it is a good idea to understand a little of the tech behind it.
So: let’s start with what a blockchain is. It’s a digital record of data, used to share and verify information.
This tech is seriously secure, because blockchain files are always stored across multiple computers on a network. It’s also readable by everyone within that network.
This means that the information stored on the blockchain is verifiable, permanent and transparent. There’s no single point of failure.
To alter the data, you’d need to access the blockchain everywhere that it’s stored. Trying to change the data interrupts the links between blocks, so any attempted breach is recognized almost immediately.
There are lots of applications for blockchain tech outside of cryptocurrency, such as supply chain traceability and private voting within organizational structures. For crypto, the blockchain acts as a transaction history – showing how the coin has changed hands over time.
Each transaction is a ‘block’, and every time a new transaction happens a new block is added to the end of the chain. In crypto this process is called ‘mining’ – new transactions are checked, to ensure the buyer has enough funds and that the sender authorized the transaction.
If it’s all good, a new block is added to the end of the chain.
All of this happens behind the scenes so you don’t need to worry about it too much.
What is a private key, and why is it so important when trading crypto?
A Private Key is similar to an autogenerated password that protects your assets from being stolen. This huge alphanumeric code is often hundreds of digits long. It’s used to authorize transactions – when you buy or sell – and also to prove that you own the asset.
This is one of the most important parts of crypto, and part of why crypto is so secure. Without the key, no one can get their hands on your crypto.
On the plus side, this protects you from thieves – provided you’re keeping your assets in a secure digital wallet. On the downside, if you lose your key – or if it’s stolen – you’ve got no recourse to get your coin back.
Thankfully, you don’t need to manually create or remember your key. Your digital wallet will automatically create and store the data. You need to save your private key and keep it somewhere secure.
You can do this manually, by printing it on a piece of paper (a paper key) or generate a QR code that you can scan whenever you need to sign for your asset.
Another method is on a hardware wallet like a smartcard, USB or Bluetooth device.
The most secure way to keep your key is in non-custodial cold storage. ‘Non-custodial’ means it’s not held on a third-party site like Coinbase, which hackers may target. ‘Cold’ means ‘offline’ – if it’s not connected to the internet, then nobody can hack into it.
It’s best to only transfer what you need when it’s time to make a trade, keeping the rest in a cold wallet where it’s safer.
What are the driving forces behind the cryptocurrency market, and why is it so volatile?
Like all markets, the price of crypto is based on supply and demand. Unlike other markets, crypto is unaffected by economic and political situations – back to that decentralization. While this sounds like a good thing, it can actually be frustrating for traders as it means the crypto market is really hard to predict.
Some things that could affect crypto prices include:
· Regulatory updates and security breaches – France is planning to bring in stricter crypto regulations in 2024, so it will be interesting to see what effect this has on the market
· Integration with ecommerce systems – Ethereum surged in price as Bored Ape NFTs gained popularity, as these collectibles sit on the Ethereum blockchain
· Press coverage – Bitcoin prices went sky-high in 2017 as the coin started to appear in popular culture. However, Dogecoin dropped in price after Elon Musk promoted it on SNL. Make of that what you will.
· Market cap – aka the value of all the coins currently in existence, and how users are responding
· Supply – the rate at which coins are released, lost or destroyed.
Where can I trade crypto?
There are two main places to trade crypto: on exchanges like Binance and Coinbase, or over-the-counter (OTC).
Exchanges are platforms that act as middle men between buyers and sellers. They make it easy to quickly buy or sell crypto at the current market prices.
Start by signing up for an account, add some funds, choose your crypto and start trading. It’s as simple as that.
You can either leave your coins in your account for quick and easy trading, or move them to a cold wallet for secure storage.
If you’re trading on short positions it’s probably not worth moving all of your coins, but if you’re planning to go long it could be worth the extra peace of mind that a secure, non-custodial wallet gives you.
OTC trading takes the middle man out of the equation. With this type of trading, you go direct to the other party. This gives you room for negotiation, so you might be able to get a cheaper price if you’re buying a huge amount of assets.
What are some of the different ways to trade crypto?
There are a couple of different ways to trade crypto. The one you choose will depend on how much risk you’re willing to take on, and how much capital you have behind you.
What is spot trading in crypto?
One of the most popular ways to trade crypto is spot-trading. It’s called this because you trade ‘on the spot’ for the current market price. As soon as you send over your cash, you receive your assets straight away. This is how most exchanges work.
Start by placing an order for crypto at its current market price. Once you receive it, you can either keep it in your account on the exchange for quick trades – or move it to a cold wallet for more security.
Spot trading crypto is quite a low-risk strategy, as you can only lose what you invest – unlike leverage trading, which we’ll come to next.
The downside is that your profits are limited to the difference between your buying and selling price.
And, because the crypto market is quite volatile, it depends on price swings. You could make a huge profit, or a huge loss, and it’s really hard to predict which way things will go.
What is leverage trading in crypto?
This is where we’re getting into slightly risky waters. Leverage trading means using borrowed capital – like a loan – to give yourself more buying power. By borrowing money to trade (leverage), you can take on more crypto than you can afford with the cash you have.
Some exchanges let you use up leverage of up to 100 times your account balance.
The more leverage you have, the more chance you have of making a bigger profit. But it’s also super risky – the more leverage you take on, the more chance there is of being liquidated.
Liquidation is when the exchange seizes your account, and all of the collateral in it. Kind of like getting your house repossessed when you can’t make your mortgage payments.
Leverage margins are usually shown as a ratio: e.g. 1:10 means you’ll be multiplying your position size by ten. So, with $100 of your own money, you could invest $1000 in the coin of your choice.
Once you’ve deposited, you need to maintain your margin threshold. So, if you the market suddenly drops, you’ll need to put more of your own money in to keep that threshold at the agreed level.
The biggest risk of this type of crypto trading is that you need to pay interest on the funds you’re borrowing, and pay back any losses you’ve incurred on the position. In a market as volatile as crypto, you need to be really careful.
What is margin trading in crypto?
‘Margin trading’ is a key part of ‘leverage trading’. It refers to the initial deposit you’ve put in to maintain your leveraged position.
Some exchanges, like Binance, let you borrow money direct from your account.
They have a ‘Borrow’ button on Margin accounts, and then you head to the Margin Trading page to begin.
We’re just going to say again: this is a super risky way to trade, so make sure you’re super confident about your position. Don’t take on more leverage than you’re able to pay back.
What is day trading in crypto?
Day trading in crypto involves entering and exiting your position during the same day – whether it’s a matter of hours or minutes.
Unlike the forex and stock markets, the crypto market never sleeps. If you decide to day trade crypto, you’re not susceptible to any nasty overnight surprises.
Remember: this market is volatile, so you could go to bed on a high and wake up on a low.
When you day trade crypto, you have the chance to make profits quickly – getting them almost instantly. But, if the market is moving downwards, you could lose money quickly too.
This style of trading is all about capitalizing on short-term trends. It does take some market analysis, and you have to be ready to move fast.
What is position trading in crypto?
AKA ‘trend trading’, this style of crypto trading means holding onto your asset for a longer period of time. It’s a more chill way to trade crypto – or any asset, for that matter.
This strategy may not be as exciting as day trading, but it helps you to ride the wave of downward trends. These tend to rectify themselves, and so everything evens out over time. Despite market volatility, it’s easier to monitor long-term trends than intraday ones.
This can help you to make more confident decisions when choosing which coins to invest in.
Of course, there are some downsides. For example if a lot of your capital is tied up in holding crypto, you can’t invest it in other things while your position is open.
It can also be easy to take your eye off the ball with long term positions, so you might miss out on some important crypto market news – and lose out on opportunities to make a bigger profit.
How do I choose the right crypto to invest in?
While it can be tempting to jump in and buy the coin you’ve heard the most buzz about lately, crypto trading involves a level of speculation. It’s worth sitting down and looking at all of the different coins available on the exchange of your choice, and making an educated decision on the best investment.
In that way, trading crypto is no different from trading stocks. It’s another asset worth keeping track of in your trading journal, which you can read more about in our article: what is a trading journal, and how do traders use them?
Before settling on a certain type of currency, start by looking at the trends:
Which way is it moving?
Is now a good time to enter, or should you wait?
What is the current market capitalization?
Another thing to do is research the coin you’re interested in.
Who’s behind it?
Is there a limited supply of the coin?
For example, Bitcoin has a limited number – at some point, there’ll be none left to mine. If demand keeps up, the price will continue to increase.
Remember: a wise investment for you might not be a wise investment for your best friend. Day traders can make great profits on coins that aren’t viable in the long term, while position traders have the chance to make huge profits on coins that would cause a loss for someone making a day trade.
It’s all about your trading style, your appetite for risk and the amount of capital you have.
Track your crypto – and other – trades with TradeZella
No matter what you decide to trade – whether that’s stocks, forex or crypto – the most important thing you can do as a trader is keep a trading journal.
By journaling everything – from wins and losses to how you felt that day – you’ll start to notice patterns. For example maybe you always make bad trades on a Monday, or sell too quickly on a Friday. With this knowledge, you can change your behavior – and ultimately become a better trader.
While you can use an Excel sheet, or pen and paper, to journal your trades, one of the best ways to do it is with dedicated journaling software. And that’s where TradeZella comes in.
Our online trading journal tool has all of the features you need to supercharge your skills. It pulls your data into simple graphs, so you can see at a glance where you’re going wrong and what you’re doing right. You can track the metrics that matter, and get reports that really dig into your strengths and weaknesses.
Adding your trades to your journal is instant, too. With in-built broker integration, TradeZella automatically syncs crypto trades from some of the biggest exchanges. Depending on the broker you use, it also pulls in stocks, options and futures. So you don’t have to spend time downloading and uploading .csv files. It’s all there for you as soon as you log in.
Sound good? Sign up for TradeZella and set out on the path to being a better crypto trader.