How Does Crypto Trading Work? A Guide for Novice Traders
Have you been thinking of joining the crypto sector? You were likely a little put off by the numerous abbreviations and puzzling jargon that most articles use.
New investors can indeed have a hard time making their first steps in trading. And yet, millions of people execute trades on the crypto market each day. In fact, in 2022 alone, the daily trading volumes averaged a staggering $855 billion.
Today, we want to help beginners by explaining what trading cryptocurrency is. By the time you’re done reading this detailed guide, you’ll be able to answer the following:
- What are the different types of exchanges?
- Do you need a crypto wallet to trade digital assets?
- What is the best type of crypto wallet?
- Are there any strategies you can employ as a beginner?
We prepared this guide to help you wrap your head around all these new concepts. Roll up your sleeves, and let’s begin, shall we?
The Basics: What is Crypto Trading?
Before answering the questions above, we want to ensure all our readers are on the same page by explaining crypto trading. It is the process of buying and selling digital assets, like coins, tokens or NFTs, in cryptocurrency markets.
You can swap a coin like Bitcoin for another crypto asset, for example, Ethereum, or exchange it for fiat currency.
You have likely also heard of blockchain technology. It’s the underlying technology that all crypto assets are based on. When you decide to send crypto to another person or exchange, the blockchain network will approve this transaction and verify it in its public ledger. A similar process happens during mining.
Speaking of which, you might be wondering, what happened to cryptocurrency mining? Why are traders shopping for crypto instead? Well, in order to mine crypto, you need immense computing power, expensive equipment, and a lot of money to cover your electric bills.
To paint a better picture, you will need an average of 155000 kWh to mine a single Bitcoin block. If this measurement unit means nothing to you, consider that a typical Аmerican household uses 990kWh a month to power their electric equipment.
There are some forms of mining available today that don’t require these immense resources. You’ll only need your phone to try them. Check out this helpful video explaining the top 5 mining apps you can use today and give it a try!
By now, you know what crypto trading is, but you are probably curious how anyone can make money from it. It all concerns one key aspect – crypto market volatility.
What is Market Volatility?
In order to make a profit, investors rely on price movements. For example, you decide to buy tons of Cardano (ADA) for a total of $600.
Through monitoring how the market moves, you’ll be hoping that the price of this asset will rise and your holdings will be worth more than what you paid for them originally.
These price swings are the effect of several different factors. Since crypto is decentralised, it’s rarely directly affected by governments, banks, and economic events. Therefore, it owes its price swings to other factors:
- Demand: How desirable different coins and tokens are;
- Overall Coin Supply: How many coins are in existence and if this number growing;
- News and Media: How much press coverage crypto receives, and whether it is positive or negative;
- Technological Advancement: How integrated is crypto becoming in other sectors, such as e-commerce and healthcare.
As you can imagine, news of crypto regulations, collapses of major exchanges, and other negative news can give crypto a bad rep. In turn, the media will spread the word, which can reduce the overall demand for digital assets.
As a result, crypto investors may become more hesitant with their investments. This reduces the number of people who are willing to back new projects and help advance crypto’s technological development. Demand dies down, and prices consequently drop.
This is only one example. Crypto price movements can be more complex, but this illustration can aid you in understanding how all these factors interconnect.
Different Places You Can Trade Cryptocurrencies
There are many options for traders in 2023. You may trade coins and tokens at different crypto exchanges and brokerages. Depending on your degree of experience, you might prefer one option over another. Below are the two popular places you can trade cryptocurrency, alongside our platform recommendations.
Crypto Exchange
A cryptocurrency exchange is an online market where you can register, add funds and buy Bitcoin and other assets. There are hundreds of exchanges available online with varying transaction fees and utilities.
If you want to experiment with crypto trading strategies, you can look for an exchange that offers advanced trading tools. Some exchanges come with learning centres, where you can explore technical and fundamental analysis, two essential concepts that will help any trader.
Some sites offer their own digital wallets where you can store crypto. We’ll further explain how these wallets work and why they are important later in the article.
Our reviewer’s recommendation: Kraken
Types of Crypto Exchanges
There are three different types of exchanges you will come across.
- Centralised Exchanges (CEX): Similar to stock exchanges, these are sites maintained by one authority or institution which oversees all accounts and their activity. When you register, you will need to comply with the KYC (Know Your Client) processes and prove your identity. These exchanges offer excellent liquidity and often provide some insurance for your funds.
- Decentralised Exchanges (DEX): On the other end of the spectrum, we have decentralised exchanges. Here, you can trade crypto anonymously, and the website isn’t owned by a single authority. You can use your own private keys for security, and you won’t come across any KYC policies. You also have full ownership of your assets and you can enjoy a reduced hacking risk while cryptocurrency trading.
- Hybrids: You may come across hybrids between CEX and DEX, which allow you to choose your preferred trading style. Alternatively, they might offer some or all of the benefits of CEXs and DEXs. However, these websites are still new to the market, and you won’t be able to find many of them.
Brokerage Services
Crypto exchanges aren’t the only place you can start crypto trading. There are many brokerage services you can try where you get to pair with a broker and speak to them directly. A crypto brokerage will house fully-featured assistants who can guide you through the complex world of crypto trading.
The platform we recommend below will pair you with a skilled broker who can give you access to all the tools you need for trading cryptocurrencies. Do you want some information about the underlying market? There’s no one better suited to help than a broker.
Surprisingly, they’re not just there to help beginners. Those who have struggled to make money from their investments can reach out to a broker for help and increase their market exposure. Through the help of demo trading, you can quickly spot mistakes in your strategy and improve all without spending a single penny.
Our reviewer’s recommendation: Immediate Edge
Cryptocurrency Wallets: What Are They and Why Are They Important?
Before you complete your crypto purchase, you will need a wallet. While some trading platforms will provide in-house wallets, it’s best to consider your options, read the Terms and Conditions, and decide the best fit for you. Here are the three types of crypto wallets you can use:
Hardware Wallets
Safety rating: 4.5/5
Also called cold wallets, these are physical devices that are not connected to the internet. For this reason, they are the safest option for investors with plenty of digital currencies. Since all your crypto is safely protected offline, you won’t experience any cyber-attacks or breaches. Still, you should keep the wallet safe somewhere, away from physical hazards.
Digital Wallets
Safety rating: 2/5
Often called online wallets or hot wallets, they store your money online, similar to how you would use PayPal. A digital wallet can also be part of an online exchange. However, its connection to the internet makes it more susceptible to online breaches.
For this reason, it’s the riskiest option on our list. Keep in mind that assets in in-house wallets may be under the authority of the exchange. In the event that the exchange goes bankrupt, they may have leverage over your funds. Therefore, it’s important to read the T&C and choose a digital wallet carefully.
Software Wallets
Safety Rating: 3.5/5
Software wallets are applications for your phone or computer. You can find hot and cold versions of these. They are extremely user-friendly and offer medium protection of your assets.
It’s important to avoid public and unsafe Wi-Fi networks when using software wallets, as they are a breeding ground for hackers. Make sure to update your wallet frequently and purchase it from a reliable platform.
Crypto Trading Strategies for Beginners
For those who are thinking that all it takes to trade Bitcoin is to log onto an exchange and press “sell”, we hate to disappoint you. You should always have a careful plan when Bitcoin trading and the trading of any other digital assets. As a beginner, we recommend that you start small and ask yourself one main question:
Why are you trading crypto?
Is it to earn some extra profit? If so, are you in a rush to start trading and earning money? Or would you rather wait and reap your rewards after a year or two?
Depending on your answer, you will begin to understand what kind of crypto trader you are. Do you have an appetite for risk? Will you be able to recoup from potential losses?
Novice traders can work alongside a broker to create a suitable strategy that matches their goals. However, if you’d rather work alone, we recommend that you consider the following beginner trading tactics.
HODL-ing
Consider HODL-ing. It’s ideal if you don’t have much time to stay engaged with the ever-shifting crypto markets. It’s all about holding onto your assets for a long time until prices trend upward.
You can sell and enjoy your profits once you are happy with the price increase. HODL stands for “hold on for dear life”, and it’s a motto among many seasoned investors.
Dollar-Cost Averaging
You can reduce the effect of market volatility by spreading it across several investments. Let’s say you have $1000 to buy cryptocurrencies. Instead of investing the lump sum all at once, divide that money into equal portions and buy crypto in equal time increments.
Staking
If you want to earn extra profit from your trades, consider this beginner strategy. It’s best suited for people with substantial investments, as most coins will have big staking requirements.
The idea behind staking is that you can support a crypto project by backing it and locking your assets. This means you won’t be able to access, claim, or sell your investment until that predetermined time expires.
Meanwhile, your investment is also a property of the crypto project. So, how do you benefit from it? You can earn a percentage of dividends for staking your money. It’s perfect for those of you looking to HODL but want to earn a little extra on the side.
Final Thoughts
Crypto trading is an exciting and potentially lucrative venture. It’s no surprise that so many people are joining the crypto scene. Of course, while there is some risk involved in trading crypto, there are many ways you can prepare for it and make the most out of market conditions.
You can confidently start this investment journey by choosing the proper exchange or brokerage service for you. Don’t forget to protect your assets and select a reliable wallet to safeguard your digital assets. We hope our guide was helpful and you can confidently venture into the crypto sector!
Main image courtesy of Freepik