Crypto Trading

What Is a Cryptocurrency?

A cryptocurrency is a digital currency secured by cryptography. It’s a digital asset typically used as a medium of exchange. Cryptocurrencies can operate globally, 24/7, and independently of intermediaries such as banks and payment processors.

The decentralized nature of cryptocurrencies facilitates peer-to-peer (P2P) transactions directly between individuals. So, instead of physical wallets and bank accounts, people access their crypto through unique crypto wallets or crypto exchanges like Binance, ByBit, OKX, BitGet, BingX, etc.

The first cryptocurrency

Bitcoin is the first and most popular cryptocurrency. It was created in 2009 by an individual or group under the pseudonym Satoshi Nakamoto. Since then, thousands of cryptocurrencies have emerged, each with unique characteristics and purposes.

Like traditional fiat currencies, cryptocurrencies can be used as a medium of exchange. However, the use cases for cryptocurrencies have expanded significantly over the years and now include a wide range of applications in various industries, such as decentralized finance (DeFi), artificial intelligence, gaming, governance, healthcare, digital collectibles, and many others.

How Does Cryptocurrency Work?

Blockchain network

Most cryptocurrencies are decentralized, meaning they use a distributed network of computers (nodes) to manage and record transactions in a public ledger known as blockchain. 

So, whenever you send bitcoin to a friend, your transaction must be collectively verified and validated by the network nodes.

Each computer node has to maintain a local copy of the blockchain and update its copy every time new data is added to the ledger. Once validated and confirmed, cryptocurrency transactions are permanently recorded in the blockchain database.

The distributed architecture increases the network’s security because there is no single point of failure for malicious actors to exploit. If a node tries to validate invalid transactions or misbehaves, they are quickly expelled from the network.

Cryptography

Cryptocurrencies use cryptography to secure transactions, maintain data integrity, and control the creation of additional units. When you open your wallet and make a crypto transaction, you are essentially using your private key to generate a digital signature. The network then checks your signature and, if all is good, your transaction is added to a new block. 

The blockchain is a chain of linked blocks, so you can think of a block as one of the many pages in the blockchain ledger. Each block contains, among other things, a unique list of crypto transactions.

What Makes Cryptocurrency Unique?

Cryptocurrencies have impacted various ecosystems by introducing innovative features that distinguish them from traditional protocols and currencies. Some of the unique aspects of cryptocurrencies include:

1. Decentralization

Cryptocurrencies allow users to have total control over their assets. Their decentralized architecture eliminates the need for a central authority. This allows for greater autonomy, as well as less vulnerability to manipulation or control by a single entity.

2. Transparency and immutability

Blockchain technology records all transactions on a public, transparent, and tamper-proof ledger. Once a transaction is added to the blockchain, it’s virtually impossible to alter or delete it.

3. Programmability

Many cryptocurrencies, such as ETH, are open-source and programmable, allowing developers to deploy smart contracts to create decentralized applications (DApps) and other innovative solutions on top of blockchains. And because permissionless blockchains are open-source, anyone can start deploying code on top of a blockchain to create their own DApps.

4. Borderless

Cryptocurrencies can be sent and received anywhere in the world, making them ideal for global transactions and remittances.

5. Limited supply

Many cryptocurrencies have a limited supply. For example, Bitcoin has a predictable issuance rate and a max supply of 21 million coins, contributing to its potential as a store of value. Limited supply helps prevent inflation and may lead to increased demand over time.

What Is Crypto Market Cap?

Short for cryptocurrency market capitalization, crypto market cap is a metric used to determine a cryptocurrency’s relative size and value. You can calculate it by multiplying a coin’s current price by the total number of coins in circulation:

Market Cap = Circulating Supply x Price

Crypto market cap is often used to rank cryptocurrencies, with a higher market cap generally indicating a more stable and widely accepted cryptocurrency. Conversely, a lower market cap usually signals a more speculative or volatile asset.

Do note, however, that this is just one of the many factors to consider when evaluating a cryptocurrency's potential. Several other factors, such as technology, team, tokenomics, and use cases, should also be considered when doing research.

Top 5 Cryptocurrencies by Market Cap

Among the thousands of cryptocurrencies, five notable examples include Bitcoin (BTC) and popular altcoins ETH, BNB, USDT, and SOL. As of November 2024, these are the top 5 cryptocurrencies by market capitalization.

Bitcoin (BTC)

Created by pseudonymous Satoshi Nakamoto, BTC is the first and most popular cryptocurrency. It’s widely used as a store of value and a medium of exchange. 

Bitcoin uses a consensus mechanism called proof-of-work (PoW), where miners compete to validate transactions in return for block rewards. In addition, BTC’s limited supply of 21 million coins makes it relatively scarce and contributes to its reputation as “digital gold.”

Ether (ETH)

Ether (ETH) is the native coin of the Ethereum blockchain. Created by Vitalik Buterin, Ethereum powers a decentralized network where developers can build DApps using smart contracts.

Ethereum initially used proof-of-work but later transitioned to proof-of-stake (PoS) to increase efficiency and reduce energy consumption. This shift has allowed users to validate transactions and secure the network by staking their ETH rather than through nodes using computing power.

BNB

BNB was introduced in 2017 as an ERC-20 token on the Ethereum blockchain. In 2019, BNB migrated to its own blockchain and is now the native cryptocurrency of the BNB Chain ecosystem.

Similar to Ethereum, BNB Chain provides an environment for smart contracts and DApps, featuring lower transaction fees and faster processing times when compared to other blockchains.

BNB has many use cases, such as staking, paying transaction fees on the BNB Chain, paying trading fees on Binance, and participating in Launchpool token sales. In addition, the BNB Auto-Burn mechanism limits the supply of BNB and helps create scarcity.

Tether (USDT)

USDT is a USD-pegged stablecoin launched in 2014 by Tether Limited Inc. Stablecoins are cryptocurrencies designed to maintain a consistent value relative to a reserve asset, such as the US dollar or another fiat currency. 

In the case of USDT, each token is backed by an equivalent amount of assets held in the company's reserves. Stablecoins like USDT eliminate the extra costs and delays associated with converting between crypto and fiat currencies.

Solana (SOL)

SOL is the native cryptocurrency of the Solana blockchain. Solana is a third-generation PoS blockchain that was launched in 2020. It has implemented many unique innovations to offer high throughput, fast transactions, and low fees.

How to Safely Invest in Crypto

Like other financial assets, investing in cryptocurrency can be risky and may result in financial loss. Here are six essential tips to make buying and selling cryptocurrency safer:

1. DYOR

The acronym DYOR stands for “do your own research”. It's important to understand the basics of blockchain technology — such as the different types of cryptocurrencies and market dynamics — before investing in any cryptocurrency.

Books, blogs, podcasts, and forums are all good places to start. You should also learn about the projects, teams, and technology behind different cryptocurrencies to make informed decisions.

2. Watch out for scams

The crypto space is full of innovation and interesting products, but unfortunately, it’s also plagued by all sorts of crypto scams. Don’t trust strangers online and be wary of pyramid and ponzi schemes.

If you need help, reach out to the official customer support channels. Watch out for phishing, multisig, airdrop, and giveaway scams. Verify social media accounts carefully to avoid falling for spoofed (fake) profiles. Consider using a reputable password manager, and make sure to keep your private keys and seed phrases offline. You may also split your seed phrase up for added security.

3. Start small

The crypto market can be volatile and unpredictable, especially when it comes to less popular coins. It’s safer and wiser to start with small investments that won’t hurt your pocket in case of losses. This approach allows you to experience and develop a better understanding of market trends without risking too much.

4. Stay informed

The cryptocurrency landscape evolves very fast, so it’s important to keep up to date with news, technological advancements, and regulatory updates. Make sure you understand the projects well before taking risks.

5. Choose a reputable crypto exchange

Choosing a well-known and secure cryptocurrency exchange for your crypto investments should be your top priority. If Binance is not available in your region, start by comparing the different options regarding trading volume, fees, customer support, security, interface, and available cryptocurrencies.

6. Practice risk management

Before investing in any cryptocurrency, it's essential to implement some risk management techniques. For example, investing what you can afford to lose and setting stop-loss orders to limit potential losses can make a big difference.

What Is a Crypto Whitepaper?

A crypto whitepaper is a document that explains the details and technical specifications of a blockchain project. It typically includes information such as the project's goals, how it works, the technology behind it, the team involved, the tokenomics of the project, and the roadmap for development and implementation.

Cryptocurrency whitepapers serve as a comprehensive guide to the project, explaining its purpose and potential benefits. Investors and community members often review and scrutinize whitepapers to evaluate the legitimacy and potential of a cryptocurrency project before investing.

However, there are no standards or regulations for whitepapers, and they could be misleading or inaccurate. Crypto projects can write anything they want in their whitepapers. As such, the responsibility to verify the truthfulness of the claims in the document falls on the users.

Cryptocurrency Trading

Cryptocurrency trading refers to buying and selling digital assets on exchanges for the purpose of making a profit. Unlike traditional markets, crypto markets operate 24/7, giving traders more flexibility but also exposing them to constant price changes.

There are thousands of cryptocurrencies out there, but there is a good chance you have heard of some of the most popular ones, such as Bitcoin and Ethereum. In fact, these are the names of the blockchain networks. The tradable crypto-assets are called bitcoin (BTC) and ether (ETH).

How it works

Crypto traders can go “long” (buying an asset expecting its value to rise) or “short” (selling an asset expecting its price to drop). Some traders hold assets for longer periods, while others prefer to move in and out of positions quickly, depending on their strategy and risk tolerance (more on these strategies soon).

You can trade cryptocurrencies against fiat currencies (such as USD, EUR, etc.) or against other cryptocurrencies. The assets you choose and the exchange you use will affect your trading experience.

Before Trading Cryptocurrency

1. Learn the basics

Before diving into cryptocurrency trading, it's important to take some time to learn the basics. 

2. Choose a crypto exchange

Choose a reliable and secure cryptocurrency exchange. Ideally, it should have a proven track record, excellent reputation, strong security protocols, and responsive customer support. 

For newcomers, beginning with a centralized exchange is recommended. As you gain more experience in crypto trading, you can explore decentralized exchanges (DEXs) at a later stage.

3. Create your account

Once you've chosen an exchange, the next step is to create your account. This usually involves providing your email, setting a password, and agreeing to terms. 

Exchanges often require identity verification (KYC) to ensure security and comply with regulations. You would need to submit a government-issued ID, proof of residence, and any other documents to complete setting up your account.

How to Start Trading Cryptocurrency

1. Fund your trading account

After you create an account, you can deposit fiat currency into your account. Most centralized exchanges allow users to deposit fiat via bank transfers, bank wires, or other common methods. Depending on the platform and location, you may also be able to buy crypto using a credit card. 

If you happen to own some crypto already, you can deposit it into your exchange account. Remember to always send your coins to the associated address: send Bitcoin to your Bitcoin address, ether to your Ethereum address, and so on. Sending crypto to the wrong addresses may result in permanent losses.

2. Choose a trading pair

Cryptocurrencies are traded in pairs (e.g., BTC/USDT, ETH/BTC). A trading pair tells you which assets are being exchanged. For example, in the BTC/USDT pair, you're trading Bitcoin against Tether (a stablecoin pegged to the US dollar).

Crypto-to-fiat trading pairs involve a cryptocurrency and a traditional fiat currency, such as the BTC/EUR trading pair. If the current value of one BTC is 92,175 euros, the BTC/EUR trading pair chart will show the same value as the market price. 

In other words, you need 92,175 euros to buy 1 BTC, half of that to buy 0.5 BTC, and so on. Note that you can buy as little as 5 EUR worth of bitcoin.

Crypto-to-crypto trading pairs involve two different cryptocurrencies, such as the ETH/BTC trading pair. At the time of writing, ether (ETH) is being traded at 0.02285 BTC per unit of ETH.

3. Check the order book

An order book is a real-time, dynamic list of buy and sell orders placed by traders. It provides a snapshot of the supply and demand for a specific asset at different price levels.

Buy orders (bids) list the orders from traders who want to buy, organized from the highest bid price to the lowest. Sell orders (asks) display the orders from traders who want to sell, organized from the lowest ask price to the highest.

4. Choose your order type

Market order:

A market order is the simplest type of order, in which you buy or sell immediately at the best available price. It’s the fastest way to buy or sell when you don’t want to wait.

Let's say the current highest bid (buy order) for one bitcoin is $100,000, while the lowest ask (sell order) is $100,100. If you place a market order to buy BTC, your order will be matched with the lowest ask, which is $100,100. If you place a market order to sell BTC, your order will be matched with the highest bid at $100,000.

Limit order:

A limit order is an order to buy or sell at a specific price or better. It’s a slower way to buy or sell but allows you to set the exact price you want.

For example, if bitcoin is trading for $100,000 but you want to buy it for $98,000 or less, you can set a buy limit order at $98,000. If the price drops to $98,000 or less, your limit order will (likely) be executed, and you'll purchase bitcoin at the desired price. But if the price never drops to your limit price, your order won't be executed.

5. Develop your trading strategy

Think about your trading style and strategy. Every trader is unique, so it’s usually better to create your own trading system and improve it as you go rather than copying other traders. This will help you improve and hopefully achieve a more consistent trading performance in the long term.

Regardless of the chosen strategy, it’s important to manage risk and learn from your mistakes. A trading journal that tracks your trades (including your thought process and decisions) can be incredibly helpful.

Popular Trading Strategies

There are many crypto trading strategies that you can employ, each with its own set of risks and benefits. Let’s go through some of the most popular trading approaches.

Day trading

Day trading is a strategy that involves entering and exiting positions within the same day. In day trading, you’ll often rely on technical analysis to determine which assets to trade. This trading style can be profitable, but it’s challenging and definitely not for everyone. Day trading tends to be more stressful and time-consuming than swing trading or long-term HODLing, so it’s generally not recommended for beginners.

Swing trading

In swing trading, you’re still trying to profit off market trends, but the time horizon is longer – positions are typically held anywhere from a couple of days to a couple of months. Swing trading tends to be a more beginner-friendly strategy, mainly because it doesn’t come with the stress and time-consuming pace of day trading. 

Scalping

Of all of the trading strategies discussed so far, scalping takes place across the smallest time frames. Scalpers attempt to game small fluctuations in price, often entering and exiting positions within minutes (or even seconds). As a form of day trading, scalping is also not recommended for beginners.

In most cases, they’ll use technical analysis to try and predict price movements and exploit bid-ask spreads or other inefficiencies to make a profit. Due to the short time frames, scalping usually has thin profit margins. Scalpers generally trade bigger volumes or dozens of trades to gradually achieve sizable profits.

HODLing 

While not exactly an active trading strategy, long-term investors, also known as "HODLers," aim to benefit from the overall growth of the cryptocurrency market. They buy and hold cryptocurrencies for an extended period, often months or years.

As a “buy and forget” strategy, HODLing is among the least stressful options. It’s ideal for those who believe in the long-term potential of specific assets and are willing to weather short-term price fluctuations. While this strategy requires patience, it can provide substantial returns over time, especially for bitcoin holders.

Technical Analysis (TA)

Technical analysis is the art of interpreting price charts, recognizing patterns, and harnessing indicators to anticipate potential price movements.

Candlestick charts

A candlestick chart is a graphical representation of the price of an asset for a given timeframe. It’s made up of candlesticks, each representing the same amount of time. 

For example, a 1-hour chart shows candlesticks that each represent a period of one hour. A 1-day chart shows candlesticks that each represent a period of one day, and so on.

A candlestick is made up of four data points: the Open, High, Low, and Close (also referred to as the OHLC values). The Open (1) and Close (4) are the first and last recorded prices for the given timeframe, while the High (2) and Low (3) are the highest and lowest recorded prices, respectively.

Support and resistance levels

Support means a level where the price finds a floor—an area of significant demand where buyers tend to step in and push the price up.

Resistance means a level where the price finds a ceiling— an area of significant supply where sellers tend to step in and push the price down.

Technical analysis indicators

Traders rely on technical indicators to better understand an asset’s price movements. These tools help reveal patterns and highlight possible opportunities to enter or exit trades based on current market conditions.

Popular examples of technical analysis indicators include trend lines, moving averages, Bollinger Bands, Ichimoku Clouds, and Fibonacci Retracement, which can also suggest potential support and resistance levels.

Fundamental Analysis (FA)

Fundamental analysis is a method used by investors and traders to determine the intrinsic value of an asset or business. In crypto trading, it often involves investigating the technology, team, adoption potential, and overall viability of a project.

In crypto trading, fundamental analysis (FA) evaluates the value of a cryptocurrency by analyzing its technology, use case, development team, tokenomics, and adoption.

In crypto trading, FA might also include things like:

• On-chain data (e.g., number of active addresses, transaction volume, etc.)

• Project roadmaps and news

• Community and developer activity

Risk Management in Cryptocurrency Trading

Risk management refers to identifying the financial risks involved with your investments and minimizing them as much as possible. Let’s take a look at a few popular strategies.  

1. Limit your losses 

Make sure you don’t trade more than you can afford to lose. Use advanced order types to lock in profits or protect yourself from losses. For instance, stop-loss orders allow traders to limit losses when a trade goes wrong. Take-profit orders ensure that you lock in profits when a trade goes well.

2. Have an exit strategy

It’s always a good idea to plan for the worst. So, having an exit strategy is an essential way to manage your risks. It's easy to get caught up in a bull market and its euphoria, but having a plan to exit your position can help lock in gains or prevent big losses in case things go bad.

One way is to use limit orders to take profit or place a floor on maximum loss that you can stand. As a general rule of thumb, once you have your exit plan, you should stick to it. Plan your trade and trade your plan.

3. Diversification

Diversifying your portfolio is one way to reduce your overall risk. You can hold a variety of different assets, keep each position at an appropriate size, and constantly rebalance the portfolio, so you won't be too heavily invested in any one asset. This can minimize the chance of oversized losses.

4. Hedging 

Although this requires a bit more experience, you can consider hedging your open positions, which means taking a position in a related asset that is expected to move in the opposite direction of the primary position. The purpose is to offset potential losses.

For example, if you own $10,000 worth of bitcoin and want to hedge against a possible decrease in its price, you could buy a put option for a premium that gives you the right to sell your BTC at $100,000 a few weeks from now. 

If Bitcoin's price falls to $80,000, you can exercise your option and sell for $100,000, significantly reducing your losses. If the price doesn’t fall, you only lose the premium paid while still profiting from the uptrend of your long position.

Closing Thoughts 

Cryptocurrency has introduced a new way to think about money and financial transactions. Some believe it could eventually replace traditional financial systems, while others see it as a complement to existing systems. Still, cryptocurrencies have already impacted finance and technology, and their influence will likely continue to grow.

Markets can be unpredictable, and cryptocurrency markets are particularly volatile. With continued learning, however, you should be able to become a better crypto trader.

Remember to prioritize risk management in your trading journey. Stay informed about the latest developments in the crypto space, continue refining your skills, and adapt your strategies as needed.