Cryptocurrencies are the new gold and continue to gain popularity every day. Their decentralization and encryption in the blockchain network make them an attractive alternative to traditional financial systems and fiat currencies. Cryptos can be used for transactions or traded for profits. Many cryptocurrencies have shown a tremendous rise in prices quickly, making them a desirable option compared to other alternatives such as stocks.
Crypto trading is speculating crypto prices over a CFD trading account and placing orders on an exchange to make profits. Traders analyze price trends and history to decide when to buy and sell. This differs from crypto-investing, which buys and holds cryptocurrencies for long-term growth. Crypto trading often happens within a day or after a few days, while crypto investing can take more than a year.
Here’s a comprehensive guide to what crypto trading is.
Cryptocurrency trading vs. Investing
Cryptocurrency investing and trading are different investment options with different risks, rewards, and tax implications. Here's a breakdown of how they differ.
Period Of Investment
The significant difference between investing in cryptocurrency and trading is when you hold onto your investments. Cryptocurrency investing implies a longer-term approach, with investors generally buying coins they believe have long-term potential. Usually, crypto investors HODL their coins for over a year before finally selling them to make a profit.
On the other hand, traders will often enter and exit positions on much shorter time frames – sometimes even within a single day. They take advantage of the volatility of the crypto market to make profits. They buy when the price drops and immediately sell when the price rises. They can enter into several positions in a day.
Crypto investing is a risk-averse approach. Investors hold their coins for the long term instead of selling and buying as the market fluctuates. This approach shields them from volatility in the market. It's assumed that it will eventually stabilize and grow in the long run. The profits in this type of investment are often low compared to what traders can make, but it also has a low-risk factor.
Traders, however, are more aggressive. They bear more risk and must be more aware of market trends to take advantage of price movements. Their trades could generate profits or losses as the market is very volatile and can shift up to 10% in one day.
The tax implications for investing and trading crypto assets are also different. Cryptocurrency investments are taxed as capital gains in most countries. This means that your cryptocurrencies only become taxable when you sell them. They often come with a lower tax rate than in crypto trading.
Taxation is different in crypto trading. The gains and losses are added to your income and taxed according to your income tax rate when you take a profit or sell your crypto.
Please note we are not tax advisors. You must consult with your own tax profesional.
Crypto market vs. Stock market
Cryptocurrency and stock trading are popular investments with huge returns if done correctly. But while the end goal is to make profits, they have several differences.
Cryptocurrencies are digital assets on a decentralized network and are not backed by any government or financial institution. They include Bitcoin, Ethereum, and other digital assets used in the metaverse, such as Apecoin and SAND. Stocks represent ownership of a company that is traded on centralized exchanges.
One key difference is the level of regulation between crypto trading and stock trading. While stocks must adhere to strict oversight from governmental agencies like the SEC (Securities and Exchange Commission), cryptocurrency trading remains largely unregulated. This makes it riskier than traditional stock market investing but more lucrative for those willing to take risks.
Furthermore, cryptocurrencies are more volatile than stocks, meaning their value can significantly rise or fall over short periods. For example, Bitcoin rose to an all-time high of over $60,000 in less than 15 years since its inception beating the likes of gold in that specific period. While this offers opportunities for quick profits, its risks are very high.
Why trade cryptocurrencies?
Cryptocurrency trading has proved to be very profitable because of the volatility and many cryptos available to trade. This offers several benefits to traders, such as the following:
More Profit Potential
The volatility of the crypto market means coins can swing and fluctuate greatly in a short time. This is often a desired characteristic of assets in day trading as it gives traders a huge opportunity to enter and exit positions quickly. There's enormous potential for profits if you can accurately predict market movements and make the right trades.
Low Transaction Costs
Transaction costs for transferring cryptocurrencies between users or wallets are usually meager, meaning that more profit can remain with the trader after each trade. This advantage is particularly beneficial when day trading since traders often have to make multiple transactions in a single session.
Cryptocurrencies are highly liquid assets due to their 24/7 nature and global acceptance. Cryptos such as Bitcoin and Ethereum are highly sought; therefore, you can quickly sell them and exchange them for fiat currencies or other assets. When trading, you'll have no problem exiting any position you've entered using such coins; hence you can easily make more trades.
Choosing a Crypto Exchange for Trading
As crypto trading continues to grow, the need for a reliable and secure crypto exchange has increased. With so many options available, choosing the right one can be challenging. Here’s a quick guide to follow:
The safety and security of your crypto should be a priority in crypto trading. Before signing up for an exchange, take the time to look into their security measures - two-factor authentication and encrypted data transfer are musts for keeping your funds safe. Check if they offer secure storage in cold wallets as well – but just as important is making sure that any past breaches were taken seriously and handled with due diligence by the company. Doing these few simple steps can help ensure you're traded securely.
Before choosing a crypto exchange, knowing what deposit methods they accept is essential. Different exchanges have different deposit methods supported on their platforms. For example, exchanges can only accept bank or wire transfers and credit card payments, while others can also accept online payment methods, such as PayPal and Skrill.
Additionally, some exchanges allow you to make deposits using other cryptocurrencies. You should choose an exchange that accepts the deposit methods that you're using.
Cryptocurrency trading is all about making money, which means you should always consider the fees. Different exchanges have different fee structures. While some charge a percentage of the trading amount, others have flat rates.
Do yourself a solid and research each exchange before making any decisions - ensure they've got competitive prices and provide full transparency on their rate plans. A rule of thumb is to go for an exchange that charges a percentage if you're trading a small amount, but choose one with a flat fee if you're trading a significant amount.
Many crypto exchanges have different limits imposed on traders. For example, traders can only withdraw their earnings once they reach a specific limit. Similarly, exchanges often require a minimum balance in order to trade. This is common for exchanges offering margin and leverage trading, so your minimum balance can act as leverage for the margin.
Additionally, crypto exchanges may also impose geographical restrictions on traders. For example, Coinbase is only available in Singapore, while Binance is only available in some states in the USA. Therefore, ensure that you work with a crypto exchange that has favorable limits or very few limits to avoid any inconvenience.
Cryptocurrency Exchange vs. Cryptocurrency Broker
Cryptocurrency exchange and cryptocurrency brokers are both essential tools in crypto trading. They allow you to access the crypto market and trade to make profits. However, the two are different.
A cryptocurrency exchange is like a stock exchange but for cryptocurrency. Users can buy and sell cryptocurrencies for other digital currencies or fiat currencies. Some top cryptocurrency exchanges you can use include Binance, Coinbase, Kraken, and Bitfinex.
A cryptocurrency broker also allows investors to trade cryptocurrencies. The brokers act as third parties between sellers, buyers, traders, and exchanges. They offer services such as educational resources, customer support, and investment advice. Examples of cryptocurrency brokers include eToro and Plus500.
A cryptocurrency exchange allows users to trade directly with other users; hence better security, faster transactions, and privacy. However, users may need an in-depth understanding of the crypto market to comfortably use an exchange.
In contrast, a cryptocurrency broker provides a more user-friendly platform for beginners to enter the market.
Market Order Types
Different types of orders can be used based on specific trading needs. The orders include the following:
Basic Market Order
A market order is the simplest and most commonly used type of market order. It is used to buy or sell cryptocurrencies at the best market price. With the market order, traders are guaranteed that the order will be executed because it happens at the market price and not a speculative price. However, because the crypto market is volatile, the security price at which the order is executed may not be the best.
A limit order is a market order that has a specified limit price. The limit price is the maximum price a buyer is willing to buy or the minimum price a seller is willing to sell. The limit order will only execute if the security price meets or exceeds the specified limit price. A limit order allows a trader to determine the price they're willing to buy or sell their cryptos. However, the disadvantage is that if the market price of the security does not meet the limit price specified, the order will not execute.
A stop order is a market order that is triggered when the price of the security reaches a specific price, known as the stop price. The stop order can be used to limit losses or protect profits. If a trader has a long position, they can place a stop order below the current market price to limit their losses if the security price drops. Conversely, if a trader has a short position, they can place a stop order above the current market price to limit losses if the security price increases. The advantage of a stop order is that it allows traders to manage risk effectively, but the disadvantage is that it may execute at a different price than the specified stop price.
Stop Limit Order
A stop limit order is similar to a stop order but has an additional limit price specified. The stop limit order is triggered when the security price reaches the stop price, but it will only execute if the price can be filled at the limit price or better. The advantage of a stop-limit order is that it allows traders to manage risk effectively while controlling the price at which the order is executed. However, the disadvantage is that it may only execute if the security price meets the limit price specified.
Fundamental vs. Technical Analysis
Fundamental analysis involves examining the underlying factors that affect the value of a particular cryptocurrency, such as its market capitalization, user adoption, and development team. This approach resembles how investors analyze traditional stocks, bonds, and other assets. By evaluating these factors, traders can predict the long-term prospects of a cryptocurrency and its growth potential.
Technical analysis, on the other hand, involves analyzing price charts and other market data to identify patterns and trends. This approach focuses on short-term price movements and is often used by day traders who seek to profit from small price movements within a single trading session.
So which approach is better for cryptocurrency trading? The truth is that both fundamental and technical analysis have their strengths and weaknesses, and the best approach will depend on the individual trader's goals and preferences.
Types Of Crypto Traders
There are different types of cryptocurrency traders. The strategies they take and the periods of their trading primarily define them.
Day traders are the opposite of HODLers. They buy and sell cryptocurrencies on the same day and close all their positions at the end of the day. In day trading, no position is left open overnight Day traders often use technical analysis and chart patterns to make quick trades and try to profit from small price fluctuations. Day traders often take more significant profits per trade than scalpers but make few trades.
Swing traders try to capture the middle ground between HODLing and day trading. They hold onto a cryptocurrency for a few days or weeks, waiting for a significant price movement before selling. Swing traders use both technical and fundamental analysis to make their decisions, taking into account the news and events that can affect the market.
Scalpers are traders who buy and sell cryptocurrencies in seconds or minutes, trying to capture small price movements. They use high-frequency trading techniques such as trading bots, arbitrage, and exploiting bid-ask spreads to take advantage of tiny fluctuations in the market. Additionally, they often use leverage to amplify their profits. Scalping is a highly technical and risky form of trading that requires fast reflexes and a deep understanding of market mechanics.
Position traders take a long-term view of the crypto market. They mimic crypto investing but take their positions in months to capture long-term price trends. Position traders often use fundamental analysis to evaluate the strength of the currency's underlying technology, market adoption, and future potential.
Crytpo trading presents more opportunities for traders to make money, speculating crypto prices. However, as the crypto market is very volatile, there's the risk of losing if you need to research correctly and learn more about crypto trading. In this article, we've covered everything you need to understand about the crypto market and how you can master crypto trading.
Let us know in the comments below what your favorite trading method is.