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How to trade cryptocurrencies


Cryptocurrency trading has become highly popular over the past year. The crypto market has grown tremendously, with global market capitalisation reaching a trillion-dollar valuation. Trading cryptocurrencies can be highly risky, but it can also be lucrative. A cryptocurrency is a form of currency developed through blockchain technology. Blockchain technology is superior in offering high transaction speeds and increasing the security level during transaction processing. A cryptocurrency is a form of currency developed through blockchain technology.

Unlike physical cash, a cryptocurrency is a virtual asset, and it can be used as a medium of exchange, just like traditional fiat. Cryptocurrencies have become highly popular because they can also be used as speculative assets. They can gain value based on the level of demand and supply. 

An example of a cryptocurrency is Bitcoin. Bitcoin is the largest cryptocurrency globally, and it was created more than a decade ago. Over the years, more cryptocurrencies have been introduced to the market, claiming to provide a better alternative to Bitcoin’s network in terms of faster speeds and more usage of its network. 

How does cryptocurrency work? 

Cryptocurrencies are also known as digital currencies. The transactions made with cryptocurrencies happen on the blockchain. Blockchain is an open distributed ledger that keeps the transactions public, meaning that it is easy for each transaction made through blockchain to be tracked. Unlike in the traditional fiat system, cryptocurrencies are decentralised. No single entity, whether a government or a central bank, controls crypto transactions. People can transact with cryptocurrencies through a crypto exchange platform or self-custodial wallets facilitating peer-to-peer transactions. 

Due to their highly unregulated nature, cryptocurrencies can be highly risky assets. However, the regulatory framework is shifting as global adoption rates grow. Therefore, soon, the market could be as regulated as the traditional financial sector.

How many cryptocurrencies are there? 

There are more than 10,000 cryptocurrencies currently. This number continues to grow because it is very easy for developers to launch their own token. However, very few are legitimate and have a strong technological backing. As aforementioned, Bitcoin is the largest cryptocurrency globally by market cap. It is followed by Ethereum, which is labelled the largest altcoin. Altcoins are all the other cryptocurrencies in the market apart from Bitcoin. 

The top 100 cryptocurrencies are popular with investors because most have strong technological backings. If you are a new investor in the crypto space, it is advisable that you keep off new tokens in the market because most of these end up being rug pulls, where the developers abandon projects and take off with investor funds. 

What drives the prices of cryptocurrencies? 

The cryptocurrency market is notorious for volatility. The prices tend to fluctuate unexpectedly during the day and night. The crypto space is still new, which drives this volatility. Some of the factors that influence the prices of cryptocurrencies include the following: 

Are cryptocurrencies legal? 

The cryptocurrency sector is versatile in terms of regulations. The regulatory framework is different among countries, and it is always important to assess your country’s regulations to ensure that you do not fall into legal trouble. During its early years, the crypto market was associated with illicit activities due to the ability of transactions to be made anonymously. However, this is no longer the case, as it has become known that transactions on the blockchain are easier to trace than transactions made with cash. 

Additionally, the crypto sector has grown due to growing regulatory scrutiny. It is almost impossible to commit crimes with cryptocurrencies due to measures such as Know-Your-Customer (KYC) and Anti-money Laundering (AML) laws that have been implemented by different crypto firms. 

However, cryptocurrencies can still be deemed illegal in countries where they have been banned. For instance, China banned cryptocurrency activities in 2021, making these digital assets illegal in the country. 

Is it a good idea to invest in cryptocurrencies? 

There have been a lot of myths related to the cryptocurrency sector, but most of these myths are unfounded. The crypto market has grown significantly over the past decade, and it has even gained the attention of leading Wall Street institutions. The crypto sector can be lucrative, but it is also a risky investment. It is advisable to invest in crypto only if you have a high appetite for risk. The prices tend to fluctuate by large margins, and it is possible to lose all of your investment. Price volatility is why new investors are advised against crypto investments. 

The other thing about crypto is that the regulatory framework is not well-developed. The regulatory framework is different among countries. It is advisable to conduct your own research first before participating in any crypto investment. 

Last but not least, many fraudsters look to exploit the new investors in the cryptocurrency market. As a new investor, you need to do thorough research into any project before committing your funds. It is also advisable to invest only with regulated exchanges. 

How to trade cryptocurrencies 

Trading cryptocurrencies is easy for any trader despite their level of experience. Cryptocurrency trading is when people buy and sell cryptocurrencies, depending on the price movement. There are many ways that you can trade cryptocurrencies, including: 

What are the strategies for trading cryptocurrencies? 

Trading cryptocurrencies can be done in a wide range of ways. An individual’s strategy will depend on their trading plan and investment goals. A winning strategy allows you to know when to enter and exit positions.

Below are the popular trading strategies for trading cryptocurrencies: 

What are the styles of trading? 

The different styles of trading cryptocurrencies include the following: 

Day trading

Day trading is a technique also known as “Intraday trading.” Through day trading, a trader enters and closes positions during the day. 

Pros

Cons

Swing trading

Swing trading is a short-term to medium-term trading style. A trader can trade between one day and a month. 

Pros

Cons

Position trading

Position trading is also known as trend trading. This trading style involves buying an asset and holding it for a long time. 

Pros

Cons

How to read the cryptocurrency market

Reading the cryptocurrency market does not need to be a complex process. It involves analysing the patterns and trends over time to help you understand when to enter or exit a position. The crypto market can be either in a bearish trend or in a bullish trend. The bullish trend is when the prices are gaining steadily. A bullish trend or a bull market happens when the demand from buyers is high. 

On the other hand, a bearish trend occurs when the crypto market declines steadily. A bearish trend or a bear market happens when the selling pressure in the market is high, resulting in increased supply and the prices decline.

A bullish or bearish trend does not necessarily happen within a long timeframe. The trend can also be exhibited in the short term. In certain instances, a slightly bearish trend can be formed during a bull market and vice versa. 

The cryptocurrency market is not always on a steady uptrend or downtrend. Sometimes, a lack of any significant price action can result in consolidation. A consolidation phase is when the price trades within a range. The price will consolidate after a steep uptrend or downtrend. Prices will also consolidate when trading volumes are low.

How can technical analysis help with crypto trading? 

Expert cryptocurrency traders usually base their decision making on analysing the prices. Analysing the past market data is known as technical analysis. It involves analysing prices and volumes to predict future market prices. Technical analysis usually involves implementing a wide range of tools and indicators. Below are examples of these tools:

Market structure and cycles

The past market data is just as relevant as the current market data. The market has a fundamental structure that makes it behave in a particular manner. The market cycle can be classified into four phases: accumulation, markup, distribution and decline, as seen below:

As the crypto market moves between the four phases, traders decide to open, close or hold their positions. By analysing these four phases, a trader will also know whether the market is bullish, bearish, or consolidating. 

Technical analysis is recommended when opening new positions, but it can also come in handy in enabling a trader to decide how they will react during certain price movements. 

Chasing the whale 

The crypto market has a section of large wallet addresses that hold a lot of funds. These addresses are known as whales. Whales can act as market makers where they create liquidity in both the buying and selling sides while creating profits. Whale addresses usually make informed decisions. Therefore, when adopting a cryptocurrency trading strategy, ensure that whales will also use it. When a trader can anticipate the action of a whale, they can make an informed decision to turn a profit. 

Psychological cycles 

Whether they are beginners or experts, cryptocurrency traders are susceptible to emotions. If these emotions govern their decision-making, the market prices can be affected. Below is a chart showing the psychology of a market cycle:

What are the basic tools? 

You do not want to be the kind of trader that makes a trade without having a plan. Being proactive and not reactive is an important thing in the cryptocurrency space. Having a micro perspective about the market will allow you to determine your actual trading strategy. Below are examples of the popular technical analysis indicators in the market. 

How can Fundamental Analysis Help with Crypto Trading? 

Fundamental analysis involves studying the components of a market, such as the underlying technology, industry, technology or assets. The cryptocurrency market is large. The two most popular cryptocurrencies are Bitcoin and Ethereum, and they comprise the majority of trader portfolios. However, traders are also interested in new assets that show growth potential. Before investing in any new asset, it is important to conduct a fundamental analysis by considering the following factors: 

Tips for trading cryptocurrencies 

If you want to trade cryptocurrencies, you need to use the following tips: 

FAQ: Frequently Asked Questions

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