Introduction
Cryptocurrencies are digitized form of paper money that is based on blockchain technology. The first ever blockchain project was introduced by a pseudonymous investor called Satoshi Nakamoto, who laid the foundation and also wrote a White Paper. The first blockchain is known as Bitcoin. Since the introduction of Bitcoin in 2009, thousands of new digital currencies have been added to the nascent sector. The cryptocurrency market is rapidly converting into an independent investment market. This article is about the basics of cryptocurrency trading.
What is Cryptocurrency?
A cryptocurrency is a product of blockchain technology and it is a digital form of money. A cryptocurrency is not usually issued by a government or regulated by state regulators. Here are some of the most important features related to cryptocurrency:
Insurance
Cryptocurrencies are not insured unlike bank accounts and other money reserves under the legal ownership of a person. The organizations like FDIC or Federal Deposit Insurance Corporation do not offer any coverage for a digital wallet account unlike the regular bank account holders under the centralized government systems.
Cryptocurrencies are subject to different regulations in comparison to the laws that apply to the legal tender of a country. There are some countries like China that have banned the use of cryptocurrencies under any pretext. Some cryptocurrencies can keep operating without any restrictions from federal laws based on their jurisdiction. In certain cases, the state regulations do not apply directly to cryptocurrencies but the cryptocurrency organizations such as exchange markets and digital wallet services providers.
The common idea that cryptocurrencies are exempted from the taxation laws is not correct. In many countries, the financial regulators in the country have introduced new regulations that have added cryptocurrencies into the taxonomy laws. Consumers in India have to pay as high as 305% taxes the lieu of capital gains taxes on their cryptocurrency trading profits.
Supervision
The cryptocurrencies are unique since they are not dependent on any Central Bank or any other state-level regulator. The core technology that supports cryptocurrencies is blockchain which is a digital ledger that is distributed on several random servers around the world. The ability of cryptocurrencies to operate without the presence of a centralized regulator is called decentralization.
How does Cryptocurrency Trading Work?
Cryptocurrencies were originally introduced as a substitute for real currencies that are operated and controlled by Central Bank. However, over the years cryptocurrencies have cemented their position as a viable investment option. Federal financial regulators like SEC have pointed out that several cryptocurrencies are digitized securities. However, in reality, most cryptocurrencies are closer to trade commodities rather than securities and stocks.
Cryptocurrency investors can purchase and sell these coins or tokens on online markets called cryptocurrency exchanges. The cryptocurrency investor uses technical and fundamental market analysis to make calculated projections and manage the financial risks to make profits from their investment. Some cryptocurrencies are used for added purposes such as staking for earning yields or lending them for earning interest income.
Types of Cryptocurrency Trading
When it comes to cryptocurrency trading the exchange markets are always online unlike the stock exchanges. There are several different types of cryptocurrency trading that an investor can use to make profits. Some of these classifications are mentioned as under:
Scalping
In simplest possible words, Scalping is the type of cryptocurrency trading where the investors try to increase their profit margins by increasing the amount of their cryptocurrency trading volume. For beginners, this technique can cause some issues for them. However, with little training or the assistance of a broker, the investors can perform scalping in a controlled manner. The key to making it big with scalping is using risk management tools.
Day Trading
Day trading is another rather risk-filled cryptocurrency trading option. This method involves a cryptocurrency trader purchasing their reserves and selling them on the same day. The main aim of Day trading is to make a quick profit and take advantage of the small window of massive volatility in a cryptocurrency to book profits on intraday trading.
Range Trading
Range Trading is the method where investors depend on support and resistance level readings to make an investment decision for their cryptocurrency reserves. The beginner cryptocurrency traders can take the projections issued by a professional cryptocurrency trader. A support level is a stable point for the lower price projection while the resistance level is a limit for the increasing cryptocurrency price.
Dollar Cost Averaging
Dollar-cost averaging is one of the most effective cryptocurrency trading methods that are often recommended for beginning investors. The investors can preserve their total savings in one place that is meant for cryptocurrency investing. However, rather than converting their entire savings into cryptocurrencies instantly, the investors divide their savings into several smaller pieces and use every part of their savings to purchase more cryptocurrency within a specified interval of time.
Balanced Portfolio
A balanced portfolio is another viable cryptocurrency trading method that is very useful for investors at all levels. With a balanced cryptocurrency portfolio, the investors are making sure that they do not put all their eggs in one basket but ensure to buy suitable percentages of a wide variety of different cryptocurrencies. Investors take into account factors such as regulations, volatility, fundamentals, and technical parameters.
High-Frequency Trading
High-Frequency Trading or HFT is the type of cryptocurrency that has been made automated affairs using an algorithm. HFT is feasible for cryptocurrency traders who want to create bots and make sure that they can make selling and purchasing decisions based on their investing knowledge and data.
Most retail investors are unable to use this method since it requires programming skills, background in investing, proficiency in trading practices, and also software engineering knowledge. However, some programmers sell HFTs for a high price, and even then it is not always guaranteed to deliver 100% profits for its users or developers.
Arbitrage
Arbitrage is a type of trading where the investors look for a cryptocurrency exchange that is offering the lowest sale price. Once the lowest possible price is spotted, the investors purchase these currencies. The next step is to look for a cryptocurrency exchange that is offering a high purchase price for the same digital currency. Cryptocurrency exchanges like FTX used such a technique to make profits from digital trading.
Options Trading
Options and Futures are two derivatives of cryptocurrencies that do not require direct investment into a digital currency. These trade contracts are based on price predictions made for cryptocurrency prices at the end of a given period. The traders who hold these futures or options can choose to sell or purchase them at a loss or profit when the time expires. ETFs are also derivatives but they operate a little differently. This type of trading is also called betting on the price volatility of options trading.
Primary Research
The Primary Research trading method is the most rudimentary type of cryptocurrency trading and it means that an investor starts by acquiring all the possible knowledge base, data, and statistics concerning a particular cryptocurrency. With time the investor can move on to new cryptocurrencies and expand their rudimentary portfolio. Platforms like WazirX provide a lot of support to the investors to get started with primary research.
Some Important Services Related to Cryptocurrencies
It seems challenging and time-consuming to invest in cryptocurrencies. However, cryptocurrency investors need to learn about some of the basic services that are crucial for carrying out a cryptocurrency trade. Some of these important cryptocurrency provisions are given as under:
Digital Wallets
Digital Wallets are digital storage accounts where cryptocurrency investor stores all their cryptocurrency reserves. Digital Wallets are either software or hardware based. An active cryptocurrency wallet is called a hot wallet while the cold water dominates an inactive cryptocurrency account.
Cryptocurrency organizations and online trading platforms offer cryptocurrency wallets. Some cryptocurrency wallets are independent and dedicated services like MetaMask and can operate in the form of mobile phones, browser extensions, and also websites.
Cryptocurrency Exchange
Cryptocurrency exchanges are dedicated online markets that allow cryptocurrency traders to purchase and sell listed cryptocurrencies. Some exchanges are centralized while others are decentralized platforms. Cryptocurrency exchanges reserve the right to seize the assets of the investors if they are suffering from losses. They are not backed by organizations like FDIC regional banks and financial institutions.
Blockchain
Blockchain is the main program that allows the presence of a cryptocurrency. A blockchain is a digital ledger that is hosted on randomized servers around the world. Anyone can join a blockchain without any discrimination. Blockchains are the core technology that allows different types of cryptocurrency byproducts such as stablecoins, coins, tokens, NFTs, and even CBDCS.
Operations
Cryptocurrencies are decentralized but these decentralized programs also require rules and standards. These terms are written into the blockchain and extended to cryptocurrencies and are also provided by human beings. The people who are trusted with implementing these rules are business owners, blockchain founders, node validators, or core developers of a blockchain.
Market Trends
Market Trends in the cryptocurrency market are highly sensitive to the sentiment among investors. The investors use services like Santiment and measures like Fear and Greed Index to measure the existing speculation around a particular cryptocurrency. Whale investors can also influence market trends by starting to buy or purchasing in bulk.
How to Invest in Blockchain?
As mentioned before blockchain is the digital ledger that is used for keeping all the records of transactions made by selling or purchasing a particular cryptocurrency. Blockchains only keep on-chain volume, which refers to all the investing activity happening from any external source to a cryptocurrency exchange.
All the cryptocurrency transactions that occur on the second layer solution or between two exchanges are recorded away from the blockchain and are called off-chain or trade volume.
Blockchain split a single string of code into different divisions to store the cryptocurrency transactions on different servers. 13, BD, and 22 are three code divisions that are stored on computers A, B, and C respectively. Here are some methods that allow investors to put their bets on the blockchain directly rather than its native coin or tokens:
Reality Shares ETFs
ETFs or exchange-traded funds are investment funds that track the performance of one or more cryptocurrencies. Reality Shares ETF is listed on NASDAQ and hails from the NexGen Economy.
Amplify Sharing ETFs
Amplify Transformation Data Sharing ETF is listed under BLOK on the stock exchange and has performed well in the last year.
Innovative Protocol ETFs
KOIN or Innovative Shares NextGen Protocol ETF is also available at the stock exchange.
Cryptocurrency Companies
There are some dedicated listed cryptocurrency organizations such as the American exchange Coinbase. On the other hand, there are also tech companies with huge stakes in cryptocurrencies such as VISA, IBM, MicroStrategy, Oracle, and others that are great choices for stock purchases as their revenue generation greatly depends on the cryptocurrency market trends.
Advantages of Cryptocurrency Trading
When it comes to investing in cryptocurrencies, many people chose cryptocurrencies for their unique benefits. Here are some of the most important benefits of investing in a cryptocurrency market:
Higher Profit Margin
The direct investment profits and yield income generated from cryptocurrencies are usually higher in comparison to the traditional investment market options such as stocks, commodities, and bonds. Cryptocurrency market prices are subject to higher price volatility that results in a better profit or loss turnout.
New Opportunities
Blockchain is the core technology for a cryptocurrency. Many blockchains are experimenting with coming up with new utilities with their ledger and cryptocurrencies. In this manner, the users can also get early access to the latest innovations in the International IT community and benefit from them in the future.
Diversification
Cryptocurrencies are most popular as a successful investment portfolio diversifier. It means that cryptocurrencies allow the investors to divide their savings into stocks, bonds, securities, commodities, real estate, and digital currencies that warrant them a higher profit return when the traditional stocks market is down or commodities are not in demand anymore.
Participation
As soon as a person starts to invest their money in the cryptocurrency sector they can join and become part of the international cryptocurrency community. There are social media and dedicated online forums where people can exchange information, conduct research, exchange ideas, and also learn about the latest trends and developments in the cryptocurrency sector.
Derivatives
In addition to providing a direct investment diversifier, cryptocurrencies also provide so many additional investment options to the investors like derivatives, lending, and yield farming. Some users also participate in cloud mining for generating an additional stream of income from blockchain and cryptocurrencies.
Business Acumen
Traditional financial and other big businesses are adopting cryptocurrencies with each passing day. Being the earliest cryptocurrency holders, the businesses can allow the consumers to make sure that they get exclusive perks and seek new opportunities of benefits on account of their association with any given cryptocurrency that the independent business is trying to integrate.
Limitations of Cryptocurrency Investing
While remaining optimistic about the latest trends in the cryptocurrency sector, investors should also remain aware of its limitations. Here are some important precincts that are part and parcel of cryptocurrency trading:
Speculation
Most cryptocurrencies are borderless investment options; it means that rather than the economic forces in one country, a cryptocurrency market is subject to the trends in the international economy. It can also mean that cryptocurrency markets are highly sensitive to the developments on the market sentiment front and subject to speculative forces.
Price Volatility
Cryptocurrencies usually suffer from many-fold higher price volatility in comparison to traditional investment options such as stocks, bonds, and securities. Since there is an added risk involved with cryptocurrency trading, it also means that the returns generated from the cryptocurrency markets are all also bigger.
Scams and Frauds
Cryptocurrency markets are a relatively new investment space and many people do not have enough education or knowledge about cryptocurrency investing. Therefore, many people fall victim to scammers and fraudulent projects that are luring them with exorbitantly high returns and making falsified promises for returns.
Cryptocurrency wallets, CEX, DEX, and other platforms are always susceptible to hack attacks. The users need to get a technical audit to ensure that a particular cryptocurrency is safe from such threats. However, there is never really full assurance and sometimes hackers use exploits and technical blind spots to steal reserves or hijack a blockchain project.
Backup
In case of a scam, bankruptcy, or a hack attack cryptocurrency investors do not have a lot of options to recover and reclaim their investments. Traditional investment options are backed by financial insurance organizations. However, a cryptocurrency organization has limited options in this regard so the investors should not place big bets on risky platforms and learn techniques to secure their investment from financial, technical, and other disasters.
Conclusion
Cryptocurrency investing is a skill that can be adopted by beginners and professional cryptocurrency traders. Some of the most common cryptocurrencies that are also most secure such as Bitcoin, Ethereum, XRP, ADA, Dogecoin, Litecoin, and others are some good options to get started. Investors should also take their time to learn about technical and fundamental analysis of the crypto market to make the best decisions independently.
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