What is Cryptocurrency Trading?
What have you learned?
- What is cryptocurrency trading
- The nature of risk in cryptocurrency trading
- Difference between trading and acting
- It’s important to keep your feet on the ground
When we asked crypto newbies what they would like to know more about, one of the most popular answers was how to trade cryptocurrencies. This shouldn’t surprise you. Cryptocurrency is an ideal commodity as its price is volatile in the short term. In other words, the price changes rapidly and regularly by significant amounts.
Volatile assets offer many opportunities for traders to make money by profiting from price movements; but cryptocurrency trading is a double-edged sword. More volatility means more risk, and for a novice trader, the risk of losing money far outweighs the chance of making any money.
Cryptocurrency is also a new and relatively undeveloped asset, meaning its true long-term potential is extremely difficult to predict. Early investors have seen astronomical returns and since adoption is still relatively low, cryptocurrencies still have the potential to generate significant returns on their investment.
Its novelty, especially in its challenge to traditional forms of money, means that its purpose and legitimacy in the eyes of governments is unproven, so there is much risk versus opportunity.
Separate trading from investing
Cryptocurrency is therefore a risky, new and volatile asset, but it has significant upside potential in both the short and long term. Your challenge is to understand how to exploit this potential, manage your risks and make money by learning to trade cryptocurrencies.
To keep things simple at this point, let’s assume that making money with cryptocurrency means selling it for more than you bought it (we’ll explain later in this section which is potentially much more complicated), and take Bitcoin as an example to use.
With that in mind and as we look at the two general approaches to profiting from cryptocurrencies, consider these two questions:
- Will the price of bitcoin go up or down in the next 24 hours?
- Will the price of bitcoin go up or down in the next 4 years?
Both questions require you to risk your money by predicting the future price movement of bitcoin, which is uncertain. The crucial difference is the time frame, because it makes you think differently about the uncertainty, the risk of your investment.
The reason for this is that what affects the price of bitcoin in a 24-hour period is different from what affects its trajectory over a four-year period.
- Yes, the 24-hour chart is part of a four-year chart and the daily changes are smoothed out to form long-term patterns, but you can’t make a long-term forecast based on what happened on any given day and vice versa .
- Factors affecting long-term change are different from factors affecting short-term change.
- When we talk about short-term buying and selling, we are talking about trading. Often betting on short-term price movements.
- Conversely, buying and then passively holding for an extended period of time to sell at a profit is considered an investment.
- The Bitcoin world has even coined a term to describe the determination to hold an asset for the long term: Holding.
So, if you are interested in making money with cryptocurrencies, you need to understand the difference and different decision making processes. You don’t have to choose, you can be both a trader and an investor or neither, as long as you appreciate the difference and separate your businesses.
Trading against Holding
While both trading and holding require risk management, it takes place over different time frames – short and long – and the effects on risk – as it manifests as price movement and approaches to managing it – are different for each. The generic term for analyzing short-term asset prices and trading volumes is technical analysis.
Fundamental analysis is a much broader examination of the influences on the future success of the commodity and the measurement of risk across long-term factors. Fundamental and technical analysis may overlap, but they provide a useful framework for differentiating trading from investing. But both approaches are still based on risk measurement.
So the basis of this part of learning to trade cryptocurrency starts with observing the decision making process:
- Technical analysis – understanding the price and its origins; reading price data and price charts; interpret historical trends; know volume and price indicators
- In-Depth Analysis: Understand cryptocurrency adoption/performance/health metrics; price correlation with the broader economy; deployment/pricing models available Risk management – how to measure risk; risk and trade size.
Once we understand the concepts related to decision making, let’s move on to implementation:
- Making Your First Trade – Learn how to trade based on your estimation and the intricacies associated with it.
- Advanced Trading Topics – Once you understand the basics, we can introduce more complex and risky trading tools that can increase your exposure using leverage or speed up the execution process through automation.