Cryptocurrency trading is becoming more and more popular as the digital asset class continues to grow rapidly. Despite ongoing volatility, recent surveys suggest that Bitcoin ownership is on the rise.
For many, purchasing digital assets remains a daunting undertaking. Loads of complex industry lingo and polarizing media coverage might leave some feeling apprehensive. However, with preparation and education, it’s possible for new traders to confidently wade into the world of cryptocurrency trading.
In this article, we’ll explore the importance of due diligence, explain the fundamentals for learning how to trade crypto, and discuss the dominant cryptocurrency trading strategies.
Cryptocurrency Trading and Due Diligence
As with any asset, performing thorough due diligence is crucial before diving in. This is extremely crucial when learning how to buy cryptocurrency. Perhaps most importantly, you should never buy more cryptocurrency than you’re comfortable losing— you’ve probably heard that before. But what exactly constitutes due-diligence in this digital asset class? Let’s explore a few crypto-specific considerations:
- You need to assess several factors when buying a specific coin or token. The stated goals and purpose of a project, as well as its market capitalization, trading volumes, and coin utility are crucial considerations. If a token has very low trading volume and few strong use cases, future growth is questionable.
- The team behind a token is just as important as the digital asset itself. Project teams and their unique skill set should be top of mind.
- You should also consider your own risk tolerance when acquiring digital assets. Even popular, high-volume assets experience wild price changes. With assets of smaller market capitalizations, these fluctuations can be even more pronounced.
Conducting due diligence is absolutely essential before acquiring any digital assets. As the cryptocurrency saying goes: always do your own research (DYOR).
Please understand that this article does not represent financial, legal, or investment advice. This blog post is educational in nature and simply meant to explain the basics cryptocurrency trading.
Getting Started With Cryptocurrency Trading
So, you’ve done your due diligence, but now what? Well, the first step is to understand how turn your fiat currency into digital currency. That is, the process of converting your cold hard cash-- whether it's USD, GBP, AUD, CAD, EUR, or something else-- into to cryptocurrency.
Although there are many ways to do this (we’ll elaborate further below), most traders use a centralized crypto trading platform. In most cases, users will need to create an account and provide personal details to verify their identity, also known as the Know-Your-Customer (KYC) process.
Once set up, funds can be transferred from your bank account to your exchange account. Depending on the exchange chosen, funding an account can be done using a wire transfer, credit card, or even a debit card (in select cases). Once funds are in your exchange account, it’s time to buy some cryptocurrency! But before getting started, there’s a few things you should know.
Similar to commodities denominated in USD on conventional markets, digital asset markets also employ this style of value representation. On most cryptocurrency exchanges, altcoins are denominated in BTC or ETH, the two most popular and widely used currencies. For example:
- Let’s say that the price of KMD is 0.00009000 BTC (sometimes referred to as 9,000 satoshis).
- If the price of KMD goes up to 0.00009900 BTC, this would represent a 10 percent increase in the asset price with respect to Bitcoin. Assuming that the price of Bitcoin remains constant in fiat value, this price jump would also represent a 10 percent increase in the price of KMD with respect to fiat.
Reading Candlestick Charts
Perhaps one of the first skills a cryptocurrency trader should acquire, interpreting candlestick charts is a mainstay in both digital and traditional markets. A candlestick represents the price activity of a specific asset during a set period of time using four main components: the open, close, high, and low.
- The “open” of a candlestick represents the price of an asset when the trading period begins whereas the “close” represents the price when the period has concluded.
- The “high” and the “low” represent the highest and lowest prices set during the same trading session.
Perspective is everything when viewing candlestick charts, and traders should be well-acquainted with adjusting timeframes. For instance, a chart can be set to display a 5 minute, 30 minute, or 4-hour timeframe, usually with the click of a mouse.
Traders should understand what an order book is and how to interpret one. In short, an order book represents a queue of market orders for a specific trading pair, at specific prices. Those wanting to buy a digital asset appear as “Buy Orders” and those wishing to sell are seen as “Sell Orders.” Whenever a buyer and seller align on price, the trade is executed.
But much more can be extracted from order books. Order book depth is an important consideration when conducting any form of asset trading. In this case, it refers to the volume and quantity of orders for a particular asset. The greater the depth of the order book, the harder it is to move or manipulate the price of that specific cryptocurrency.
With a thin order book, there may be substantial gaps in the buy and sell orders, opening up the possibility of large price fluctuations with a single trade. This lack of activity also points to liquidity issues, as those looking to exit their position struggle to find a buyer.
For coins with a small market cap, a trade equating to only a few thousand dollars can push a token’s market price up by several percentage points or more. However, a high-value coin such as BTC would require trading volumes in the hundreds of millions to push the market price up by the same amount.
Cryptocurrency Trading Strategies
In line with conventional market behavior, cryptocurrency traders fluctuate between bearish and bullish market sentiment. But what exactly do these terms mean?
In short, a bearish trader expects a particular asset to decline in value, while a bullish trader banks on price appreciation. As market trends unfold, it's important to adjust strategy to trade cryptocurrency in way to maximize profitability. It’s an ongoing balancing act.
Bearish Traders (Short)
When bears conduct cryptocurrency trading, they often access financial instruments that can generate a profit on the assumption that digital asset prices will fall.
To short an asset, you must first borrow the coins from an exchange or brokerage firm, which requires the use of an approved margin account. Fortunately, many digital asset exchanges support both margin trading and short-selling, streamlining the risk-management process. But how exactly does short-selling work?
Under a short-selling scenario, a trader borrows a specific digital asset at a set market price. Next, they immediately sell it at market value and then repurchase it when the price falls. The originally borrowed assets are returned, and the trader pockets the difference.
Futures are also a well-established financial instrument in conventional markets. In short, futures represent an agreement to buy or sell an asset on a specific date at a predetermined price. Once two parties enter a futures contract, both sides must buy and sell at the agreed-upon price on the time specified, regardless of prevailing market prices when that moment arrives.
Although futures trading can be profitable using a long strategy, many traders use this financial tool as a form of risk management. As part of a portfolio, futures are effective at compensating for price fluctuations, especially when the underlying asset is particularly volatile.
Bullish Traders (Long)
Cryptocurrency traders that have a bullish outlook on the cryptocurrency market, often known as “hodlers,” will often engage in long-term trading strategies. In many cases, this simply means buying a digital asset and waiting for it to appreciate. However, some traders also engage in margin trading to maximize their potential for profits.
While standard trades occur with leverage of 1:1, margin trading gives you the ability to increase this ratio dramatically. In a traditional trading environment, if you have $10,000 worth of capital to use, then you’re allowed to purchase up to $10,000 worth of the assets of your choosing.
However, with margin trading, you can buy more than the amount of capital you hold. This dynamic is possible because you’re making purchases with funds borrowed from an exchange or brokerage, with your personal capital serving as collateral. It’s a loan to increase your purchasing power.
Although trading on margin can be highly profitable, it can also be extremely risky when asset prices fall. As such, only advanced traders should experiment with this strategy!
To learn more, check out Komodo's long-form guide to margin trading.
Dollar-Cost Average (DCA) Strategy
A “Dollar-Cost Averaging” (DCA) strategy is another technique employed by those who believe in the long-term price appreciation of digital assets. In general, this strategy entails purchasing a fixed dollar amount of a specific cryptocurrency regardless of the market price.
That is, purchases are dictated by a calendar rather than a specific prevailing market price. Because timing the market is very difficult, DCA hedges against natural price fluctuation. Let’s break down this concept with an example scenario:
- Imagine you began buying $100 worth of BTC every week starting in December 2017.
- During this time, the price of BTC was in the midst of an incredible bull market that briefly saw the price of Bitcoin jump over $19,000 USD per coin.
- Despite market declines since, you’d still be up by more than 20 percent today.
Technical Analysis and Cryptocurrency Trading
Savvy traders understand the immense value of market data when trading cryptocurrency. Using both fundamental and technical analysis, you can manage their risk by identifying emerging trends and market behavior. Although these indicators, also known as cryptocurrency trading signals, can be intimidating for newbies, a little research goes a long way!
In line with long-term trading strategies like DCA, fundamental analysis studies the fundamental factors influencing digital asset prices. These factors may include the project’s state vision and goals, the quality of the project’s team, the level of the project’s activity on Github, the project’s social media presence and size of its community, and the project’s history of completing its stated goals, among other things. Using this method for short term analysis is especially challenging, given the high volatility in the cryptocurrency markets.
In contrast to the long-term application of fundamental analysis, technical analysis focuses on short-term price movements (in terms of hours or days, not months or years). When conducting technical analysis, price charts often identify trends and patterns that provide traders with immediate market insight. By facilitating these short-term predictions, technical analysis is extremely valuable for day trading crypto and others looking to turn a quick profit. As a result of ongoing cryptocurrency volatility, technical analysis continues to gain momentum.
Moving averages help break down the momentum of a particular digital asset using a visual format. Displayed as a simple line on resulting graphs, these averages provide an idea of where a tokens price was and where it’s likely to go. However, there are a couple of different moving averages that traders have come to rely on.
Simple Moving Average
Although basic, the simple moving average (SMA) is a popular tool for those looking to purchase and trade digital assets. These SMAs can assist traders looking to identify resistance points in the market, also highlighting good buy-in points during pull-backs. This technical analysis tool is a straightforward way to gauge market sentiment.
Moving Average Crossover (MAC)
The moving average crossover (MAC) function adds another layer of complexity to the SMA metric. This technical analysis tool allows traders to identify instances where two or more moving averages cross paths, indicating a shift in the market trend.
Generally, these crossover events coincide with large shifts in asset prices, pushing the lines up or down, causing them to cross. Depending on how short and long term moving averages cross, a bearish or bullish signal is sent to the market.
The Golden Cross
The Golden Cross is defined when the line of a short-term moving average (i.e. 50 Day) crosses over a longer-term line (i.e. 200 Day). This cross indicates that a bullish breakout is imminent.
The Death Cross
The Death Cross is defined when a short-term moving average (i.e. 50 Day) crosses under a long-term moving average (i.e. 200 Day). This cross indicates that a bearish breakout is imminent.
Fibonacci retracement is a technical analysis tool that refers to areas of support or resistance. Appearing as horizontal lines, Fibonacci retracement indicates where potential levels of support and resistance fall.
Each level is associated with a set percentage reflecting how much a prior price movement has retraced. The Fibonacci retracement levels are: 23.6%, 38.2%, 61.8% and 78.6%. And although not an official Fibonacci ratio, 50% is also used. Let’s break this concept down further using a simple example.
Let’s imagine the price of a token rises to $10 and then drops in value by $2.36, settling at a new price of $7.64. The price has retraced 23.6%, which happens to be a Fibonacci number. The indicator has proven useful based on its ability to correlate two price points, such as a high and a low (effectively establishing a level between the two).
Because Fibonacci numbers are sometimes found in nature, their market relevance is thought to be especially relevant— a natural expression of free market movements, so to speak.
Trading Fibonacci Retracement
Trading using the Fibonacci retracement strategy relies on the most prominent Fibonacci retracements (23.6%, 38.2%, and 61.8%). In general, the stronger the initial trend, the milder the retracement typically is. The key concept behind this strategy dictates buying at one of the key Fibonacci support levels in an appreciating market, and selling at key levels in a falling market.
Trading Fibonacci Extensions
In contrast to retracement levels, traders can use Fibonacci extensions to predict future levels of support or resistance once the main support or resistance threshold is broken. These extensions can be traded using two strategies:
- Ride the trend once the major support is broken and place take profit orders just before 127.2% extension
- Use extensions as a potential bounce zone to initiate, in this case, buy orders against this level looking for a bounce. Similar to the previous strategy, this one offered at least two trading opportunities
Choosing the Best Cryptocurrency Trading Platform
Cryptocurrency trading occurs through several different platforms, each offering unique functionality. As such, traders should consider which approach they’re most comfortable with and what best suits their unique circumstances. Below, we’ve broken down the most common platforms on the market today.
Over the Counter (OTC) Trading Desks
Over the counter (OTC) desks facilitate the exchange of tokens directly between two parties - and business is booming. According to Digital Assets Research and TABB Group, the OTC market facilitated anywhere from $250 Million to $30 Billion in volume per day. This range is so dramatic because OTC trades are inherently hard to track.
Because OTC transactions technically occur off the market, trade details remain private, and there is no direct effect on asset spot prices. These factors continue to draw institutional customers and privacy-minded individual to OTC platforms.
Centralized Cryptocurrency Exchanges
The majority of cryptocurrency exchanges today are centralized. This dynamic means that exchange-held funds are the property of the exchange itself, not the users. For some, this arrangement is problematic given the well-documented history of exchange hacks.
However, large centralized exchanges also offer robust volume and ample liquidity, facilitating greater flexibility for traders. To manage the risk of exchange hacks, many users have begun to hold their funds in the best crypto wallets, rather than in a centralized exchange’s wallet. This is typically safer because the user has control of their own Bitcoin private key or private key for other cryptocurrencies.
Decentralized Cryptocurrency Exchanges
Decentralized exchanges are becoming more prominent in the digital asset ecosystem. In contrast to centralized exchanges, these platforms facilitate peer-to-peer transfers, negating the need for an intermediary exchange “broker.” And although similar to one another in principle, these platforms differ greatly in functionality.
In general, decentralized exchanges offer the following benefits:
- Non-Custodial Trading
- Atomic Swaps (Instant Swaps)
- No Withdrawals or Deposits Necessary
In addition to offering these features, the AtomicDEX is also the first atomic swap DEX available on mobile devices. Further, it's the only DEX bridging the gap between Bitcoin-protocol coins and Ethereum-based ERC-20 tokens. This functionality makes AtomicDEX the superior choice among all decentralized exchanges.
The Future of Cryptocurrency Trading
For those beginning their foray into the digital asset class, the journey should always begin with an extensive due diligence process. Using both fundamental and technical analysis can help traders make objective, evidence-based decisions. Employing this approach can help newbies make pragmatic decisions, not emotional ones. Although cryptocurrency trading can be difficult, with practice and education, even newbies can achieve success.