Despite some setbacks in the past few years, cryptocurrencies had remained a popular topic among people interested in technological options when it comes to finances. At the time of writing, the cryptocurrency market is worth approximately $233 billion and there are close to 5,000 different cryptocurrencies in existence. Since the market continues to grow, despite various critics, we would like to clarify some things about digital assets, as well as the topic of cryptocurrency trading.
What is a cryptocurrency?
A cryptocurrency can be regarded as an online medium of exchange, using cryptographic functions in order to conduct financial transactions, through the blockchain technology (which offers decentralization, transparency, and immutability). One of the most important features of cryptocurrencies is the lack of control from any central authority due to this decentralized way of operating.
Like any other financial asset (stocks, currencies, commodities, etc.) cryptocurrencies can be traded and sent directly between two parties via the use of private and public keys. These transfers are done with processing fees, depending on the exchange platform involved or any blockchain-related fees.
Satoshi Nakamoto is the unknown founder of Bitcoin and made the first step in building the market we see today in 2008 when he published a document named “A Peer-to-Peer Electronic Cash System” and since then thousands of new cryptocurrencies had appeared, leading to the developed of a wide cryptocurrency trading market.
Introduction to crypto trading
Cryptocurrency trading means exchanging one cryptocurrency for fiat money (US dollar, Euro, Yen, Sterling, etc.) or another cryptocurrency. This need happens for two reasons:
- Each cryptocurrency has a particular function and sometimes people need to exchange in order to complete a certain activity;
- Because cryptocurrencies have a floating value, speculation is one of the most popular activities. People can exchange crypto to fiat or crypto to crypto and generate profits from the rising and falling of prices.
What people who are at the beginning and who want to start to trade cryptocurrency need to know is that this market is one of the most volatile in the world, with prices fluctuating by a large degree. Also, since there is no regulatory framework in place on a global scale, cryptocurrencies are subject to price manipulation.
Among some of the most used price manipulation techniques, traders must know about wash trading, spoofing, pump-and bump, and short squeeze. Since either buyers or sellers can influence the price (due to low market liquidity), cryptocurrency trading is more flow-based than linked to any fundamental factor. Before we can into other details, let’s see how cryptocurrency trading can be done, since there are two main options available.
Using exchange platforms
The first way to trade cryptocurrencies involves trading platforms. By choosing this path, traders transact with “physical cryptocurrency” meaning they actually hold the underlying asset. The process is simple and done in a few steps.
First, the user buys cryptocurrency with fiat money (BTC, ETH, or other popular tokens), open an account with an exchange platform that offers trading services, deposits the purchased token into the exchange wallet and then is able to trade in a number of predefined markets.
There are some disadvantages which must be mentioned, though. Trading by holding the underlying assets means the clients will have to pay exchange fees, blockchain fees, or even transfer fees, which may add up over time. There could also be security issues since many exchange platforms had been hacked during the past two years.
Cryptocurrency derivatives trading
Secondly, cryptocurrency trading in now possible using derivatives. As opposed to the first option, in this case, traders won’t own any underlying asset. If you want to know how to trade crypto in this manner, derivatives based on cryptocurrencies allow traders to profit from the rising and falling of prices.
The entire is much faster and does not involve the costs mentioned previously. At the time of writing, Bitcoin is the most favored cryptocurrency, since there are futures contracts, ETFs, and CFDs available for trading. However, during the past year, we’ve seen many cryptocurrency trading platforms offering contracts based on cryptocurrencies for clients who want to trade without owning the underlying asset.
On top of that, popular brokerage companies had also included cryptocurrency-related assets into their instruments list. Margin trading is enabled in this case, which is both a positive and negative aspect, given that it can amply profits or losses.
The bottom line is that there are upsides and downsides in both cases and it’s up to each trader to choose which is the best alternative.
To summarize, cryptocurrencies continue to exist despite strong critics and although it does not seem, the idea of digital money continues to be appealing for a larger number of people. As for cryptocurrency trading, we’ve talked about the two main options traders have and it’s up to each person to decide which one fist the best.