Cryptocurrency Trading & Investing -The complete guide

Cryptocurrency trading entails a high level of risk and is not suitable for all investors. You should carefully consider your investment objectives, level of experience, and risk appetite before deciding to trade cryptocurrency. You should not invest money that you cannot afford to lose because there is a chance that you will lose some or all of your initial investment.

Interest in cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin has exploded in recent years. It’s easy to understand why. Cryptocurrency is a significant advancement in financial technology that has the potential to totally transform the financial services industry.

Do you want to learn more about cryptocurrency and how to trade and invest in it? This crypto tutorial is an excellent place to begin. We’ll go through the fundamentals of cryptocurrency and show you how to trade it in this guide.

What are Cryptocurrencies?

Cryptocurrencies are digital assets that may be moved, stored, and exchanged electronically and are secured by cryptography.

The fact that all Cryptocurrencies are based on distributed ledger technology is a distinguishing trait (DLT). A distributed ledger is a computerized database of transactions that is executed across a network of computers and does not have a central administrator or data storage. The database is said to be ‘decentralised’ since all of the data is stored across the network. Any transaction that occurs on the network is recorded in numerous places at the same time using a distributed ledger. In comparison to a ‘centralized’ ledger, where data is held in one location, this means there is a higher level of security.

The most well-known type of DLT is blockchain. Many well-known Cryptocurrencies are built on this technology. Blockchain organizes transactions into ‘blocks’ that are linked together, and all transactions are secured and verified using encryption. All transaction data is open to the public and can be viewed by anybody. It is nearly hard for someone to falsify a transaction as a result of this.

How many cryptocurrencies are there? What are they worth?

According to Coingecko, a market research website, more than 7,500 different cryptocurrencies are publicly traded. Moreover, cryptocurrencies continue to proliferate, raising funds via DeFI and NFTs. According to Coingecko, the total value of all cryptocurrencies on May 29, 2021, was more than $1.5 trillion.

How do I buy cryptocurrency?

While some cryptocurrencies, such as Bitcoin, can be bought using fiat money, others require bitcoins or another cryptocurrency to be purchased (altcoins).

To purchase cryptocurrencies, you’ll need a “wallet,” which is a web-based application that stores your funds. In general, you open an account on a cryptocurrency exchange and then use real money to acquire cryptocurrencies like Bitcoin or Ethereum. Here’s how to get started with Bitcoin investing.

eToro is a renowned cryptocurrency trading platform where you can open a wallet as well as buy and sell Bitcoin and other cryptocurrencies. Binance, FTX, Plus500, XTB, and Admiral Markets are just a few of the online brokers who provide cryptocurrency. Webull is a trading platform that allows you to trade for free (Webull Crypto is available in most, but not all, U.S. states).

Trading Cryptocurrencies

Cryptocurrency prices are notoriously volatile. It’s not uncommon for a Cryptocurrency’s price to fluctuate by 50% in a single day. As a result, the asset class can provide traders and investors with several options.

Trading is a basic economic concept that entails the purchase and sale of assets. These can be goods or services for which the buyer compensates the seller. In other cases, the transaction may entail the trading parties exchanging goods and services.

Financial instruments are assets traded on financial markets. Options, futures, margin products, leverage tokens, and CFD cryptocurrency are just some of the ways you can trade crypto.

Short-term trading, in which traders actively enter and exit positions over relatively short time frames, is referred to as trading. This is, however, a slightly erroneous assumption. Trading can refer to a variety of strategies, including day trading, swing trading, trend trading, and many others.

What is investing?

Investing is the allocation of resources (such as capital) with the hope of profit. This can involve utilizing money to establish a business or purchasing an NFT with the intention of reselling it at a better price later. In the financial markets, this usually entails investing in financial instruments with the intention of subsequently selling them at a greater price.

The anticipation of a return is central to the investing notion (this is also known as ROI). Investing, as opposed to trading, often takes a longer-term strategy to wealth accumulation. An investor’s purpose is to accumulate riches over a lengthy period of time (years, or even decades). There are several methods to accomplish this, but most investors will rely on basic considerations to identify potentially profitable investment possibilities.

Because of the long-term nature of their strategy, investors are frequently unconcerned by short-term price swings. As a result, they will often remain relatively inactive, not overly concerned about short-term losses.

Trading vs. investing – what’s the difference?

In the financial markets, both traders and investors are looking for a profit. Their approaches to achieving this aim, on the other hand, are completely different.

Investors often want a return over a longer period of time, such as years or even decades. Because investors have a longer time horizon, their expected returns on each investment are often higher.

Traders, on the other hand, strive to profit from the market’s turbulence. They are more likely to join and leave positions more often, and they may seek lesser profits on each trade (due to the fact that they are regularly making several transactions).

Which is the superior option? Which one is the most appropriate for you? That is entirely up to you to decide. You might begin by learning about the markets and then practicing what you’ve learned. You’ll be able to tell which one best matches your financial objectives, personality, and trading profile over time.

Spot market explained

The spot market is where financial products are traded for “immediate delivery.” In this situation, delivery simply refers to exchanging the financial instrument for cash. This may appear to be an insignificant differential, but some markets are not immediately resolved in cash. For example, in the futures or options markets, the assets are delivered at a later date (when the futures contract expires).

In plain language, a spot market is a market where trades are made “on the spot.” Because trades are finalized promptly, the current market price of an item is commonly referred to as the spot price.

Margin trading explained

Margin trading is a kind of trading in which money are borrowed from a third party. In fact, margin trading multiplies outcomes — both positive and negative. Margin accounts provide traders with increased liquidity and reduce some counterparty risk. How is this so? To be sure, traders may maintain the same position size while maintaining a lower capital position on their crypto exchange or trading platform.

When it comes to margin trading, the phrases margin and leverage are sometimes used interchangeably. The term “margin” refers to the amount of capital committed (i.e., put up from your own pocket). Leverage is the amount by which you increase your profit margin. Thus, if you utilize 10x leverage, you create a trade that is ten times the size of your margin. If you leverage 4x, you open a position four times the value of your margin, and so on.

However, keep in mind the possibility of liquidation. Leverage increases the proximity of the liquidation price to the entering price. You risk losing your whole margin if you are liquidated. Therefore, before you begin, be fully informed of the substantial dangers associated with margin trading.

Margin trading is commonly employed in the stock, exchange-traded funds, index, commodity, and foreign exchange markets, as well as in the cryptocurrency markets. In a more typical situation, an investment broker provides the capital for the loan. In the case of cryptocurrencies, the exchange often lends the cash in exchange for a financing charge. However, in certain instances, the borrowed money may originate directly from other traders on the site. This often entails a variable interest rate (funding fee), since the rate is set on the open market.

Derivatives market

Derivatives are financial assets whose value is determined by another asset. This might be a single asset or a basket of assets. Stocks, etfs, commodities, market indexes, and cryptocurrency are the most frequent forms.

In essence, the derivative product is a contract between numerous parties. It derives its value from the underlying asset that serves as the reference point. Regardless of the asset utilized as a reference point, the fundamental principle is that the derivative product receives its value from it. Futures contracts, options contracts, and swaps are all types of derivatives products.

The derivatives market, by some measures, is one of the largest marketplaces in the world. How is this so? To be sure, derivatives exist for almost every financial product – including derivatives themselves. 

Futures contracts

A futures contract is a sort of derivatives contract that enables traders to bet on an asset’s future value. It entails the parties agreeing to complete the transaction at a later date referred to as the expiration date. As with derivatives, the underlying asset for this kind of contract might be any asset. Cryptocurrencies, commodities, exchange-traded funds, and equities are all common examples.

The expiry date of a futures contract is the final trading day for that contract. The contract expires at the last traded price at the end of that day. The contract’s payment is established in advance, and it may be cash-settled or physically delivered.

When it is physically delivered, the contract’s underlying asset is traded directly. Woods, for example, are delivered. When a transaction is concluded in cash, the underlying asset is not transferred directly; rather, the value it represents is traded (in the form of cash or cryptocurrency).

Perpetual futures contracts

Futures products provide traders an excellent opportunity to bet on the price of an asset. What if they choose to retain their position beyond the expiration date?

Perpetual futures contracts are a kind of futures contract. They are distinguished from standard futures contracts by the fact that they never expire. This manner, traders may speculate on the underlying asset’s price without regard for expiry.

This, however, has its own set of complications. What if the perpetual futures contract’s price deviates significantly from the underlying asset’s price? Due to the absence of an expiration date, the perpetual futures market may experience a huge, ongoing differential with the spot market.

This is why perpetual futures contracts require traders to pay a financing charge. Assume the perpetual futures market is trading at a premium to the spot market. In this instance, the funding rate will be positive, which means that long positions (buyers) will compensate short positions for financing costs (sellers). This motivates purchasers to sell, lowering the contract’s price and bringing it closer to the spot price. On the other hand, if the perpetual futures market trades below the spot market, the financing rate is negative. This time, shorts compensate for longs to encourage them to drive the contract’s price up.

To recap, when funding is favorable, longs(buy) compensate for shorts. Shorts(sell) compensate for longs when financing is negative.

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Cryptos
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1PrimeXBT review
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3FTX
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Options contracts explained

An option contract is a sort of derivatives instrument that provides traders with the right, but not the duty, to purchase or sell an asset at a specified price in the future. The primary distinction between futures and options contracts is that traders are not required to settle options contracts.

When traders purchase an option, they are betting on the price moving in a certain way.

Options contracts or are classified into two types: call options and put options. A call option wagers on the price increasing, while a put option wagers on the price decreasing.

As is the case with other derivatives, options contracts may be based on a broad range of financial assets, including market indices, stocks, and cryptocurrencies.

Options contracts offer very sophisticated trading strategies and risk management techniques such as hedging. Options may be the most advantageous in the context of cryptocurrencies for miners looking to hedge their cryptocurrencies holdings. This manner, they are more protected against incidents that might result in a loss of cash.

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What are leveraged tokens?

Leveraged tokens are tradable assets that allow you to get leveraged exposure to the price of a cryptocurrency without having to deal with the normal risks of a leveraged position. This eliminates the need for margin, collateral, financing, and liquidation.

Leveraged tokens are a cutting-edge financial instrument made possible by blockchain technology. Leveraged tokens were first presented by FTX, a derivatives exchange, but have subsequently seen a variety of other implementations. The basic concept is the same, though: tokenizing open leveraged positions.

Open perpetual futures positions in a tokenized form are represented by leveraged tokens. Remember how we spoke about how derivatives may be made out of derivatives? Because they derive their value from futures holdings, which are also derivatives, leveraged tokens are a good illustration.

Leveraged tokens are an excellent approach to get easy leveraged exposure to cryptocurrencies.

What is index investing?

Index investing is a kind of “buy and hold” strategy. The investor aims to benefit from the movement of assets inside a specified index, as the name indicates. They might do so by buying the assets themselves or investing in an index fund.

This is, once again, a passive tactic. Diversification across several assets may also help individuals avoid the stress of active trading.

Why trade Cryptocurrencies?

Trading Cryptocurrencies has a variety of benefits.

The following are some of the most significant advantages:

  • More volatility: Cryptocurrencies like Bitcoin, Ethereum, and Dogecoin have a far higher volatility than conventional assets like equities, bonds, and real estate. Consider the case of Bitcoin. Its price typically fluctuates by 3% in a single day. Because of the high amount of volatility, traders will always have lots of possibilities. You may also trade in both directions with eToro, which means you may earn from both upward and negative market swings.
  • When trading Cryptocurrencies using CFDs or futures, you may utilize ‘leverage’ to trade a higher amount of money than you have invested. This might work in your favor since your benefits will be amplified. Leverage, on the other hand, might compound your losses, so it’s crucial to be aware of the hazards.
  • Minimum investments are low, so you may get started trading Cryptocurrencies with a modest sum of money.
  • Trading at all hours of the day and night: one of the most appealing aspects of cryptocurrencies trading is that it is available 24 hours a day, seven days a week. This means you can trade whenever you choose, on your own timetable.
  • Cheap transaction costs: Transaction costs for cryptocurrencies trading are often low.

What drives Cryptocurrency prices?

Supply and demand determine cryptocurrency pricing.

A Cryptocurrency’s price will rise in response to increased demand, while its price will fall in response to excess supply.

Many different variables may influence supply and demand. Here are some of the most important considerations:

  • Economic changes: Economic changes that affect conventional asset classes like equities, bonds, and cash might have an influence on Cryptocurrency demand. For example, if investors feel that governments will depreciate fiat currencies such as the US Dollar in the future, they may resort to cryptocurrencies for security.
  • Media coverage: There are several websites devoted to reporting cryptocurrency news and developments, and news about a specific cryptocurrency may impact supply and demand in the crypto market. Positive news, such as reports that a certain Cryptocurrency is gaining popularity, might boost demand. Negative news, such as the announcement that a crypto exchange has been hacked, on the other hand, might lower demand.
  • Government regulation: Governments all around the globe are increasingly attempting to control cryptocurrency, and changes in this area may have an impact on supply and demand. When China stated in early 2018 that it will restrict all websites connected to cryptocurrency trading, demand for Bitcoin and other cryptocurrencies plummeted, causing their values to plummet.
  • Investor sentiment: The cryptocurrency market is extremely volatile, and investor emotions like fear and greed may have a big influence on supply and demand. When crypto prices rise, investors get more greedy, driving demand even higher. In contrast, when prices fall, investors become afraid, resulting in excess supply. Cryptos such as ETH and Bitcoin  in late 2017 and early 2018 is a wonderful illustration of this. The main feeling among crypto investors in late 2017 while Bitcoin’s price was quickly climbing was greed. This resulted in an increase in demand. When the price of altcoins started to plummet, however, the dominating feeling shifted from greed to panic. As a consequence, there was an excess supply of the cryptocurrency, causing prices to fall.

How do I start trading cryptocurrency?

Here are some things to think about if you’ve chosen to start trading.

To begin, you’ll want funds to trade with. It may have a main adverse influence on your life if you don’t have any savings and start trading with money you can’t lose. Trading is not a simple task; the vast majority of novice traders lose money. You should anticipate the money you set aside for trading to go rapidly, and you may never be able to recoup your losses. This is why it’s best to start with tiny sums to get a feel for the situation.

Your overall trading approach is something else you’ll need to consider. When it comes to generating money in the financial markets, there are several options available. You may select from a variety of techniques to attain your financial objectives, depending on how much time and work you have available.

Finally, I’d like to make a point. When trading isn’t their primary source of income, many traders do well. It is simpler to endure the emotional strain in this manner than if their daily existence relied on it. Successful traders are able to control their emotions, which is far more difficult to accomplish when one’s livelihood is on the line. As a result, you might consider trading and investing as a side business, particularly if you’re just getting started. Also, remember to begin with small amounts in order to learn and practice.  It’s also a good idea to look at passive income strategy to make money by employing staking with cryptocurrencies. Staking rewards can vary between 2%-200% depending on the chosen cryptocurrencies token metrics.

What is a pump and dump (P&D)?

A pump and dump technique is a method of artificially inflating the value of an asset by providing misleading information. When the price has risen significantly (“pumped”), the seller sell (“dump”) their low-cost bags at a much higher price.

In the cryptocurrency markets, pump and dump operations are common, particularly during bull periods. Many novice investors join the market at these periods, making them easy to exploit. Small market cap cryptocurrencies are the most vulnerable to this form of exploitation, since their values are simpler to inflate thanks to the limited liquidity of these marketplaces.

Pump-and-dump operations are often conducted by private “pump and dump organizations” that promise quick profits to newcomers (usually in exchange for a fee). What frequently occurs, though, is that those who join are exploited by a much smaller number who have already established their positions.

People found guilty of assisting pump and dump scams face stiff penalties in traditional markets.

Trading Cryptocurrencies with CFDs

When you trade a Cryptocurrency using a CFD, you’re basically speculating on the asset’s future price movement without really owning it.

If you purchase $1,000 worth of Bitcoin CFDs, for example, you will benefit if Bitcoin’s price increases, but you will not possess any BTC tokens.

There are two major benefits to trading cryptocurrency using CFDs.

To begin with, CFDs allow you to trade in both directions. This implies that both upward and negative price fluctuations have the potential to reward you.

You would initiate a BUY CFD trade if you think the price of a Cryptocurrency would climb (this is known as ‘going long’). If you feel the price of a Cryptocurrency will decline, you would place a SELL CFD transaction (also known as “going short”).

Second, CFDs allow you to increase your exposure by using leverage. With x2 leverage, for example, you can control $2,000 with only $1000. This suggests there’s a chance of making more money (but also the potential for higher losses).

Trading CFDs has the disadvantage of not allowing you to hold any crypto tokens. This implies you can’t put them in your wallet or use them to buy anything with them.

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Trading PlatformLeverageAvailable futures
Cryptos
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1PrimeXBT review
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2bybit
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3FTX
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4Binance
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Over 100
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5OKEX
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Over 100
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6Phemex
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37
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7Kraken (1)
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Buying the underlying asset vs trading CFDs: which is the best approach?

Both strategies to cryptocurrency trading have the potential to generate enormous gains. Which technique is best for you depends on your goals and risk tolerance.

If you have the following criteria, buying the underlying asset may be the best option:

  • Plan to keep the crypto for a long time.
  • Only interested in profiting from price increases.
  • Want to put your Cryptocurrency in a wallet or use it to buy things with it?
  • Are willing to pay the whole amount of the deal up front
  • If you don’t want to raise your risk by using leverage,

Trading CFDs might be the best option if you:

  • Do you want to trade both ways?
  • If you want to utilize leverage to get more exposure?
  • Do not care whether you own the underlying asset
  • You don’t want to trade your cash for cryptocurrency?
  • You don’t want to set up a cryptocurrency wallet.

Crypto funds 

For those interested in a more passive approach to investing in crypto funds. These are essentially crypto-based investment funds

  • CopyPortfolio: This investing method exposes investors to a diverse portfolio of Cryptocurrencies. The portfolio is weighted according to market capitalization and includes exposure to key cryptocurrencies.

Risks of trading Cryptocurrencies

Crypto trading is no different from any other kind of investment or trading.

The following are two major crypto trading hazards to be aware of:

  • Volatility risk refers to the danger of Cryptocurrency price swings. While the volatility of cryptocurrency prices might provide trading opportunities, it may also be a danger issue. Traders might lose a lot of money if prices move in the wrong direction. Your trades may be automatically cancelled if you do not have sufficient cash in your account to cover any losses.
  • While leverage may multiply trading profits, it may also multiply trading losses. When trading with a lot of leverage, even a minor price movement in the incorrect direction may result in a lot of money being lost. It’s crucial to keep in mind that losses might much outnumber your initial investment.

Risk management strategies 

By concentrating on risk management while trading Cryptocurrencies, you can lower your risk.

The following are three risk-reduction strategies:

  • Choosing the right position size for each trade: Before you begin trading Cryptocurrencies, you need decide on the best position size for each transaction. A decent rule of thumb is to never put more than 5% of your cash at danger on a single deal. If you trade more than 5% each deal, you risk incurring losses that are difficult to recover from.
  • Stop losses are an important part of any risk management plan since they assist to limit trading losses by shutting out lost positions before they get too big.
  • Diversifying your portfolio: a portfolio with a diverse range of assets is less risky than one that concentrates only on a single item, such as Bitcoin. You may reduce your total portfolio risk by diversifying your portfolio over several asset classes including equities, ETFs, commodities, and crypto.

Final thoughts

It might be difficult to get started with cryptocurrencies trading since there are so many topics to understand. This tutorial should have made you feel a little more at ease with cryptocurrency trading. 

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