trader. To help you out, we have created this detailed guide to cryptocurrency trading for beginners updated for 2021.
In this guide, you will learn everything you need to start trading cryptocurrencies. Once you end reading our guide, you will be knowledgeable in buying and selling digital assets. There’s a lot to cover in this guide, so let’s dive right in.
Simply put, cryptocurrencies (or simply ‘crypto’) are digital forms of currencies. They can be used to pay for goods and services just like conventional currencies. Like how the traditional forms of currencies can be traded against one another on the forex, cryptocurrencies can also be traded against specific pairs on specialized platforms called cryptocurrency exchanges.
The difference is that unlike conventional currencies such as the U.S. dollar, cryptocurrencies are often not controlled by a single entity. They are also secured using complex cryptography coupled with a new form of online public ledger called a blockchain. It is distributed to anyone and everyone interested in having a copy. Watch the short video below to understand how blockchain works before we proceed further.
Digital currencies have been around for more than a couple of decades in different experimental forms, but the first one to be successfully implemented was Bitcoin. Bitcoin was created by Satoshi Nakamoto (pseudonym), who released its whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System” in October 2008 and launched the network in January 2009.
Bitcoin has spurred a whole new digital coin class that can now be bought and traded on cryptocurrency exchanges worldwide.
Other than Bitcoin, there are other well known and recognized cryptocurrencies like Ethereum – which is currently trailing Bitcoin in terms of network value; and Tether – which is the leading stablecoin also in terms of network value.
Currently, there are more than 8,000 cryptocurrencies listed on CoinMarketCap, a leading data aggregator for the cryptocurrency market.
As you learn how to buy and trade cryptocurrencies, you must differentiate between crypto trading and investing. What is the difference? Which is better? And, how do you take advantage of this distinction to effectively make your trades? The two terms are often used interchangeably, but they are different.
They are only similar to the extent that the end goal is the same – gaining profit from your activities. They are different in that results from trading activities are generally expected within a short to medium-term period. This could be anything from minutes or hours to a few days or weeks. With investing, the trader is in it for the long haul. We’re talking about months all the way to years or even more.
As a beginner, you probably want to choose a trading strategy that involves medium to long term trading and investing. This will typically require more time to research and analyze your trades before committing.
The stock market has been around for a long time now, and there is a bunch of literature on the topic. But, how different or similar is it from or to the nascent cryptocurrency market? Here’s how.
Given that cryptocurrencies seem to have more negatives against the stock market but not enough positives, why would you want to trade digital assets? Well, here are some of the pros below.
There are two main techniques to use to analyze and evaluate cryptocurrency. The techniques have existed for generations and have successfully been implemented for traditional financial assets. These are the Fundamental Analysis (FA) and Technical Analysis (TA). Often they are used complementary to each other, but it is possible to apply either independently.
FA is the art of a trader using both economic and financial factors affecting a given asset to determine an asset’s value. Through FA, you will be able to know whether that asset is either overvalued or undervalued at the current valuation. If you can figure out that question, you can then decide whether or not to invest, when, and for how long a period you would look to keep the investment.
Fundamental analysis for cryptocurrency involves evaluating two important factors – on-chain and off-chain metrics. On-chain metrics include network hash rate, wallet addresses (active and dormant), network applications, token/coin issuance rate (inflation/deflation), network fees, and transactions.
Luckily, with cryptocurrency, most of the networks are public such as Bitcoin and Ethereum making access to these on-chain factors easy. To track both Bitcoin and Ethereum on-chain metrics, you can use Bitinfocharts.com. This website has loads of data and is extremely simple to use and navigate.
Off-chain metrics include community engagement, exchange listings, government regulations, etc.
Technical analysis is a trading discipline predicated upon the idea that a trader could predict an asset’s future price movements, given its historical price action. TA uses a host of technical indicators to achieve this, including trade volume, moving averages, trend lines, candlesticks, chart patterns, and more. At the end of a technical analysis, a trader should have identified trading opportunities and a potential entry point.
Cryptocurrency technical analysis can work for any trading timeline, from scalping and day trading to long-term investments.
It entirely depends on the trader profile. Do you want to be the kind of trader that prefers to get in and out of trading positions multiple times a day (i.e., day trader)? Then crypto technical analysis will be your best friend. Instead, do you prefer to research and make informed bets every time (i.e., swing trader)? Then – a mix of both is the way to go.
For instance, you may use FA to determine that an asset is worth investing in. What you may not uncover with FA, however, is the right time to invest. For this, you will have to rely on technical analysis. Conversely, if you are using TA to work out future price movements for a given asset, you can use FA to confirm whether or not the price trend you are witnessing is poised to continue.
Therefore, there are advantages to using either technique over the other at various moments in your research, but to have a more complete picture, use both.
When it comes to the available cryptocurrency markets, just like the traditional financial instrument markets, there are two classes: the spot and the derivatives markets.
As the name suggests, in a crypto spot market, assets are either bought or sold on the spot, meaning that delivery happens “on the spot.” If you buy Bitcoins, the coins are delivered immediately, and the payment is also settled immediately.
The spot market is made up of two kinds of traders:
Makers bring liquidity to the marketplace. There are makers and takers on either side of the purchase coin. There are makers for both buy and sell orders, and consequently, there are takers for both buy and sell orders. An order book is the ledger on which available orders yet to be fulfilled are recorded.
For instance, if you are a buying taker, you could scan through the order book and opt to fulfill (take) an order that already exists or place an order. The platform will automatically match your purchase order with an already existing sell order.
The cryptocurrency derivatives marketplace consists of financial instruments whose value is based on a virtual currency’s value. These derivatives can be based on other derivatives’ value and forming multiple tiers – a house of cards if you will.
To be successful in cryptocurrency trading, you will need an effective trading strategy. What is it? A trading strategy is simply a plan that you will follow when executing your trades. It will comprise the kind of assets to invest in, the frequency of your trades, and your investments’ size.
In this section, we will discuss some of the most common crypto trading strategies. Although keep in mind that you can always create your personal strategy that works for you. It could be based on these broad strategies or something completely new.
Here’s why a crypto trading strategy is crucial to your success:
Here are some of the popular strategies used by highly successful traders and investors:
A crypto day trading strategy allows the trader to take full advantage of cryptocurrency assets’ price volatility. As mentioned earlier, virtual assets are currently extremely volatile, which works to the advantage of a day trader.
The day trading strategy is a game of numbers strategy. A day trader will make multiple trades within a day, buying low and selling high within little gains that compound to large sums by the end of the day. Typically, sometimes it gets hard to perform this manually. To succeed in this strategy, you will need to consider automating your trades using trading applications or crypto trading bots like TradeSanta.
Scalping (a trading strategy in which traders profit off small price changes) is a part of day trading but typically involves concise trading periods. Think minutes.
When either day trading or scalping, many trades will result in both wins and losses. The idea is to make sure that the win/loss ratio is in your favor. Score more wins to consider your strategy a success.
When it comes to swing trading, the time period varies. Whilst in day trading and scalping, traders typically open and close positions multiple times within a day. In swing trading, this happens within a much longer period. This could be anything from a few days to a few months.
A crypto swing trader will aim to take advantage of an incoming or ongoing trend. In crypto, this strategy is sometimes referred to as BTFD (“buying the f’n dip”). It means buying when the price is low and selling when the price is high. Extensive application of both FA and TA techniques is necessary when using this strategy.
Also called trend trading or following the trend, this strategy involves long-term investing in assets. A trader/investor will typically buy or invest in an asset when the price is low and sell when the price is high, not unlike the other strategies. The only difference is the long time periods between opening and closing a position.
Trades set up through this strategy could take months and sometimes years. It is an ideal strategy for investors favoring a more hands-off approach. This strategy is sometimes called ‘HODL’ (or Hold On for Dear Fife) in cryptocurrency. The term is derived from a play on the word ‘hold’ – to buy and hold. A crypto trader would invest in a coin or token and hold it even when the prices are plummeting. Such a trader would thus be called a ‘Hodler.’
Margin trading is not a trading strategy but rather a trading method. Adopted from the traditional stock market, it involves a trader using borrowed capital to open positions on a trading platform.
As anticipated, the results from trading on margin are greatly amplified to either direction of the trading position. If you score a win, the reward is much larger, and the reverse is also true. If the trade goes sideways, you also lose a lot more.
The larger the leverage, the closer the liquidation price to the entry price.
To better understand leverage, assume you enter a trade with 5x leverage. This means that your trade’s position size is 5 times the capital you staked from your own pocket (i.e., margin). Usually, the exchanges with margin trading options offer a leverage up to 100x, which is a hazardous ‘game’ and not recommended for beginners.
It’s hard to talk about crypto trading without talking about risk management in cryptocurrency trading. It is another essential part of your success journey. Risk in crypto trading refers to the chance of an undesirable outcome happening.
You may have heard that trading cryptocurrency is risky, and that is true, but so is trading all other financial instruments, including stocks and bonds. What differs is the level of risk.
There are different kinds of risk, and in this section, we will discuss those related to cryptocurrency trading.
Now that you understand the kind of risks you are most likely going to encounter, you should factor them every time you are about to make a trading decision.
Professional traders rarely have just one asset within their portfolio. Therefore, to juggle all their investments and trades, they need specific tools to be efficient while trading. And that’s where portfolio trackers come in.
They are software applications for desktop, tablet, and mobile devices that help track every kind of investment you make in the crypto market.
By tracking your portfolio and measuring your performance, you can easily improve upon it and make better trades. As the saying goes, you can’t improve what you can’t measure.
When it comes to crypto portfolio management, you want to know how much of a particular asset you hold and where it is stored. You also want to know how much you are gaining or losing from a particular trade or investment.
Keep in mind that you could have to maintain multiple portfolios. As a trader, you might employ different trading strategies simultaneously, meaning you are actively trading while at the same time swing trading and/or position trading.
To be a profitable trader, you will need a suite of applications from data portals and news aggregators to portfolio trackers. They all work in tandem to offer you real-time data you can use to make better trading and investment decisions.
There are hundreds of cryptocurrency exchanges in the market today. Some are centralized (a company runs them), while others are decentralized (a community runs them). Whichever option you choose comes down to your preferences. But here are a few factors to consider when choosing the best crypto exchange for a beginner:
Given the factors above, we recommend you check out Binance exchange as the best cryptocurrency trading platform for a beginner. It is the most popular crypto trading platform, supports a large number of virtual assets, and constantly works towards improving the trading experiences of its customers.
Here’s how you can buy cryptocurrency with a credit or debit card on Binance once you decide to start trading:
Additionally, the user experience is ideal for a beginner. There are both Classic (previously named as basic) and Advanced user interfaces catering to both beginners and advanced traders.
Classic interface:
Advanced interface:
Binance supports the widest selection of deposit/withdrawal options of any exchange currently and the widest geographical coverage as well. You can also download a mobile application on either iOS or Android and trade on the go.
To learn how to execute trades on Binance watch this video:
IMPORTANT: Before you start trading cryptocurrencies
Here’s the short breakdown of what assets you will find in our aforementioned guide:
Hopefully, you have learned a lot and you are now more informed and knowledgeable about cryptocurrency trading and investing than you were at the beginning. Now it’s your turn. We enjoyed researching and writing the guide with you in mind. Good luck!
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