Welcome to the exciting world of cryptocurrency trading! Over the past few years, digital currencies have taken the global financial markets by storm, capturing the attention of investors and traders alike. If you’re intrigued by this new-age investment frontier, you’ve come to the right place.
In this comprehensive guide, we'll unpack the mysteries of crypto trading, examine its unique characteristics, and highlight the key distinctions between cryptocurrency and traditional trading methods. This guide is designed for both experienced investors and curious novices, providing valuable insights and essential knowledge to help you successfully navigate the dynamic world of digital assets.
Let's start with the basics: Cryptocurrency is any digital or virtual currency that uses cryptography to secure transactions. The advantage of crypto lies in the lack of a centralized issuing or regulating authority; instead, they rely on a decentralized system to record transactions.
So, what exactly is cryptocurrency trading, and how does it differ from traditional trading? Fasten your seat belts and join us as we embark on an exhilarating journey into the captivating realm of cryptocurrency trading and the wealth of opportunities it offers.
What Is Cryptocurrency?
The first globally viable cryptocurrency arrived when Satoshi Nakamoto launched the Bitcoin protocol in January 2009. Cryptocurrency is a new class of digital assets that operates utterly differently from the fiat currency that we all use daily. The most apparent distinction is that it is solely a virtual currency, which means there are no physical cryptocurrency coins or notes to keep in your back pocket.
Rather than being issued by a central bank or government, as US dollars, euros, and other fiat currencies are, new cryptocurrency units typically enter circulation through a technological process involving the participation of volunteers from around the world using their computers.
That is why Cryptocurrency is frequently referred to as "decentralized." Typically, cryptocurrencies are not governed or managed by any single entity in a single country. Therefore, a network of volunteers worldwide is required to secure and validate cryptocurrency transactions. These volunteers are known as nodes.
The definition of Cryptocurrency will continue to grow as innovations reshape the cryptocurrency sector, including intriguing new categories like decentralized finance (DeFi).
How Does Cryptocurrency Work?
Cryptocurrency markets are decentralized, meaning they are neither issued nor backed by a centralized body such as a government. Instead, they are distributed throughout a computer network. On the other hand, Cryptocurrencies can be purchased and sold on exchanges and held in "wallets."
Digital currencies, unlike traditional currencies, exist only as a shared digital record of ownership maintained on a blockchain. When a person wishes to send Bitcoin units to another user, they do so through the crypto exchange or a digital wallet. The transaction is not considered complete until validated and uploaded to the blockchain via the mining process. This is also how the vast majority of new cryptocurrency tokens are created.
What Is Blockchain Technology?
A blockchain is exactly what it sounds like - a virtual chain of blocks, each containing a set of transactions and other data. When a block is added to the chain, it becomes immutable, meaning the data stored within it cannot be changed or removed. The network nodes serve various functions, from storing a complete archive of all historical transactions to validating new transaction data.
So far, in this guide, we've discussed what cryptocurrency is and how it functions. Let's take a closer look at what digital asset trading entails.
What Is Cryptocurrency Trading?
The exchange of digital assets between traders is known as "cryptocurrency trading." It enables them to profit from price fluctuations caused by supply and demand. Because of crypto market volatility, cryptocurrency trading is both rewarding and risky.
Trading crypto is still in its infancy. However, the recent BTC price surge has generated a lot of attention in the media. Aside from Bitcoin, there are thousands of digital assets, called altcoins, available for trading on various trading platforms. Depending on the trading style, a crypto trader might buy and sell a digital asset at a higher price in minutes or weeks.
What Should You Know About Cryptocurrency Trading?
- A cryptocurrency exchange is not affiliated with traditional stock exchanges.
- Beginners may prefer to trade cryptocurrency stocks because the market is open 24/7.
- The cryptocurrency market is extremely volatile. Therefore, crypto traders can take advantage of trading opportunities at any time.
- The elegance of the cryptocurrency market is that if we use the right strategy, we can make some profitable trades in both bull and bear markets.
Starting Your Crypto Trading Journey
Before you begin trading, it's important to first ensure that you have the following:
- A cryptocurrency wallet (you can choose from paper, mobile, software, or hardware wallets)
- Access to a cryptocurrency exchange that will allow you to buy, sell, or trade digital assets.
How Does Crypto Trading Work?
Like most financial markets, the Cryptocurrency market is also driven by demand and supply. When demand exceeds supply, the asset's price rises; alternatively, when supply exceeds demand, the price of a cryptocurrency tends to fall.
Is it really that simple?
We'd all be millionaires if it were that simple. Since cryptocurrency markets are decentralized, they are immune to many economic and political concerns plaguing traditional fiat currencies. At the same time, there is still much uncertainty surrounding cryptocurrencies.
Various methods exist to analyze the crypto market and identify multiple trends. For instance, a bullish trend occurs when a cryptocurrency moves higher for an extended period. Alternatively, a bearish market occurs when the market falls for an extended period.
So let's discuss several other factors that influence the crypto markets.
Factors Impacting Crypto Assets
Supply: The total number of coins in circulation, the rate at which they are released, burned, or lost, is referred to as the supply.
Market capitalization: The total value of all coins in circulation and how users perceive it to develop. In general, the larger a cryptocurrency's market cap, the more dominant it is presumed to be in the market. s a result, market capitalization is frequently considered the most important measure for ranking cryptocurrencies.
Press coverage: The price of cryptocurrencies is heavily influenced by the media and the amount of coverage. The more attention a cryptocurrency gets, the greater its demand.
Integration: This refers to how easily a cryptocurrency can be integrated into existing infrastructure, such as e-commerce payment systems.
Major events: Cryptocurrency, unlike fiat currency, is not issued by a central bank or backed by a government. Moreover, purchasing a cryptocurrency differs from buying a stock or bond because Cryptocurrency is not a corporate entity. Thus, there are no company balance sheets or Form 10-Ks to examine. Therefore, major events that can drive digital currencies' prices include regulatory updates from securities and exchange commissions, security breaches, and economic setbacks.
When first entering the world of crypto trading, we will typically begin by purchasing the first Cryptocurrency with fiat currency. Hundreds of crypto exchanges allow us to buy Bitcoin or Ethereum with fiat currency, but not all offer large crypto pairings.
"A national currency, such as the US dollar, Great British Pound, Euro, Japanese Yen or Australian dollar, is called fiat currency."
Once we've gotten our feet wet, we should start trading between two digital currencies, such as Bitcoin (BTC) and Ethereum (ETH). Like the foreign exchange (forex) market, cryptocurrencies can be traded in pairs. This can be overwhelming for newcomers because exchanges list pairings in abbreviated forms, such as BTC/USDT, BTC/ETH, BTC/USDC, etc.
So far, in this guide, we've discussed what cryptocurrency trading is and how it works. Let's take a closer look at what crypto trading entails.
Three Ways to Analyze Cryptocurrency for Trading
Investing in cryptocurrencies is still regarded as highly speculative and risky. Even though any cryptocurrency faces the risk of collapsing, almost all financial experts agree that Cryptocurrency is the way of the future. So it's not a question of whether cryptocurrencies will be a staple asset in five, ten, or fifteen years; instead, it's a question of which coins will lead the way.
When analyzing crypto – whether it's Bitcoin, Ethereum, Litecoin, or another smaller coin – consider the crypto markets as stock exchanges and perform three different types of analysis.
- Technical Analysis
- Fundamental Analysis
- Sentimental Analysis
In the upcoming lessons, we will discuss these three types of analysis in more detail. Let's look at the differences between crypto and traditional trading.
Crypto Trading vs. Traditional Trading: What's the Difference?
In recent years, cryptocurrency exchanges have grown massive popularity to become more mainstream amid new technology and innovation. The surge in digital currency investment has increased the total market capitalization of cryptos to more than $3 trillion. The speculative rise of blockchain technology and its numerous cryptocurrencies has piqued the interest of traders concerned about missing out on significant gains.
Trading in cryptocurrency exchanges starkly contrasts the stock exchange and forex trading as both markets are comparatively less volatile. Moreover, the leverage used in forex and stock exchange makes it appealing to traders.
This section will examine the similarities and differences between forex, stock exchange, and cryptocurrency trading.
Crypto Trading vs. Traditional Trading Environment
Both cryptocurrency and forex trading have similarities and differences; for instance, the buying and selling of digital assets such as cryptocurrencies, tokens, and NFTs (non-fungible tokens) are known as crypto trading. On the other hand, Forex trading is about exchanging one currency for another in the hope that its value will rise, allowing the trader to re-exchange it for a profit.
The factors that drive the valuations of cryptocurrencies and currencies, such as supply and demand, are similar. However, the specific forces driving supply and demand for crypto and forex differ vastly.
Cryptocurrencies, for example, are based on blockchain technology, which employs a distributed and decentralized ledger. As a result, massive investment is being made in this new infrastructure, and demand for cryptocurrencies is skyrocketing.
Forex Trading Environment
Forex trading has been around for decades, essentially pitting one economy against another in the hope that the value of your purchased currency will rise. The forces that drive demand and supply in forex are tremendous, and any imbalances can impact the global economy.
Stock Exchange Trading Environment
When we invest in shares, we purchase stock in a publicly-traded company. The shares we buy give us a piece of the company and a tangible asset to back up our investment. But, unlike cryptocurrency, whose value fluctuates based on public opinion, the value of a stock is determined by the company's performance, outlook, valuation, and cash flow, among other things.
Stock exchanges have been in operation since 1611. With such a long trading history, financial experts have a wealth of data to draw on when spotting trends and forecasting future market performance. While predicting the success of a single publicly-traded company is difficult, index funds and other mutual funds, and exchange-traded funds reduce risk by investing in groups of companies rather than a single one.
Cryptocurrency Market Cap: The overall market capitalization of cryptocurrency is approximately $3 trillion. The first $1 trillion in combined valuations took 12 years to develop and another 11 months to add the next $2 trillion. Considering the decentralized nature of crypto, determining trading volumes is challenging, although estimates range from $100 billion to $500 billion daily.
Forex Market Cap: However, determining the value of FX is more challenging. Economists can estimate the global economy's overall value, estimated to be $80 trillion in 2017.
The Bank for International Settlements (BIS) estimates the world's foreign exchange trading volume every three years. The most current data was released in September 2019, when the BIS discovered that forex transacted $6.6 trillion per day, up from $5.1 trillion three years prior.
US Stock Exchange Market Cap: The overall market capitalization of the stock market in the United States is now $53,366,436.4 million (December 31, 2021). The market value is the total market capitalization of all publicly traded firms in the United States that are listed on the New York Stock Exchange, the Nasdaq Stock Market, or the OTCQX US Market.
Despite the epidemic, the total market capitalization of publicly traded American corporations climbed by 20.15 percent in 2020. The market capitalization of publicly traded firms in the United States climbed 170.11% between January 1, 2010, and December 31, 2020. The table below also shows the historical total market capitalization of the top 500 corporations in the United States.
Stocks: The most crucial difference between investing in the stock, forex, and crypto markets is what you're acquiring. Shares are securities that reflect a percentage of firm ownership (or equity): the issuing corporation or the issuer. Stocks often confer specific rights on their owners, such as voting rights or a percentage of the issuer's profits in the form of dividends.
Forex: CFDs are traded and settled with the broker in the forex market. We do not obtain ownership of currencies traded with a broker unless we purchase them directly from the money market.
Investors may encounter low liquidity when trading low-cap coins and tokens or buying and selling smaller crypto platforms. Stock market trading has liquidity issues, mainly when dealing with micro-cap companies or over-the-counter (OTC) penny stocks. In contrast, the crypto and forex markets are highly liquid.
This is one of the reasons why forex trades around $6.6 trillion per day, whereas crypto trading is estimated to be between $100 billion and $200 billion per day, with a peak of $516 billion in May 2021. This means that the liquidity in the forex market is 12 to 60 times greater than in the cryptocurrency market.
Crypto markets operate 24/7, meaning they are accessible at all times, including weekends and holidays. Traditional financial markets, on the other hand, usually have specific trading hours and are closed during weekends and holidays. The crypto market never closes, letting investors place trades irrespective of geographical location.
Although cryptocurrencies and traditional trading assets offer different investment opportunities, traditional trading, and the crypto ecosystem rapidly merge to form a new digital economy. Synthetic assets are being used by projects such as Synthetix and Terra to bring traditional stocks to the blockchain.
Having said that, crypto traders will soon be able to trade their favorite stocks on decentralized marketplaces worldwide because of a robust network of blockchain-powered oracles connecting traditional financial databases to cryptocurrency markets. Consider each market's distinct characteristics and risks to see if you're ready. Based on your risk tolerance, which is best for you?