Cryptocurrency trading is one of the most popular use cases of digital assets. It’s a good way to make a profit for long and short term traders. However, just like fiat trading, you need to arm yourself with knowledge if you want to be a successful cryptocurrency trader. First things first, what do you know about cryptocurrencies? You can’t start trading cryptocurrencies if you don’t know anything about the term.
What is Cryptocurrency?
Cryptocurrencies are decentralized digital assets that secure financial transactions using strong cryptography. The first cryptocurrency in the world is Bitcoin. It was created as the first application of blockchain technology by Satoshi Nakamoto. Until now, there is still a debate about if Satoshi wanted Bitcoin to be a store of value or a medium of exchange. The decentralization of cryptocurrencies is one of the key features that make them different from fiat currency which is controlled by centralized institutions. Bitcoin has become so popular and expensive over the years. However, there are thousands of alternatives to Bitcoin called altcoins. Whether you are interested in Bitcoin trading or trading other cryptocurrencies, the rules are more or less the same.
How To Trade Cryptocurrency
The golden rule you should never forget when you’re trading cryptocurrencies is that the prices of many major altcoins move in the same direction as the price of Bitcoin. So, in most cases, a rise in the price of Bitcoin is accompanied by a rise in the price of altcoins. This is a major market indicator. However, there are times when altcoins defy the odds and rise at the expense of Bitcoin.
Another thing you need to keep in mind is that not every cryptocurrency or exchange is legit. Some company’s promise investors major returns, host initial coin offerings and exit with your money. Some cryptocurrency exchanges scam people in a similar way. So, confirm the validity and reputation of the cryptocurrency exchange before you proceed. This way, you’ll be sure that your funds are safe. You also need to consider the exchange rate on the cryptocurrency trading platform.
Some of the top exchanges out there are Coinbase, Bitcoin Loophole, and Binance. The first thing you need to do before you can start trading on most exchanges is to create and verify an account. After your account has been created successfully, you can make a deposit and start trading. Most exchanges have demo accounts where you can use virtual cryptocurrencies to test the trading waters before you make a real deposit. When you’re fully acquainted with the cryptocurrency trading game, you can start trading.
Most cryptocurrency traders use trading bots to trade on the go. Whether you are using a bot or you’re trading manually, you need to keep your cryptocurrency safe. This is where a cryptocurrency wallet comes in. You can either use a hot wallet, a cold wallet or both. The hot wallet is always online. This is where your cryptocurrency does during trading. The cold wallet or hardware wallet is an offline wallet. It is an external storage device. All you have to do is lock the tokens in and disconnect them from the internet. Most cryptocurrency exchanges have hot and cold wallets. The bulk of the cryptocurrencies in exchanges are kept in the cold wallet to protect the funds in case the platform is hacked and the hot wallet is accessed.
Depending on the cryptocurrency exchange you decide to use, you’ll have the option of making fiat to cryptocurrency trades or cryptocurrency to cryptocurrency trades. Some other exchanges allow you to enjoy both options. Just like with forex trading, your goal is to buy and sell cryptocurrencies on exchanges at strategic times to make a profit. It’s always better for you to place a buy order when the price of a given cryptocurrency is bearish and sell when the price is bullish. A cryptocurrency trading bot can analyze the market trends an initiate trades for you when you’re busy with other things.
Take Advantage of Arbitrage Trading
Arbitrage trading refers to buying cryptocurrencies at low prices on one exchange and selling at higher prices on another exchange. It’s an effective way to increase your earnings because the price differences are often significant. The more tokens you buy and sell through arbitrage, the more money you’ll make.
Pros of Arbitrage Trading
- Increased profits when spreads are high
- It is risk-free so your capital will be protected except there is a drastic change in prices
- It offers high liquidity.
Cons of Arbitrage Trading
- You’ll need to invest in an expensive trading bot
- The market is highly volatile and subsequently unpredictable
- Arbitrage profit might be taxed like equities in some countries.
Bottom Line
There are several options to explore when it comes to trading cryptocurrencies. Whether it is leverage, arbitrage or pair trading, you’ll make a real profit if you know how to make strategic moves. For more information about cryptocurrency trading, learn more about Bitcoin Loophole.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.
