What is cryptocurrency trading and how does it work?

Learning how to trade with cryptocurrency can be scary. In this guide, we break down the basics to help you feel more comfortable trading with crypto.

Interested in the world of cryptocurrency and want to begin trading? If you are unsure of what cryptocurrency trading is and how it works, then this guide is for you. Let’s break down the basics to help get you started.

As a note to begin with, trading in any capacity, much more so with cryptocurrency, comes with a great deal of risk. Investments can be volatile at the best of times. With cryptocurrency, even the most popular currencies, such as Bitcoin, suffer from huge volatility on a regular basis. Before making any move, ensure you have done your own research and are happy with the decisions you are going to make, and only invest as much as you can afford to lose.

What do you need to begin with?

Before you can start trading, you will first need to make sure you have the following:

  • A cryptocurrency wallet (you can choose from paper, mobile, software, or hardware wallets)
  • Access to an exchange that allows you to buy, sell, or trade crypto

 

For information on how to choose the best cryptocurrency wallet for you and how safe they are, click here. For more information on exchanges, click here.

What you need to know about cryptocurrency trading

  • A cryptocurrency exchange is not part of a regular stock exchange. Two popular cryptocurrency exchanges are Coinbase and Coinbase Pro, formerly GDAX, both of which function differently to Wall Street exchanges. Coinbase is designed for beginner to intermediate traders, whereas Coinbase Pro is aimed towards people who have a greater understanding of crypto trading. Binance is another leading exchange that is popular with many traders.
  • Cryptocurrency trading is a 24-hour market. This is different to traditional stock markets which do not trade within a 24-hour window.
  • Beginners may prefer to trade cryptocurrency stocks. One of the biggest Bitcoin (BTC) stocks is GBTC, which is a trust. Trading with stocks means users do not have to trade crypto directly, though this comes at a cost. Stock trading works through premiums, which in short means that Bitcoin itself is cheaper than its stocks. It is an avenue for beginners to help them get acquainted with trading, however.
  • The market is incredibly volatile. The impact of volatility cannot be understated. Markets are not concrete. Much trading is done through speculation. Therefore, any “tips” you might see from traders carry substantial risk. Eventually, you may feel comfortable making your own speculations after spending a lot of time with the markets, but to begin with, do not go on a spree of trading anything you can. Make smart trades, and only ones you will feel comfortable with even in the event you lose money.

 

What are pairings?

When delving into the world of cryptocurrency trading, you will typically start by buying your first crypto with fiat currency. Fiat refers to a national currency such as the pound or the dollar. So, an example might be that you wish to trade your USD with Bitcoin (BTC). This is something that is popular and support by a lot of exchanges.

However, once you have tested the waters, you might want to begin trading between two cryptocurrencies, such as Bitcoin and Ripple. In this case, they would be abbreviated as BTC (for Bitcoin) and XRP (for Ripple) on an exchange. For a newcomer, this can be slightly overwhelming as exchanges tend to list pairings in their abbreviated forms.

Below is a list of the top 10 cryptocurrencies, as per CoinMarketCap, in their abbreviated forms:

  1. Bitcoin – BTC
  2. Ripple – XRP
  3. Ethereum – ETH
  4. EOS – EOS
  5. Stellar – XLM
  6. Bitcoin Cash – BCH
  7. Tether – USDT
  8. Litecoin – LTC
  9. Bitcoin SV – BSV
  10. Tron – TRX

 

Note: This list is not extensive. There are over 2,500 cryptocurrencies out there, so it would be difficult to list them all here. It would be time well spent for any newcomer to become acquainted with popular cryptocurrencies and their abbreviations before beginning to trade. Similarly, playing around with the most popular cryptos such as Bitcoin is a great starting point to get used to this type of trading.

How to choose the right trading platform

Choosing the correct platform for you is very important. There are differences across competing exchanges, and as such, it is useful to do some research to decide which is best for your needs. Below is a brief list of some of the key things to look out for:

  • Available currencies: As mentioned above, Bitcoin to USD is common, but other trade pairings might be available on one platform and not another. Be sure that the crypto you want to trade with is supported.
  • Leverage: This refers to the amount you are allowed to trade above your initial deposit and by how much you can multiply your gains. A higher leverage will suit risk takers who look for the high reward. A high leverage is not recommended for beginners, however. A common leverage is typically 20:1 with crypto. Again, though, this is dependent on your chosen platform.
  • Hedging: Hedging is a risk reduction tactic that typically involves taking an offsetting position on your primary asset. This provides insurance and reduces the possibility for loss.
  • Minimum investment: This refers to the minimum amount you can deposit and invest with. This is important as different platforms will require different minimum investments. Choose one that suits your budget.

 

How does trading with an exchange work?

Below is how exchanges typically work:

  • Users either transfer their existing crypto to their account on an exchange or use the exchange to buy crypto with fiat currency (note that not all exchanges provide the option to buy cryptocurrency with fiat currency)
  • The exchange then holds on to the cryptocurrency
  • The user then watches the prices of other cryptocurrencies available
  • Users then place their buy or sell orders once they have chosen the desired trade
  • The exchange finds a seller or buyer to match your trade
  • The exchange then completes the transaction

 

For a more in-depth look at over the counter (OTC) trading, click here. For more news and guides from Coin Rivet, click here.

 

 

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