Crypto Trading: Everything You Need To Know
From blockchain to trading – all you need to know about the world of cryptocurrencies
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
Before you start crypto trading there are things you need to be aware of. In particular, if you are new to trading as a whole. The first characteristic of cryptocurrency markets is that it is decentralized. This means that digital currencies are not backed by a central authority. Exchange platforms and online wallets are the main way to buy and store cryptos. They exist solely as a digital asset and a record of ownership. These are securely stored on a blockchain.
The blockchain conundrum
Cryptocurrencies operate main processes via blockchain. It is a shared digital register of data. The transaction history of every unit is stored minutely. And ownership details are securely recorded in the blocks. Each transaction occurs through a process called mining. Which is how new crypto tokens are created. Blockchain technology is meant to provide a secure environment for traders. Thus a blockchain file is stored on more than one computer across a network. That way it is readable by everyone in the network and it is difficult to alter. Weak points and vulnerabilities are extremely hard to find. The cryptocurrency market is shielded from human error, software issues, and malicious hacks. Complex mathematics keep this delicate balance altogether, and any attempt to alter the data will quickly be identified as fraudulent.
The way to create new blocks in the blockchain and check crypto transactions for sufficient funds and authorization.
Every market is regulated by supply and demand. However, due to the decentralized nature of cryptos, their fluctuations may not be affected by traditional factors such as political events. But the price of cryptocurrencies can be affected by other elements, such as:
- The supply rate
- The value of coins and sentiment towards it
- Media coverage and portrayal
- The extent of integration with e-commerce payment systems
- Major events about regulation, security, or economic.
The spread is the difference between the buy and sell price. Similar to other financial markets, when you open a position on a cryptocurrency market you will get two prices. For long positions, you will trade at the buy price which is a little higher than the market price. And if you want a short position, you will trade at the sell price, which is a little below the market price.
Cryptos are commonly traded in lots. And lots are batches of cryptocurrency tokens. They are mainly used to standardize the size of trades. Because cryptos are very volatile, most lots are small or just one unit.
Leverage is the way to get exposure to large amounts without having to pay the full price upfront. You give a deposit, which is considered to be a margin. And once you close the leveraged position, the performance and result are based on the full value of the trade.
To buy and sell cryptocurrencies you need to go through an exchange platform. There are centralized and decentralized platforms, but the latter are more popular. You can buy and sell cryptos as well as store them in a digital wallet. Exchanges will charge a traders fee, on average it is 0.1% of each executed trade.
Which brings us to the next point, the two types of cryptocurrency trading:
Short term trading
This refers to buying at a low price to hold for a short time before selling at marginal profit. The hold time can vary from just a few minutes to a couple of months.
Long term trading
This strategy refers to buying a crypto asset and holding for a very long time. The duration can vary from many months to years regardless of volatility. The expectation is that the price will significantly increase after years of holding.
Challenges of trading cryptos
While trading digital currencies is on an upward trend, there are still challenges and risks to keep an eye out for. In particular if you are new to the trading world. Therefore be aware of the main issues you may face:
There is no fixed price for any given period. This means that the value of a cryptocurrency today can change tomorrow. Changes can occur very fast or over a long period of time. While historically, it has shown to rarely face drastic drops.
Because banks and governments are not in control of these digital assets, it is considered unregulated. However, many countries are starting to get on board with cryptos and mass adoption is gaining ground.
There is a risk for technical failures and hacks. But many new security protections and development in the blockchain technology aims at minimizing these obstacles. Of course the best way to trade efficiently and to minimize risks is to be well informed.
Why is cryptocurrency a great asset to trade?
Aside from the fact that digital currencies are trending, there are many aspects that make it a great asset to trade. And one of the main ones is precisely something we often consider a risk: fluctuations. You are likely to gain more when you buy at a certain price and the value increases sharply. Also, when an increase occurs steadily in the long run, your early days’ purchase means you’re making a profit. If the income from cryptocurrency trading may not be as spectacular as you had anticipated, the longer you hold your asset, the higher the chances to cash out big. So you can now start trading crypto wisely, being aware of the ups and downs you may face.