Ever since 2017, cryptocurrency trading has been an area of interest for new and old investors alike. Notably, cryptocurrency trading involves speculating on future price movements within the market. In its simplest form, trading requires the buying and selling of cryptocurrencies in a manner that produces profit. In order to accomplish this task, you need to have a firm grasp on what cryptocurrencies are and what affects their market movements.
Cryptocurrencies are decentralized digital assets that rely on a network of computers to validate their authenticity and the overall state of the network. Unlike fiat currencies such as the dollar, there is no government or central authority backing these coins. Instead, cryptocurrencies rely on mathematical protocols to reduce human intervention and provide the world with a truly unique financial instrument.
Importantly, cryptocurrencies exist only as a shared digital record of ownership. This means you can’t handle or even touch a cryptocurrency. Instead, these assets exist only in the digital realm. Consequently, no crypto transaction is complete until it is verified by the network nodes (miners) and added to the blockchain.
Interestingly, there are multiple different types of blockchain assets one can trade today. Each asset has its own regulatory and trading requirements that you must adhere to. The three main types of blockchain assets in the market today are cryptocurrencies, utility, and security tokens.
Luckily, buying and selling cryptocurrencies has never been easier. Today, there is a multitude of exchanges in the market at your disposal. Each of these exchanges provides a different UX and features. As such, it’s recommended that you take a look at a few exchanges before you make your final decision. Also, savvy investors will also trade between exchanges when there is an opportunity to earn revenue on the spread of a certain asset.
It’s recommended that you stick with reputable exchanges. The reasons for this are simple, every couple of months some exchange experiences a hack that drains the platform of its holdings. When this occurs, you can lose your cryptocurrency if the exchange doesn’t have the ability to refund your losses. A perfect example of this scenario playing out occurred during the now infamous Mt.Gox hack where investors lost millions. Here are some of the most recognizable exchanges to consider:
The Binance exchange entered the market in 2017 with the goal to simplify the trading process for normal investors. The firm’s founder, Changpeng Zhao was already well known in the FinTech sector as the premier developer of high-frequency trading software. This technological know-how helped Binance create a unique UX and cement its position as an industry leader.
This simplicity helped the exchange grow. By 2018, Binance was the largest cryptocurrency exchange in the world in terms of trading volume. Today, the exchange still dominates the sector. Binance has since opened multiple platforms including Binance US, Binance DEX, Binance KR, and Binance Australia, to name a few.
The Singapore-based crypto exchange KuCoin was one of the first platforms to enter the market. Reports confirmed that developers began market research for this exchange as early as 2011. In 2013 KuCoin entered the crypto market as a dominant player.
Today the platform is known for its state of the art technology. The exchange features a combination of reliable and extended technical architecture. In this way, developers have been able to streamline the standard trading operations encountered by users.
The Poloniex exchange entered the market in 2014 with the aim to provide US clientele safe access to digital assets. Currently, the firm has a headquarters located in the Greater Philadelphia Area of the Southern US. The founder of the exchange, Tristan D’Agosta, is known for living a private lifestyle, despite making Fortune magazine’s 40 under 40 list.
Poloniex is known for its accessibility and overall market positioning. Today the platform offers over 100 BTC trading pairs. Additionally, traders are privy to advanced charts and data analysis tools to help further their investment strategies. Notably, the exchange charges a 0.2% transaction fee on all trades.
Bittrex is another market leader to consider. This firm has been in operation since 2016. The developers behind this platform wanted to create an institutional brokerage firm that could help bridge the gap between the traditional financial sector and the crypto markets.
Bittrex is well known for its industry-best security practices. Currently, the platform is one of America’s leading blockchain technology providers. As such, it enjoys a reputation as one of the most reliable exchanges in the world.
Once you have chosen an exchange that is known for its quality and security, you are ready to begin trading. Keenly, the setup process is simple. You just need to register with your new platform and fund your online wallet. Funding your wallet can vary in the processes required and depending on if you want to fund it with fiat currency or using other cryptocurrencies.
Notably, there is a tiny learning curve that you must overcome when switching between platforms. Each exchange utilizes a slightly different approach and interface. Additionally, there are variances in transaction times, costs, and daily limits to consider.
You will also need to take into account your location. Certain exchanges do not permit users from specific countries to participate in their platform. For example, you can only trade on exchanges that require KYC and AML regulations if you live in the US.
Whenever you are investing directly in cryptocurrencies, you purchase the coins themselves. This strategy means that you will hold the cryptocurrency you own and not just some form of ownership rights. It also means that you must pay the full value of the asset to open a position. Additionally, you will be responsible for finding a reliable wallet to store your holdings.
What Moves Cryptocurrency Markets
Cryptocurrency trading requires you to make educated guesses as to market movements in the future. While no one can predict these movements with 100% accuracy, there are still some techniques used by professionals to mitigate risks while trading.
The first thing you need to understand is what actually effects market movements in the sector. Unlike stocks, cryptocurrencies are uncoupled from many of the economic and political concerns that affect traditional markets. In most instances, the cryptocurrency market moves according to supply and demand. Here are some important factors to consider:
The supply of a particular cryptocurrency refers to the total number of coins the firm will issue over the entire lifespan of the project. It also references the time frame and structure that these coins will be introduced to the market. Importantly, you also need to take into consideration the number of coins destroyed or lost as well.
The next factor you need to examine is the total market capitalization of the project you are interested in. The market cap is the total value of all the coins in existence for a certain project. Understanding the growth and retractions of a tokens market cap is critical to making informed price speculations.
Importantly, not all factors that affect the market’s movements are technical in nature. One of the most influential market movers in the sector is the media. You must pay close attention to how the media portrays cryptocurrencies. You will want to be aware of any potential developments that could boost or hinder large scale adoption in the sector.
Specifically, regulatory news can play a huge role in the market capitalization of a cryptocurrency. For example, the market took a big hit when China began a large scale cryptocurrency crackdown at the end of 2017. Considering the sheer size of the Chinese market, investors could easily tell that this decision would negatively affect the market in some way.
The next point to consider in your investment strategy is how well the coin in question is able to integrate into the current financial system. Tokens that feature easier integration are more likely to experience rapid growth in the market. This growth can be substantial when a coin is introduced to an already existing network.
A perfect example of integration providing a huge potential for upside growth can be found in Facebook’s Libra token. While this token is still under development and undergoing regulatory approval, it has more upside potential than most new projects in the sector. The reason for this inherent value stems from the fact that the Facebook network encompasses billions of international users.
Major events within the sector can provide a boost to the value of your investment in different ways. One such event, known as the halving recently took place within the Bitcoin ecosystem. This event occurs roughly every four years when mining rewards are halved. Historically, these events are followed by rising market values.
Like any profession, trading cryptocurrencies requires you to learn some new terminology. Luckily, this terminology is standard across the trading industry. Consequently, you will also gain valuable insight into trading other assets such as stocks and commodities.
The spread is the price difference at which you buy or sell your cryptocurrency. As such, spreads are variable depending on the assets, time of the trade, and the time it takes to complete your transaction.
When discussing trading assets, you may encounter the term lots. In this instance, lots is simply the term used to describe batches of cryptocurrencies used to standardize the size of trades. In most scenarios, a lot can consist of a single coin. These small lots are popular in the crypto space because they help to mitigate risk to volatility.
Cryptocurrency futures are agreements to purchase or sell crypto at a set price. Notably, these financial instruments allow investors to earn profits from cryptocurrencies without the need to actually own the assets directly. Nowadays, futures are used by investors to maximize profits. Miners also use futures to lock in profits against drops in value.
One of the advantages of trading futures is the ability to utilize leverage. Leveraged trading is an advanced investment strategy. It requires an investor to take a short term loan to fulfill their investment. In this way, investors can gain access to larger investment opportunities without the need to fully pay for the assets upfront. Leveraged traders only need to pay a small deposit when they open their position. This deposit is also called the margin.
The margin is the initial deposit you put up to open and maintain a leveraged position. Keenly, you need to be aware that margin requirements will change from broker to broker. Also, the size of your trade will play a part in how large of a margin is required.
Pips are units used to measure movement in the price of a cryptocurrency. The Pip can change depending on the platform and the pairing used. For example, in the US you can say that a coin raised one Pip in value if its market value went up one dollar. The key point here is that pips refer to a one-digit movement in the price at a specific level.
Another common phrase that you will encounter if you trade cryptocurrencies in the US is KYC/AML. Know Your Customer (KYC) and Anti-Money Laundering Laws (AML) refers to a legal framework that requires exchanges to verify the identity of users. All regulated exchanges in the US and EU require AML and KYC.
Trading cryptocurrencies can be a great way for you to earn some extra Satoshis and improve your understanding of the market. Remember, the difference between a successful investor and one that fails usually comes down to the level of research and their ability to stick to their investment strategy. Savvy investors know that the secret is to stay vigilant in your market assessments and you are sure to see some gains.