Trading is the buying and selling of assets. When applied to cryptocurrency, trading is the exchange of currencies using different trading pairs, or the exchange of cryptocurrencies with goods.
You may be wondering, how does cryptocurrency trading work? Is it just like trading in the stock exchange or in the foreign exchange market?
Unlike traditional markets like these, the cryptocurrency market is decentralized, meaning there is no government or bank that regulates it. The crypto market is also open 24/7, and it can be accessed anywhere in the world in countries that have not banned it.
Cryptocurrencies have gotten a lot of people interested in the idea of having a decentralized economy, where transactions are not controlled by any central authority. Its use of blockchain technology makes it more secure, and a distributed ledger that can be accessed by the public shows all the transactions that have been done, preventing fraudulent or malicious transactions to occur.
All these factors add up to the reasons why more and more people get into trading cryptocurrency. Continue reading this article to find out how cryptocurrency trading works.
Getting Started: Cryptocurrency Market
Cryptocurrencies are traded online, and as a digital currency, these have no physical manifestation unlike cash or coins. Due to being decentralized, cryptocurrencies are not based on any real asset like gold. Instead, the value of cryptocurrencies is based on speculation.
There are five major factors that can affect the market prices of cryptocurrencies.
Market capitalization, more commonly known as market cap, is based on the value of all the coins of a certain cryptocurrency in existence. Since the value of cryptocurrencies is based on speculation, market cap also considers how crypto traders and users perceive the value of a coin.
Bitcoin currently has the highest market cap in 2020, at around $129 billion. Other top altcoins include Ethereum, Ripple, and Litecoin.
The supply is the total number of coins of each cryptocurrency. Cryptocurrencies have a finite amount, and this amount contributes to increasing the value of each coin. Supply includes how often coins are released, and how often these coins are lost or destroyed.
Even though cryptocurrencies are not regulated by any government, these are still susceptible to become affected by external forces. These include any reports of security breaches or hacks, fraudulent transactions, software updates, as well as economic events.
These events can either drive the prices of cryptocurrencies up or down, depending on the impact on each coin.
Media coverage is important because this is how people around the world get to know of a cryptocurrency. Unless you have been closely following every coin released in the market, the only way to learn about a coin is through the media.
Coins with greater media coverage tend to increase in value, as more people will become familiar with the coin and thus perceive it as valuable. On the other hand, media coverage can also lead to a decrease in market price, especially if the media covers events such as security breaches.
Adoption is important because this is one of the factors that can help experts predict the future of cryptocurrencies. This refers to how well the cryptocurrency is being integrated into existing platforms such as e-commerce.
If these e-commerce platforms are offering payment solutions that include some cryptocurrencies, this is a good sign of the longevity of that coin, and it will drive the coin’s market price up.
To engage in cryptocurrency trading, you will need two things: a wallet and an exchange.
A cryptocurrency wallet is where you store your cryptocurrencies. Most exchanges, like Coinbase, offer secure wallets with insurance for your money.
Aside from keeping your coins online, you can also choose to store it in a hardware wallet. A hardware wallet is a small physical device that can store your cryptocurrencies. It is a safe option because you can keep it safe from potential threats or hackers.
A cryptocurrency exchange is the platform on which you do your trading. You can buy, sell, and trade your cryptocurrencies on an exchange. There are many reliable exchanges today, including Binance, Coinbase, and Robinhood, just to name a few.
In choosing an exchange, you must consider what are the currencies that are available on it. There are different trading pairs on different platforms, and not all cryptocurrencies accept fiat currencies to trade with cryptos. Make sure that you are choosing an exchange that can support the currencies that you have.
When first starting out, you will need to learn the basics when trading on a new platform. Here are the usual steps to trading on an exchange.
- First, you will need to transfer the existing cryptocurrencies that you have to the exchange. If you do not have any existing cryptos yet, you can deposit fiat currencies through either your bank account or debit card.
- Next step is to check the charts on the exchange for price actions, trends, and other technical indicators that can help you decide when to buy or sell.
- Once you have decided on a crypto to buy, or to sell your own crypto, you will then place a buy or sell order to initiate the trade.
- The exchange will then find you a seller or a buyer that will match your order. During this time, all you need to do is wait! But if you change your mind on your order, most exchanges offer a cancellation option before the trade goes through.
- The exchange then completes the trade, and you will now have the updated balance of your crypto assets reflected in the exchange. Want more awesome tips on cryptocurrency trading? Go here!
How does cryptocurrency trading work? This article presented you the basics of cryptocurrency trading, from choosing a wallet and an exchange, to making an actual trade. You can surely become a successful cryptocurrency trader if you research on the market and its coins. By doing this, you will be able to master the basics of cryptocurrency trading in no time.