The cryptocurrency market is most lucrative compared to the traditional financial market. There are so many best crypto trading platforms to choose from, and in this article, we will help you with the basics of understanding the cryptocurrency market.
The act of speculating on the price of a cryptocurrency through a CFD account or trading the underlying coins through an exchange is called cryptocurrency trading.
Contract of Difference (CFD) trading on cryptocurrencies:
CFDs are derivatives used for trading. Instead of owning cryptocurrency, traders can speculate on the price of the cryptocurrency with CFDs. Traders will go long (buy) if they think the value of cryptocurrency will appreciate, or they will go short (sell) if they think it will fall.
Since they are leveraged products, traders only need to invest a small amount of capital known as a margin to access the underlying market fully. As per the size of the position, profit and loss are calculated. It would help if you remembered that leverages tend to magnify profits and losses; thus, use them wisely.
Buying and selling cryptocurrencies through an exchange:
When you buy cryptocurrencies through an exchange, you own those coins. Therefore, you are required to create an exchange account and open up a position by putting up the entire value and storing these cryptocurrency coins in your wallet until the need arises for you to sell them.
Exchanges have their learning curves as you need to understand the technology involved and learn to decipher the data presented in front of you. In addition, many exchanges allow you to have limits on depositing since maintaining the account is expensive. Thus while you exchange on a crypto trading platform, you should be aware of these little things that can change your trading experience.
The cryptocurrency market is decentralized, meaning there is no regulatory authority like the government to govern them; instead, they’re distributed across a computer network. Nonetheless, cryptocurrencies can be stored in the wallet and traded across the exchange.
Cryptocurrencies are very different from traditional currencies as the transaction is recorded like a ledger on a blockchain. When traders wish to send cryptocurrencies to another trader, they send them to the recipient’s digital wallet. The transaction is not complete until it is validated and included in the block via mining. Thus in the process of mining, new cryptocurrency coins are minted.
What moves cryptocurrency markets?
The cryptocurrency market is decentralized, meaning it is not subject to the same economic and political issues as traditional currencies. There is a lot of ambiguity around cryptocurrencies since it also fluctuates frequently in the crypto market.
- Demand and supply: As crypto’s demand increases, the cryptocurrency price also rises. And when the supply increases, the price of the crypto falls.
- Supply: The crypto coin’s value also depends on the cryptocurrency’s total supply—the total crypto coins in existence after they are released, destroyed, lost, or minted.
- Market Capitalisation: The total worth of all coins in circulation and how users perceive this to be changing.
- Social media platform: How cryptocurrency is projected and covered on social media affects the value of the cryptocurrency.
- Integration: The ease with which cryptocurrency may be integrated into current infrastructures, such as payment systems for e-commerce.
- Key events: Regulatory changes, security breaches, and economic setbacks are all examples of important occurrences.
Working Of Cryptocurrency Trade
You can use derivatives while trading a cryptocurrency. The objective of using a derivative while trading is to trade on the value of the cryptocurrency rather than buying it. The worth of the cryptocurrency is made in fiat currency like USD.
Contract of Difference or CFDs is leveraged derivative financial products that help your profit margin magnify with little capital or margin money involved. Although, with leverage products, your chances of profits increase, so do the chances of making a loss.
What is the spread in cryptocurrency trading?
A spread is a difference between the buy and the sell prices of a cryptocurrency. When you open up a long position, it means that you have bought the cryptocurrency at that specific price; if you open a short position, it means you have sold the cryptocurrency at that price.
What is a lot in cryptocurrency trading?
Cryptocurrencies are generally traded in batches called lots. Although cryptocurrencies are volatile, the lot size while trading generally tends to be small; most are restricted to a single unit. However, some traders trade in huge lot sizes.
What is leverage in cryptocurrency trading?
Leverage means gaining exposure to the cryptocurrency’s price without the need to buy that cryptocurrency. Instead, you buy the cryptocurrency’s price with token money called margin. Leverages magnify both profit and loss. Thus it is important to use leverages carefully.
What is the margin in cryptocurrency trading?
It is the initial deposit required to open and maintain a leveraged position. You must remember that this margin money needs to be deposited for accessing leverage depending upon your broker or your exchange.
For example, Ethereum (ETH) price is trending at $1,500 and requires 10% of the total value to open up a position. So instead of depositing $1,500, you pay a margin of $150.
What is a PIP in cryptocurrency trading?
Pips are measurement units in the price of a cryptocurrency. This means a single dollar movement is considered a single pip. For example, Ethereum is trending at $2,000, and the price surges to $2,010; the price has moved ten pips upwards. However, many cryptocurrencies can be bought in fractions. In these cases, a pip can be measured in cents or even a fraction of a cent.
It is important to ensure you understand how the pips will be measured before approaching a crypto trading platform and placing a trade.
What are crypto trading bots?
Crypto trading bots are automated crypto trading tools that execute the trade without the interference of humans. This excellent tool carries out trade on your behalf while you sleep or are at work, where it becomes challenging to attend to your portfolio.
Advantages of having a trading bot:
When processing vast amounts of information, robots excel where humans fail. For example, automated trading bots are programmed using different algorithms and charts to predict the price movement of cryptocurrency with fewer errors. Thus they prove to be more efficient than humans.
With trading bots in place, you will never experience FOMO, Fear of Missing Out, or worry of any good trade being missed out. In addition, trading bots are more reliable as they are more accurate than humans.
Disadvantages of having a trading bot:
As the cryptocurrency market is highly volatile, predicting the price swing is challenging. Your portfolio is at risk if the trading bot is not programmed for certain events, such as market crashes. One wrong decision can ruin your perfectly balanced portfolio.
Furthermore, these trading bots are programmed to generate small profits. So it is not wise to hand over your entire portfolio to them.
Different types of bots
There are different types of trading bots, each specific in its trade.
- Arbitrage: These trading bots look across various cryptocurrency exchange prices and profit by trading between them. Even though these price discrepancies may change only a few hundred dollars, they generate a huge profit over a period by executing multiple small trades.
- Market making: Market-making bots make buy and sell orders regularly to profit from the spread. The spread is the difference between the highest bid and the lowest offer on a coin. As a result, a market-making bot will repeatedly buy a low-priced coin and sell it to a higher bidder.
Thus, you need to understand these things before you start trading on a crypto trading platform, as it can help you mitigate loss and maximize your profit margin.
Mahesh Kumar is a dynamic marketing consultant and tech enthusiast with a passion for driving business growth through his innovative strategies and cutting-edge technology. With 6 years of experience in the industry, he has helped numerous businesses leverage the power of digital marketing to reach their target audience, build brand awareness, and increase sales.