How does Cryptocurrency trading work?

Cryptocurrency trading is now a profession in itself. There are 19-year-old crypto millionaires around the world that believe Cryptocurrency will change the world. If you wish to get started with cryptocurrency trading and make money, read the article below.

Cryptocurrencies are complex in nature because they are new. If you understand the concept behind it – it really is just a secure form of currency. 

Like any other currency, Crypto is based on the idea of mutual trust. The reason I take a ₹500 bill from you is that somebody else will take it from me. 

However, unlike any other currency, Crypto is deregulated i.e. it has no central backing. For example, The Indian Rupee has the backing(guarantee) of the Government of India. 

The government stops backing the currency, we stop accepting them – just like the old ₹500 and ₹1000 notes. 

And the biggest difference is that any exchange of crypto is noted in an open ledger. It uses a technology called Blockchain.

[It should be noted that all cryptocurrencies do not have a limited supply]

Contents

Cryptocurrencies and Trading

Trading is buying and selling of goods and services in exchange for remuneration.

So, trading stocks is quick buying and selling stocks to make money and cryptocurrency trading is buying and selling cryptocurrencies to make money. 

That is it. 

Both involve speculation, both involve quick thinking and both are extremely risky – more so when it comes to cryptocurrency. 

The following infographic really sums everything up if you know about stock trading. 

Infographic on CFD Trading and Exchange Based Trading

If you are unaware of these – the article explains each in detail. 

  1. CFD Trading 

Extremely risky – very complex – portfolio changing profits and losses

CFD trading involves using Leverage by putting up Margin. 

In CFD trading, much like IntraDay stock trading – you do not take ownership of the Crypto/Stock – you borrow it. This is Leverage. 

You take leverage by offering a small amount called Margin. 

A leveraged position can change your portfolio for better or for worse. 

In the Indian stock market, the stock takes T+24hours to be a part of your Demat account but if you believe (via analysis or some other reason) that the price will rise or fall – you can put a call or put option as per your choice and borrow the stocks from the broker. 

Hypothetically speaking, let’s say that you trade on a margin of 33%(Which many Banks did around 2007) – a downward movement in asset price by just 3% would wipe out your portfolio entirely. 

Considering how volatile the crypto market is – the reward on a risk-adjusted basis is not worth it. A favourable tweet by Elon Musk about an AltCoin(Alternative coin) can make your portfolio taste sand. 

For Beginners, CFD trading on Crypto is a No! 

  1. Exchange-Based Trading

As explained above, in the Indian stock market, you place an order for a share and it gets transferred to your Demat account i.e. you take ownership of the share. Now, you become a part-owner of the company. 

When you Buy crypto via an exchange – it becomes a part of your wallet and you become the owner of the crypto – in whatever quantity. 

If you must start cryptocurrency trading – as a beginner, trade via an exchange. 

You have to pay a full amount and the gains will not be as good as on margin, but on a risk-adjusted basis, you’re better off. 

How to trade cryptocurrency and make profits

If anyone knew the exact answer to that – they’d be the richest person on the planet. 

Nobody on the planet can assure guaranteed profits, especially on Crypto. 

The problem with Crypto – 

No matter what Crypto fans say, it is not free from interference.

If China decides on a crackdown(like it recently did) – BTC goes down drastically(like it recently did). 

If Elon Musk decides to tweet against BTC – it is bound to go down. 

It does not mean, however, that you stop trading in Cryptos. 

There are certain strategies that you can follow to minimize losses. 

Steps to Start Trading/Investing in Crypto

Step 1: Filter out currencies

There are problems with currencies. BTC for example- requires a lot of computing power which damages the environment and also, takes a lot of time to process. ETH seems to be a better option. 

Form a process and keep eliminating currencies that have adverse problems attached – this will not take long. 

Step 2: Understand the remaining completely. 

ETH is a superior currency to most because of how efficient it is – both in terms of transfer speed and mining. 

Understand the intricacies of the best cryptocurrencies. 

Note: do ensure the crypto has a limited supply. 

Step 3: Use technical analysis

Use this with caution. 

Recently, Micheal Burry posted a picture of Bitcoin showing a Head-and-Shoulders pattern and the coin did infact follow that. It can be pure coincidence or it might actually work. 

However, even if you leave out Step 3 – you can still make profits because eventually – only cryptos surviving will be the efficient ones. 

Should you trade Crypto?

Crypto trading is similar to stock trading – just more volatile and is open 24/7. 

If you believe cryptocurrencies are the future and wish to be a part of it – you can follow the first two steps mentioned above.

However, if you are unsure of the future but wish to make a quick buck at the moment – you can use the third step to bring some clarity into your trading. (using momentum might also be a very good idea)

Unless you are an experienced trader – do not use a CFD on Cryptocurrencies.

Finally, there are certain apps like Binance and CoinDCX that can help you get started on your crypto trading journey. 

Binance is a very popular app that offers an in-app lite version that is friendly for beginners.

CoinDCX is an extremely user-friendly app that includes all major currencies that a lot of people use – it also charges a low commission. 

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