The digital currency market is full of myths and misconceptions. You can lose funds when storing crypto, buying and selling it, making trades on exchanges, etc.
Economic shocks, fluctuations in financial markets, and the recent Bitcoin halving have attracted new users to the crypto sphere in the past couple of months. Where should one start when getting acquainted with this new type of asset, how to avoid losses, and develop trading skills?
Newcomers may have many questions, and a lack of answers can lead to financial losses and failure in this field. In this article, we explain what cryptocurrency trading is. Also, we discover what is a crypto exchange and how to choose it.
Table of Contents
What is Cryptocurrency
Cryptocurrency is a digital asset that exists only on the internet and has no physical form. Crypto coins use blockchain technology to ensure the security and confirmation of transactions. They are an alternative to traditional money that we are used to using for goods and services in real life.
Virtual currency serves as a medium of exchange. It differs from centralized currency and surpasses it in many aspects. Its main characteristics include:
- Decentralization. Central authorities do not control cryptocurrency. It is based on blockchain technology, which can store and transmit data across a distributed network of nodes.
- Cryptography. Cryptocurrency uses cryptographic methods for the security and anonymity of transactions. Each transaction is signed with a digital signature based on a public key system, ensuring that only the holder of the corresponding private key can control their funds.
- Limited Supply. Some cryptocurrencies have a fixed number of units determined in advance and cannot be changed. It prevents inflation and increases the value of cryptocurrency for long-term investment.
- Irreversibility. Cryptocurrency cannot be revoked or annulled after a financial transaction is confirmed. It means there is no way to recover your funds in case of an error, fraud, or loss
Such cryptocurrencies as Bitcoin, Ethereum, Litecoin, Ripple, and many others occupy a specific market share. We can divide all crypto coins into three main types: bitcoins, altcoins (for example, stablecoins), and tokens (DeFi tokens, NFTs).
The most common and popular cryptocurrencies are those with the highest market capitalization, trading volume, and number of users. Most people often invest in them to achieve a good profit. It’s best to pay attention to these cryptocurrencies first.
What is Trading in Cryptocurrency
It is an extremely risky profession. The price of cryptocurrencies is volatile, fluctuating by 10-20% or even 50% or more in a single day. It can create the impression for inexperienced users that trading can yield huge profits almost every day. However, in practice, the opposite is true. Typically, 90% of beginners lose a significant portion of their capital in the short term and exit the market.
When starting to trade cryptocurrency, it’s important to rid yourself of greed. You shouldn’t wait for the price to reach its peak. It’s better to execute several trades with a 100% chance of profit than to miss the opportunity while waiting for the price to reach its highest or lowest point.
Technical and fundamental analysis can help determine the direction in which token prices will move. It’s the traders working with large volumes who determine price trends and make significant price changes that small traders can’t influence.
It’s an online platform where users can buy, sell and trade cryptocurrencies. Cryptocurrency coin markets play a central role in the crypto ecosystem by facilitating trading and providing liquidity.
The process of buying and selling on an exchange involves several steps:
- Users must create an account and go through identity verification processes.
- Then, you can deposit funds into the exchange account via bank transfer, credit card, or other options.
- After that, browse through the exchange’s market listings to find a desired cryptocurrency trading pair. For example, Bitcoin/USD, Ethereum/BTC, etc.
- Enter orders to buy or sell by specifying the amount and price. The exchange will match buy and sell orders and execute the trade.
- To withdraw funds, initiate a request and send the coins to an external crypto wallet address.
There are several types of cryptocurrency exchanges:
- Centralized exchanges like Binance and Coinbase hold user funds and facilitate all trades through their platform. They are easy to use but carry the risk of security breaches.
- Decentralized exchanges like Uniswap allow peer-to-peer trading through automated smart contracts. Trades happen directly between user wallets.
When selecting an exchange, key factors to consider are:
- Geographical restrictions — Some exchanges are not available in certain countries.
- Fees — Exchanges have trading fees, deposit/withdrawal fees, and spreads.
- Security – Assess the exchange’s track record, security protocols, and insurance safeguards.
- Liquidity — Higher liquidity makes trades faster and easier. Check the trading volumes.
- Supported cryptocurrencies — Many exchanges only support the major coins like Bitcoin and Ethereum.
- Ease of use — The user interface design and process for trading, deposits/withdrawals.
- Customer support — Availability and responsiveness of assistance for issues.
Security in Crypto Trading
Newcomers make a lot of mistakes, and they usually cost money. Therefore, it’s better to familiarize yourself with others’ experiences in advance to avoid unnecessary losses. To help with that, we’ve prepared a set of rules that every beginner should follow.
- Don’t buy cryptocurrency based on news. Typically, if a user hears about some news that should lead to an increase in the coin’s value, it has probably already happened. If you do buy, make sure to use stop-loss orders. These are orders to sell coins at a specific price. For example, if you buy Bitcoin at $28,000, and the price rises to $30,000, you can set a stop-loss order at your purchase price. In this case, the exchange will automatically sell the asset at the specified price, and the trader won’t lose anything.
- Avoid greed. If you’ve managed to buy Bitcoin at $20,000, and its price goes up, it’s safer to sell part of your coins and set a stop-loss for the rest.
- Be very cautious about or avoid entirely trusting signals from others for buying and selling assets. At the moment, there are many channels on Telegram and other social networks publishing forecasts on cryptocurrencies. Their authors are not responsible for their subscribers’ money.
- Don’t entrust your capital to anyone, especially people you barely know. And if you do, do it only with a notarized contract. This practice has been popular in the crypto world for several years and often results in negative outcomes for inexperienced traders.
- Don’t let emotions take over. Most losing trades happen due to a loss of control.
- Don’t trade with your last money, especially not with borrowed money. Making a profit in the cryptocurrency market is difficult, and for beginner traders, it’s almost impossible. That’s why you should invest only the money you can afford to lose.
- Always have funds on hand in case the asset’s price drops below the level at which you bought it.
- Don’t neglect education. Cryptocurrency market trading is not a casino; it’s hard, nerve-wracking work. It can take years to understand how asset prices behave in different situations.
- Record your trades. This will help evaluate and adjust your trading strategy and identify any mistakes you’ve made.
What Does Trading Crypto Mean
Despite the risks and complexity, starting crypto trading as a beginner can be worthwhile if done with caution. Beginners should start small, choose user-friendly exchanges, learn about secure storage, and diversify investments.
While crypto trading has challenges, its potential rewards make it an opportunity worth considering for those new to the space who educate themselves and start with small amounts. With prudent strategies, beginners can gain valuable experience and capitalize on the exciting possibilities of crypto markets.