How to Trade Cryptocurrency – a Step by Step Guide for Beginners
- Buying Crypto
- Choosing crypto pairs to trade
- Choosing a trading platform
- Pros and cons of trading bots
- Best trading software
- Best trading practices
Cryptocurrencies are a comparatively new asset class that has gained widespread adoption among traders, businesses, and even institutional investors. The launching of Bitcoin futures by CME Group and CBOE in 2017 was the first indicator that crypto was something more than a niche for tech nerds.
Since then, the market has even found a foothold among mainstream businesses such as Starbucks and Nordstrom and is prompting greater investor interest in Bitcoin and other cryptocurrencies. Economic studies repeatedly confirm that the market size is expected to exceed $1.40 billion in the next five years, with the average growth rate amounting to 6.18%.
When the market was in its infancy, there was a difference between Bitcoin and altcoin traders. While Bitcoin traders were predominantly interested in the strongest and historically reliable performer, the latter backed alternative coins that seemed to be on the rise. Now, with more than 2 thousand cryptocurrencies on the market and Bitcoin no longer the stand-alone leader, this distinction has largely disappeared.
The fast evolution in the crypto market underlines the potential it has to encroach further on the territory of the traditional market. In this beginner’s guide to crypto, we’ll break down how to trade cryptocurrency point by point, including the basic characteristics of this asset class, choosing crypto pairs, the best Bitcoin trading platforms and bots, trade execution and finding available software solutions. We’ll also look at essential practices like risk management and fundamental and technical analysis.
What exactly is cryptocurrency as an asset and how is it different from other forms of currency? Cryptocurrency originates from blockchain technology, a decentralized and constantly growing digital ledger of blocks that each store information about a specific transaction.
These blocks are secured by cryptography and fastened to each other. As a result, information stored in the blockchain network cannot be accessed or changed by third parties that have not participated in a transaction. In this decentralized network, there is no single server responsible for storing the information. This protects the system from malicious interference.
If you have any experience with financial markets and exchanges, you can see the same patterns and price fluctuations in the BTC trade that you would see across stocks. Cryptocurrencies, although volatile, are volatile mostly in predictable ways. That means that the same analytical tools and approaches that are used on other financial markets can be applied to portfolio management, as well as technical and fundamental analysis of crypto.
However, there are some important differences that distinguish cryptocurrency trading from trading on the stock market. The cryptocurrency market is still in the early stages of development and has yet experienced widespread adoption, although this is slowly changing. Consequently, these assets are much more volatile. A coin bought on Tuesday for one price can be worth several times more by Friday and vice-versa.
Another advantage of crypto exchanges is the timetable during which trades can be made. Whereas trades can be made on stock markets only during business hours, crypto exchanges operate 24/7. For one thing, that means more opportunities to jump on a price increase immediately. It also opens the market up to those who aren’t in a place to make trading their full-time gig. It’s possible to work your regular 9 to 5 and still earn from crypto trading on the side.
In addition, there is no minimum trading balance required for cryptocurrency traders, opening up the market from the narrow finance elite of Wall Street or Shenzhen. You can invest an amount that’s comfortable for your financial means and earnings goals without having to worry about upcoming margin calls (because brokers are another thing that you won’t find in crypto).
No minimum trading balance and fewer regulations are characteristics that skeptics of crypto have criticized as risky. The flip side, however, is that these low entry barriers allow a degree of freedom and flexibility for bitcoin traders that an over-regulated, centralized market does not. As the market grows and becomes more regulated, additional requirements may continue to develop, as well. The current period of unrestricted opportunities on the free market will not last forever.
Choosing crypto pairs to trade
One way to approach cryptocurrency trading is to buy coins directly with fiat currency (or a national currency, in layman’s terms). Typically, your account balance with the exchange will be held in the crypto you’ve bought. Less commonly, some Bitcoin trading sites like GDAX offer the chance to hold an account balance in fiat currency. However, this is sometimes less convenient than holding your account balance in other major coins.
Beginners in crypto trading usually start with short-term investments in major cryptocurrencies like Bitcoin or Ethereum, which they buy with fiat currencies. Once they become skilled at that, they switch to trading crypto pairs, i.e. keeping their funds in a Bitcoin account or a crypto wallet supporting other major coins and trading them for other coins. But despite being a popular approach, it presents a high degree of risk. Keeping your investment fully in highly volatile crypto assets compounds the risk of losing money. On the other hand, the chance for your investment to increase is also increased.
Before taking cryptocurrency trading to the next level, you should determine the basic coins you will be using as a currency to buy other assets. Bitcoin, as the most well-known and liquid asset, is a popular choice for a base. Other possible options include Ethereum, Litecoin and Ripple coins.
Trading cryptocurrencies, you should be aware that these assets have bid-offer spreads, similar to stocks, financial derivatives, and commodities. These spreads are the differences between the price given for an immediate ask-order (purchase) and a bid-order (sale). Usually, high-risk crypto assets tend to have larger spreads, so you have to take them into account, especially if you plan to make intra-day transactions. In this case, your gain on price volatility should be higher than the actual spread you have to cover.
Choosing a trading platform
There are hundreds of altcoin and Bitcoin trading platforms to choose from, many of which offer the same cryptocurrencies. This is a key difference between the cryptocurrency market and stock exchanges, where only a few companies have listings on multiple exchanges.
However, cryptocurrencies are often listed at slightly different prices on various exchanges. For example, the current price quote for Ripple on Exchange X might be different than the price listed on Exchange Y. Another important difference between crypto trading and stock exchanges is that usually, it’s possible to hold Bitcoin accounts with multiple exchanges and transfer funds between them.
And while you’re likely to find top coins like Ethereum and Litecoin almost anywhere, the offering of alternative coins varies from exchange to exchange. If a platform offers a few rare altcoins you want to invest in, this is an important differentiator to take into account.
In addition to limiting their actual cryptocurrency portfolios, platforms and exchanges usually target certain regions. Because most registered platforms are required by regulators to verify the identity and residence of their traders, it’s important to make sure that your country of residence is eligible for the trading site you choose.
Even with the best cryptocurrency trading platform, however, how much you earn will ultimately come down to your own market analysis skills and the time you’re willing to invest. Here, trading bots can offer an attractive solution.
Pros and cons of trading bots
Algorithmic trading efficiently handles large trades, conducts micro-level analysis, and keeps trades free of human factors that can blind rational thinking. In this type of trading, bots are programmed to respond to certain market triggers and can be very useful for high-frequency trades, where you make profits on fractions of price points. Trading bots ideally should be treated as a tool for executing a strategy based on your own knowledge of the market and risk preferences.
The biggest misconception about trading bots is that they can magically make you money while you sleep, go out, or work your day job. In reality, the job of bots is simply to execute the trades. It is still the trader’s responsibility to research market dynamics, constantly adjust the algorithm accordingly, and set and reset stop limits.
This is especially important since bots will act automatically based on the algorithms you set. They may be more efficient when programmed well, but grow inattentive and your account will feel it. Start by pre-testing new algorithms on small amounts of money. If you are trading crypto on the side, conservative trading strategies are your safest bet. In this case, the bots are triggered only when appropriate market conditions happen. Setting conservative algorithms will get you the time-saving benefits of bots while retaining control over your account.
It is common for cryptocurrency exchanges to charge different rates depending on the number of trades made within a certain time period, while others offer a fixed rate regardless of the transaction number. If you plan on trading with a bot, this is another factor to consider when choosing an exchange (and when setting your algorithms). If an exchange reduces its fees as the transaction number increases, you can set bots for high-frequency market operations and significantly cut transactional costs.
Once you select the platform and the bot, choose the risk and reward profile of your investment strategy based on market trends and your level of risk aversion. Some bots allow you to decide on the alpha and beta values of your future portfolio. Next, you have to choose a set of assets for trading and determine the strategy for reinvestment, i.e. whether you want to reinvest your profits. The automated trading software will manage and rebalance your investment portfolio according to the criteria you choose.
Best trading software
There are many software solutions to help you successfully trade. Bots and algorithmic trading software make up the lion’s share. The most widely used options include Gunbot, Haasbot, ProfitTrailer, Cryptohopper, Cryptotrader, TraderPlan, and Gekko. There are also software tools that act as assistants, comparing prices and making graphs to inform your decisions without actually executing any trades. Some of the widely used charting tools include Cryptowatch and Coinigy.
Coinigy is one of the most popular charting tools that aggregates available cryptocurrency pairs across all exchanges you work with. The charts this tool offers are fully customizable and you can set the indicators and charts you want to trace. You can also place orders with exchanges directly from Coinigy using the tool’s API.
In terms of possible software options, look for widely used, secure tools that can help you with investment decision-making. It’s important to take into account details like the processing speed of operations, the user interface, functionality, and possibilities for integration with other platforms.
Trading bots usually restrict the number of exchanges you can work on to the ones they support. If you use open source solutions, you also have to make sure that these tools have active developer teams that can respond to any tech issues.
Best trading practices
To be a legitimate trader, not simply an amateur making guesses, there are some basic analytical tools and approaches to be aware of. The key practices you have to master on this path include risk management, as well as fundamental and technical analysis. These concepts are initially drawn from financial markets, so literature on stocks can be useful here, not only that which specifically relates to cryptocurrency trading.
First of all, you have to be aware of potential risks that could lose you money, be able to calculate the assets at risk, and analyze the volatility of available investment options. Right now, the crypto market is underregulated, and there are no protections in place to shield market players from possible losses. On the other hand, an industry landscape with fewer regulations offers more investment opportunities because the entry barriers are lower. This is in line with the key idea of investment theory: the higher return you strive to achieve, the more risk you take on.
One of the most important measures that capture the asset risk is volatility. In mathematical terms, it is usually defined as the standard deviation of returns of price movements measured during one day, one week, one month, etc. The larger the price deviations are from the mean value, the higher the volatility. High volatility implies possible returns or losses on a larger scale and the risk associated with this particular asset is, in turn, considered to be high.
When you make a trade, you should perform a risk analysis first to ensure that this asset provides competitive risk and return balance. All major Bitcoin trading sites offer automation tools that you can use to identify:
- the entry point of the ask-order execution
- the price target for sale
- stop-loss limits
As a rule of thumb, it is recommended to set stop-loss limits so that you never risk more than 1% of your account in one trade.
Fundamental analysis, on the other hand, offers you a set of indicators to show if prices are likely to go up or down in the near future. Applying this technique, you can analyze a coin’s fundamentals through white papers, articles in trustworthy media outlets, press releases, and market statistics. This approach is dependent on your understanding of the underlying economics and market sentiment.
Technical analysis, on the other hand, takes price patterns of the crypto assets as the key input to make financial decisions. Applying this technique, you look at the candlestick charts trying to spot the known elements and figures of technical analysis. Common technical analysis indicators are wedges, ascending triangles, flag patterns and head & shoulders. Usually, Bitcoin trading platforms also offer drawing tools to build support and resistance lines that help you identify entry triggers and the best points to exit the position.
Portfolio management and diversification are other techniques that can be used to improve risk and return trade-off of a combination of trades. Generally, your portfolio’s risk decreases as you add more assets, especially if they have negative correlations. If you want to actively manage your portfolio, you have to identify your target level of systemic risk tolerance, or Beta, of your asset portfolio.
Ask yourself which outcome would you tolerate less:
- Bitcoin price has increased by 50% and your portfolio has grown only 25%
- BTC fell 50% and your cryptocurrency portfolio also dropped in value by 50%
If you chose the first option as less desirable, you are a profit-oriented, risk-taking investor, whereas in the latter case you are a more conservative investor. The first option also means that the Beta of your portfolio can be higher. The alternative scenario indicates that you have selected trades that result in a lower Beta.
As of today, cryptocurrency trading has a much lower financial threshold and entry barriers to start market operations as compared to regular stock markets. You can embark on this opportunity any time you want as this market is available 24/7. In addition to being open to everybody, the crypto market has shown an extreme potential for profits, with up to 1,000% annual returns.
Similar to trading assets on other markets, your long-term success with crypto is determined by understanding market dynamics and risks, the ability to evaluate your current risk exposure and the diversity of your portfolio. If you are a newcomer to trading, there is still lots to learn. This guide has given you a map and an initial introduction to the most important aspects of crypto trading. Once you learn the ropes and get skilled at conducting basic market operations, you will see further possibilities to elaborate on your own investment strategy open up.