How to trade cryptocurrencies? Explained information for beginners

What is crypto trading?

Cryptocurrency trading involves speculating on price movements either through a contract for difference (CFD) trading account or by buying and selling the actual coins on an exchange. CFD trading, a derivative type, enables betting on Bitcoin (BTC) ticker price fluctuations.

For instance, you can take a long position (buy) if you anticipate a cryptocurrency's value will increase, or a short position (sell) if you predict a decrease. These are leveraged instruments, requiring only a small deposit, known as margin trading in crypto, to gain full exposure to the market. However, leveraging crypto trading amplifies both gains and losses since profits or losses are based on the total investment size.

Additionally, investors use cryptocurrency options to manage risk or increase market exposure. Crypto options trading involves a derivative financial instrument whose value is linked to another asset's price – in this case, the underlying cryptocurrency.

Before delving into crypto trading, it's essential to grasp the assets and technologies involved. Bitcoin serves as the foundation from which numerous other cryptocurrencies have emerged.

Similar to stocks and other financial markets, cryptocurrency trading can be intricate, involving various elements and necessitating expertise. Bitcoin, introduced in 2009 as the pioneer crypto asset, still holds the title of the largest cryptocurrency by market capitalization and prominence.

Nonetheless, a diverse array of other digital assets has emerged over the years, creating an entire industry where these assets are traded for profit. Any cryptocurrency apart from BTC is referred to as an altcoin, with Ether being the most prominent among them.

This guide aims to elucidate cryptocurrency trading strategies and acquaint you with crypto trading platforms and applications, the elements of a trade, trading styles, and the significance of technical and fundamental analysis in formulating a holistic trading strategy.

How to start trading cryptocurrency as a beginner?

Numerous methods are available for trading cryptocurrencies, but it's essential to have a solid understanding of the subject before diving in. Knowing the risks involved and being aware of the legal implications based on your location is crucial for making informed decisions.

Register for a cryptocurrency exchange platform

You'll have to create an account with a cryptocurrency exchange if you don't already own cryptocurrency. Some of the top crypto brokerages include Coinbase, eToro, and Gemini. These platforms offer user-friendly interfaces and a diverse selection of altcoins.

When signing up for a crypto brokerage account, you'll need to provide personal information, similar to opening a stock brokerage account. This includes details like your address, date of birth, Social Security number (for U.S. residents), and email address, as part of the Know Your Customer (KYC) requirements.

Deposit funds into your account

After registering with a cryptocurrency exchange, you'll be required to link your bank account. Most crypto exchanges allow bank deposits through debit cards and wire transfers. Wire transfers are typically the most economical method and are available on platforms like Coinbase and Gemini.

Select a cryptocurrency to invest in

Most cryptocurrency traders opt for Bitcoin and Ether as their primary investments due to their relatively predictable movements compared to smaller altcoins. However, some traders utilize technical indicators for trading these cryptocurrencies.

A portion of cryptocurrency investors also allocate funds to altcoins, which, although riskier than large-market cap cryptos, have the potential for significant upside gains, especially among mid-market cap cryptos.

Start trading

If you're interested in implementing a crypto trading strategy, consider utilizing automated crypto trading software such as Coinrule. These trading bots are programmed to optimize returns according to your investment goals. With crypto automated trading, you can earn profits quickly, hold onto your coins, or diversify your portfolio, offering conservative, neutral, or aggressive approaches. Additionally, you can explore active cryptocurrency trading on certain platforms while automating trades on others.

Store your cryptocurrency

If you're regularly trading BTC, your funds must remain on the exchange for accessibility. However, for medium to long-term holdings, consider acquiring a Bitcoin wallet. There are two main types: software wallets and hardware wallets. While both are secure, hardware wallets offer superior protection by storing your cryptocurrency offline on a physical device.

Understanding the fundamentals of cryptocurrency trading

The value of Bitcoin is subject to constant fluctuations, influenced by an ever-active market. As a decentralized digital asset, its worth is shaped by an open market, posing distinct challenges related to volatility, unlike traditional currencies.

Therefore, it's crucial for beginners to gain some understanding of how cryptocurrency markets operate. This knowledge enables them to navigate the markets safely, even if only occasionally, and maximize the value they derive from participating in the cryptocurrency trading ecosystem.

Bitcoin trading can vary widely in terms of scale and complexity. It can range from basic transactions, such as converting Bitcoin to fiat currency like the U.S. dollar, to engaging in various trading pairs to capitalize on market fluctuations and expand one's investment portfolio. Naturally, as the size and complexity of crypto trades increase, so does the trader's risk exposure.

Now, let's delve into some fundamental concepts.

Structure of a crypto trade

A cryptocurrency trade involves both a buyer and a seller, each taking opposing positions—buying and selling. This makes trading inherently a zero-sum game, where one party gains while the other loses. Understanding cryptocurrency market dynamics is essential for minimizing losses and maximizing gains.

When a buyer and seller agree on a price, the trade is executed through an exchange, establishing the market valuation for the asset. Typically, buyers set orders at lower prices than sellers, forming the two sides of an order book.

If there are more buy orders than sell orders for a cryptocurrency, the price tends to rise due to increased demand. Conversely, if selling outweighs buying, the price declines. Exchange interfaces often distinguish between buy and sell orders using different colors to provide traders with a rapid snapshot of market conditions.

You might be familiar with the trading mantra: "Buy low, sell high." While this advice captures the essence of buyer and seller motivations, determining high and low prices can be subjective. Essentially, buyers aim to minimize spending, while sellers seek to maximize profits. However, there's also the aspect of longing an asset versus shorting it to consider.

To engage in longing an asset, you purchase it with the expectation of profiting from its upward price movement. Conversely, shorting an asset involves selling it with the anticipation of buying it back at a lower price, thus profiting from a price decline. Shorting typically involves selling borrowed assets that must be repaid at a later time, adding complexity to the process.

Analyzing market trends and indicators

To the layperson, “the market” may seem like some complex system that only a specialist could ever hope to understand, but the truth is, it all comes down to people buying and selling. How to trade crypto might seem like an esoteric concept at first. Once you begin to understand it, however, the idea becomes a lot simpler.

The totality of active buy and sell orders is a snapshot of a market at any given moment. Reading the market is the ongoing process of spotting patterns, or trends, over time, which the trader can choose to act upon. Overall, there are two market trends: bullish and bearish.

A “bullish” market, or bull market, occurs when the price action appears to steadily increase. These upward price movements are also known as “pumps,” as the influx of buyers increases the prices. A “bearish” market, or bear market, occurs when the price action appears to steadily decrease. These downward price movements are also known as “dumps,” as the mass sell-offs result in the price going lower.

Technical analysis

Paraphrase: Technical analysis (TA) involves examining historical market data, particularly price and volume, to predict future price movements. Traders have access to various TA indicators, which vary in complexity. Here are some fundamental tools used for both macro and micro-level analysis.

Understanding Market structure and cycles

Paraphrase: Traders can identify patterns not only within short-term timeframes but also over longer periods, spanning months or even years, revealing fundamental market structures that influence certain behaviors.

The market cycle consists of four primary phases: accumulation, markup, distribution, and decline. Traders adjust their positions by consolidating, retracing, or correcting as the market transitions between these phases. Understanding the roles of bulls and bears and their dynamics within the market is crucial for traders to identify their position and recognize the dominant market trend.

Technical analysis is essential not just for establishing one's stance in the dynamic market but also for effectively managing its fluctuations as they arise.

Chasing the whale 

Large financial players, known as "whales," predominantly influence price fluctuations. These entities, whether individuals or groups, possess substantial capital to engage in trading activities. Some whales function as "market makers," strategically placing bids and asks on both sides of the market to enhance asset liquidity while generating profits. Whales exert their influence across various markets, spanning from stocks and commodities to cryptocurrencies.

An effective cryptocurrency trading approach must acknowledge the tactics employed by whales, including their favored technical analysis (TA) indicators. In essence, whales typically possess a deep understanding of market dynamics. By anticipating the actions of whales, traders can align their strategies with these seasoned operators to capitalize on potential profits.

Psychological cycles

Amidst a plethora of metaphors likening the market to a zoo, it's crucial not to overlook the fact that actual individuals, for the most part, are the driving force behind these trades. Consequently, they are susceptible to emotional responses that can exert significant influence on the market.

This human element of the market is vividly captured in the timeless chart titled "Psychology of a Market Cycle."

While the bull/bear dichotomy offers valuable insight, the psychological cycle illustrated above offers a more nuanced understanding of market sentiment. Despite the foundational principle of trading being the detachment from emotion, the influence of collective psychology often prevails. The ascent from hope to euphoria is primarily fueled by FOMO (fear of missing out) among those who have yet to establish their positions in the market.

Effectively navigating the trough between euphoria and complacency is essential for timing an exit before bearish sentiment takes hold and triggers panic selling. In this context, it's crucial to consider high-volume price movements, which can serve as indicators of overall market momentum. The strategy of "buying low" becomes evident, as the opportune moment to accumulate assets within the market cycle typically arises during the despair phase following a significant price decline. It's a reflection of the adage that greater risk often leads to greater reward.

For committed traders, the task at hand is to maintain a strategic approach to trading, avoiding the influence of emotions amidst the abundance of opinions and analyses from the media, online forums, and self-proclaimed experts. These markets are susceptible to manipulation by influential entities, including whales and market influencers. It's imperative to conduct thorough research and act decisively in cryptocurrency trading endeavors.

Basic tools 

Recognizing patterns and trends in the market is essential for gaining a comprehensive understanding from a macroscopic viewpoint. Understanding your position within the broader context is crucial. Ideally, you want to resemble the seasoned surfer who anticipates the arrival of the perfect wave, rather than aimlessly paddling in hopes of a fortunate outcome.

However, the microscopic perspective is equally important for shaping your specific strategy. Despite the multitude of technical analysis (TA) indicators available, we'll focus solely on the fundamental ones.

Support and resistance

Support and resistance, two of the most commonly employed technical analysis (TA) indicators, pertain to price barriers that typically emerge within the market, hindering excessive price movement in specific directions.

Support represents the price threshold where downward momentum typically halts, attributable to increased demand. As prices decline, traders often seize the opportunity to purchase at lower levels, thus establishing a support line. Conversely, resistance denotes the price level where upward momentum typically stalls, often due to heightened selling activity.

Numerous cryptocurrency traders rely on support and resistance levels to speculate on price movements, adjusting their strategies dynamically as prices breach either upper or lower thresholds. Once traders pinpoint these limits, they establish a range of activity within which they can initiate or liquidate positions. The conventional approach involves purchasing near the support level and selling near the resistance level.

When prices exceed these boundaries in either direction, it signals shifts in the market's overarching sentiment. This remains an evolving process, as fresh support and resistance levels tend to materialize when trends undergo breakthroughs.

Trendlines

While the static support and resistance thresholds mentioned earlier are commonly employed by traders, price dynamics often lead to upward or downward trends, causing these barriers to evolve over time. A series of support and resistance levels can signify a broader market trend, represented by a trendline.

During an upward trend, resistance levels gradually emerge, causing a slowdown in price movement and prompting a pullback toward the trendline. Cryptocurrency traders closely monitor the support levels of an ascending trendline, as they denote areas that deter significant price declines. Conversely, in a downward-trending market, traders observe the succession of descending peaks, connecting them to form a trendline.

At the heart of it all lies the market's historical data. The potency of support and resistance levels, along with the trendlines they generate, grows with each recurrence over time. Consequently, traders meticulously document these barriers to refine their ongoing trading approaches.

Whole numbers

Round numbers often influence support and resistance levels, driven by the fixation of both inexperienced and institutional investors. When a significant number of trades cluster around a neat round figure—such as the case with Bitcoin whenever its price nears a value divisible by $10,000, for instance—it becomes challenging for the price to breach this threshold, thus forming a resistance.

This common phenomenon underscores the susceptibility of human traders to emotional impulses and their inclination towards shortcuts. Particularly in the context of Bitcoin, reaching a specific price point typically triggers a surge of market activity and anticipation.

Moving averages

Traders frequently use the "moving average," which is a simplified visual representation of market history that combines support/resistance levels and the resulting trendlines into a single line.

The moving average effectively tracks the lower support levels in an upward trend and the resistance peaks in a downward trend. When considered alongside trading volume, it serves as a valuable indicator of short-term momentum.

Chart patterns

There are several methods to visually represent and identify patterns in the market. One widely used visual representation is the "candlestick," which provides traders with a visual language to anticipate potential trends based on market price action.

Candlestick charts were developed in Japan during the 1700s to help traders understand how emotions influence price movements, going beyond basic supply-and-demand dynamics. These charts are highly favored by traders because they convey more information than simpler line or bar charts. A candlestick chart displays four key price points: the open, close, high, and low prices.

In cryptocurrency trading, candlesticks are named for their rectangular shape and the lines that resemble wicks above and/or below the rectangle. The wider part of the candle represents the price range between the opening and closing prices, depending on its color. The wicks indicate the price range within which an asset traded during the specified period of the candlestick. Candlesticks can represent various time frames, from one minute to one day or more, and exhibit different patterns based on the chosen timeframe.

Fundamental analysis

How can we assess the potential of a specific cryptocurrency beyond or before its behavior in the trading market?

While technical analysis focuses on analyzing market data to inform trading strategies, fundamental analysis involves studying the underlying industry, technology, or assets that make up a market. In the realm of cryptocurrencies, a trading portfolio typically includes Bitcoin and alternative coins (altcoins).

How can we discern whether an asset is supported by solid fundamentals rather than hype, overstated technology, or, in the worst case, nothing at all? When conducting fundamental analysis on new assets, several factors should be taken into account:

Technical specifications

Distinct from market technical analysis, the fundamental technical aspects of a cryptocurrency encompass the network's algorithm choice (which affects security, uptime, and consensus), as well as issuance and emission details such as block times, maximum token supply, and distribution strategy. A careful evaluation of a cryptocurrency network's protocol stack and the monetary policy enforced by the protocol can help a trader assess whether these features align with a potential investment.

Community

Community plays a vital role in cryptocurrency trading ventures. The amalgamation of users, token holders, and enthusiasts largely propels these assets and their underlying technologies. Essentially, any new technology inherently contains a social element. However, due to the significant financial implications involved and the frequent participation of non-professional retail investors, the space is often characterized by toxicity and conflicting factions. Therefore, a healthy, transparent discourse within the community is essential.

Developers

Prior to investing in a cryptocurrency asset, it's crucial to evaluate the integrity and proficiency of the developers behind it. What is their history? What software projects have they previously launched? How engaged are they in developing the token's underlying protocol? As numerous projects are open-source, their activity can be directly observed on collaborative code repository platforms such as GitHub.

Liquidity (and whales)

Liquidity plays a crucial role in maintaining a robust market. Are there well-regarded exchanges that facilitate trading of a specific crypto asset? If yes, what trading pairs are offered? Is there a substantial trading volume? Are there significant market players, and if so, how do their trading behaviors affect the market?

Nevertheless, building liquidity is a gradual process. While a new, innovative protocol may be operational, it might not have immediate access to liquidity. Investing in such assets carries risks. If trading volumes are low and there are limited trading pairs, you are essentially speculating that a healthy market will eventually develop around the project.

Innovation

Although Bitcoin was initially intended for use as electronic money, developers and entrepreneurs have since identified new use cases for the Bitcoin blockchain. They have also created entirely new protocols to support a broader array of applications.

Branding and marketing

Many cryptocurrency networks lack a central figure or company to oversee branding and marketing efforts, leading to branding that may be fragmented or lacking a cohesive strategy.

However, this does not mean that branding and marketing efforts are absent. Over time, protocols develop their own branding and marketing strategies. An analysis of the marketing efforts by core developers, corporations, foundations, and community members can offer insights into how different entities communicate the value propositions of the technology to the public.

Infrastructure

This aspect of a cryptocurrency trade can be viewed as the embodiment of a project's technical details. Beyond what is outlined in white papers or discussed at conferences, what is the tangible implementation of the protocol in question?

It is important to identify the stakeholders involved: the developers, block validators, merchants/companies, and users. Equally crucial is understanding who governs the network, their responsibilities in maintaining network security (through mining or validation), and the distribution of power among these stakeholders.

On-chain analysis

As all cryptocurrencies are fundamentally based on blockchain technology, a new form of analysis has emerged, known as on-chain analysis. This analysis relies on data extracted directly from blockchains.

On-chain analysis involves studying supply and demand trends, transaction frequency, transaction costs, and the rate at which investors are holding or selling a cryptocurrency. By analyzing these factors, analysts can make precise qualitative and quantitative assessments of a cryptocurrency's blockchain network strength and its price dynamics across various markets.

Furthermore, on-chain data offers valuable insights into investor behavior and psychology. Analysts can correlate various macro and microeconomic events with investors' actions, which are immutably recorded on the blockchain.

Analysts search for trading signals, patterns, and anomalies in buying, selling, and holding behavior, especially in relation to market rallies, sell-offs, regulatory developments, and other network-related events. This analysis helps forecast potential future price movements and predict investor reactions to upcoming events, such as network upgrades, coin supply reductions, and activities in traditional financial markets.

Crypto trading vs stock trading

Stocks and cryptocurrencies are two distinct types of investments. While both can be considered liquid assets for a speculative portfolio, they differ significantly in nature and should be managed separately.

Stocks represent ownership stakes in publicly traded companies. Each share of stock purchased represents a proportional ownership in the company, based on the total number of shares issued by the corporation. Investors can profit from stocks by selling them to other investors, with the difference between the purchase and sale prices being the capital gains. Additionally, stocks can appreciate in value through dividends and voting rights.

Cryptocurrencies, on the other hand, are digital assets that exist solely on the internet. They lack a physical form and exist only as entries in an online ledger that tracks ownership. This contrasts with physical currency like the United States dollar, which can exist as both physical notes and digital entries in a bank account. Each unit of a cryptocurrency is called a token, similar to how a stock's unit is called a share.

The risks of crypto trading

Risk management is a crucial aspect of trading. Before entering a trade, it's essential to determine the amount you are willing to lose if the trade moves against you. This decision can be influenced by various factors, including your trading capital. For instance, some traders may choose to risk no more than 1% of their total trading capital on a single trade.

Trading, by its nature, carries inherent risks, and predicting future market activity with certainty is nearly impossible. Therefore, it's important to make informed decisions based on available information, personal judgment, and proper education.

Furthermore, trading strategies can vary widely from person to person, depending on individual preferences, risk tolerance, trading capital, and other factors. Trading entails significant responsibility, and individuals considering trading should carefully assess their personal circumstances before engaging in trading activities.