There are various ways to profit from crypto, from investing in cryptocurrencies and waiting for them to rise in value to crypto staking, mining and trading.
Although crypto trading requires considerable time and knowledge, it can yield high profits quickly. In this guide, we’ll explore how to trade crypto and check out the key factors you need to consider before you begin, including some key strategies.
Crypto Trading
Crypto trading mainly refers to exchanging digital currencies on cryptocurrency exchange platforms and profiting from price fluctuations.
Apart from using crypto exchanges, traders also engage in direct, peer-to-peer (P2P) trading with other traders or use over-the-counter (OTC) service providers that deal with large-scale investors. However, crypto exchanges are the most popular and convenient places to trade crypto.
The most basic way to profit from crypto trading is to buy a specific cryptocurrency when the price is low and sell it when it gets higher.
You can also exchange different cryptocurrencies to profit from their price differences. However, you need to take blockchain transaction fees and crypto exchange trading fees into account to calculate how much you will profit from a trade.
Crypto trading is fast-paced because of the frequent crypto price swings, so traders must react quickly and seize the moment to profit. Bitcoin (BTC) or any other crypto can rise a few percent in the morning and fall several percent lower in just a few hours.
Since the crypto market is open 24/7, traders can often miss profit-taking opportunities, but that’s why various trading tactics and tools let users automate a portion of their trading activity and take profits even while asleep.
Crypto exchanges offer numerous types of trading orders for setting buying/selling limits and limiting potential losses. Some even offer demo trading accounts for beginners where they can practice trading without investing real money.
Trading Crypto on Cryptocurrency Exchanges
The most practical channel for crypto trading is through a centralized crypto exchange. Centralized exchanges like Binance, Coinbase, KuCoin, and others require users to set up a user account and deposit fiat currency to start trading.
You don’t need to create a user account if you choose to trade on a decentralized exchange (DEX) like UniSwap or PancakeSwap. However, DEX platforms don’t support fiat currencies and are a bit too complex for beginners.
This is mostly because you need to have a crypto wallet app with some digital currency on it to use a DEX. It’s much easier for beginners to use a fiat-friendly trading platform that lets them directly purchase crypto with cash.
Centralized exchanges are like a middleman who guarantees the safety of every trade. They also offer users a wide range of trading tools and possibilities. For example, Binance supports more than 600 cryptocurrencies and has an easy-to-use trading interface with all the necessary tools for implementing all types of trading strategies.
The trading interface has a detailed price chart where you can view the price history and price fluctuations of your selected asset or trading pair. The price chart includes numerous technical analysis tools to monitor price chart segments and price change patterns based on recent trading sentiments.
Additionally, the trading interface includes an order book where you can view all recent buy/sell orders for your selected asset. This can help you specify your trading order price realistically based on available trading data.
Also, you have a trading order menu at your disposal, where you can select different order types. For example, market orders are filled immediately, while limit orders are filled once the price of the underlying asset reaches the specific buy/sell threshold you have chosen.
Most popular crypto exchanges have similar interfaces, but even the most straightforward one can be overwhelming if you’re a beginner. That’s why it’s best to study how the trading interface works and what are the different order types before diving into crypto trading with your money.
Factors to Consider Before Trading Crypto
You need to consider several essential factors before you start trading crypto.
Crypto Volatility
Cryptocurrencies are the most volatile financial instruments in the world, and their prices can dramatically change overnight. Unlike stocks, crypto prices can go wild and jump or fall more than 10% within a single day.
This can be highly frustrating for traders because a specific profit-taking opportunity might only exist for a few minutes or hours before the price goes up or down again. Because of this, crypto trading can take a considerable chunk of your daily time, and many traders limit their trading hours to a specific time of day.
DYOR – Do Your Own Research
One of the critical principles of crypto investment and crypto trading is to always do your own research (DYOR). You should never invest in a particular crypto or conduct a specific trade just because someone told you it’s a good opportunity. It’s necessary to learn about the nature of the crypto market, study each project you want to invest in, and familiarize yourself with various trading strategies.
There’s a lot to learn about the crypto world, including how to conduct technical analysis on price charts and read patterns or which order types are best used in specific situations. Additionally, you should closely follow crypto media to learn about the latest news regarding particular projects, partnerships, and innovations. Big news often boosts the price performance of a cryptocurrency.
Risk Control
If you aren’t careful, you can lose a lot of funds quickly when trading crypto. Beginners often make the mistake of constantly pouring money into their crypto exchange account and making reckless trades that aren’t profitable.
You should put precise boundaries on the amount of money you’re prepared to invest in crypto trading for a period of time. For example, if you set a monthly limit of 1,000 USD and reach your limit mid-month, you should stick to your limit to avoid impulsive spending.
Additionally, you should only invest what you’re prepared to lose because crypto trading is very risky due to the market’s high volatility. Unpredictable things can happen, and the value of your crypto can crash fast. Never spend your savings or money meant for other purposes on crypto.
Crypto Trading Strategies
There are various trading strategies that you should learn about to understand how to trade crypto. Some of these strategies are straightforward and relatively simple once you get some practice, while others require more knowledge and fast trading moves to take advantage of the market.
Day Trading
Day trading is one of the most popular crypto trading strategies, fit for both beginners and professionals. This strategy allows traders to take profits from daily price changes of specific cryptocurrencies. You buy a particular crypto whose price is low and sell it the same day when its price rises.
Day trading doesn’t yield massive gains in price percentage difference, but it’s a simple strategy to profit from single trades. It’s essential to accurately estimate whether a specific crypto will rise or fall in price during the day.
The best way to choose your day trading assets is by analyzing the price charts and finding price patterns that indicate a potential upward price breakout. Another good way to choose a day trading crypto is to monitor the daily crypto news and find out which projects introduced new features or partnerships that day because their price might pump in the next few hours.
Arbitrage Trading
Arbitrage trading is a popular strategy for taking profits based on the price difference of a specific crypto across multiple exchanges.
You need to have user accounts on several exchange platforms and monitor the price of a specific asset on those exchanges. You can exploit the price difference of a cryptocurrency on different platforms and buy it for a lower price on one exchange to sell it for a higher price on another platform.
Scalping
Scalping is much like day trading, except that it requires increased volumes of crypto to make reasonable profits. Traders invest a certain amount of funds in a specific asset and then sell it once its price increases minimally.
When scalping, traders look for price changes that can be even less than one percent. However, if you’re engaging in several scalp trades within a day, the profits can add up on a monthly basis.
Shorting
Short-selling or shorting is a trading strategy where users bet on the price decrease of a specific crypto. Bitcoin (BTC) and Ethereum (ETH) are the most popular assets for shorting.
To get started, you need to find a crypto exchange that supports short-selling. You can borrow assets from the platform with fiat or crypto collateral and bet on the price fall of an underlying asset like BTC and ETH. If the underlying asset’s price falls within a specific time frame, you’ll profit.
This strategy is best used when prices are generally falling in crypto bear markets.
Automated Crypto Bot Trading
Various crypto exchanges offer crypto trading bot services. These bots are computer algorithms programmed to conduct certain trading operations on a single exchange platform or across multiple exchanges at once. Traders can specify what type of trading strategy they want the bot to implement and how much funds the bot has access to.
Using a crypto bot won’t make you vast amounts of money, and it isn’t a good idea to put a lot of funds at an algorithm’s disposal. However, high-quality bots can earn traders decent profits if they are programmed right.
Dollar-Cost Averaging
Dollar-cost averaging isn’t really a trading strategy, but it’s very useful for growing your crypto portfolio, which you can use to conduct trades. When dollar-cost averaging, traders invest the same amount of fiat currency in crypto on a weekly or monthly basis to combat crypto volatility.
For example, traders who invest 100 USD in Bitcoin every week, both when Bitcoin is up or down, will ultimately avoid losses because the price gains and losses eventually even out. This is better than investing a huge amount of cash in a particular crypto at once because you’ll suffer huge losses if the price of that crypto crashes in the following period.
Crypto Futures
Entering crypto futures trading contracts is potentially very profitable, but it’s also one of the riskiest trading strategies.
Crypto exchanges that support futures trading allow users to bet on the price change direction of a specific cryptocurrency. Users can do so with assets they borrow from the platform to enter leveraged trading positions.
Some platforms even offer up to 100x leveraged futures contracts. If your estimate is correct, you can earn 100 times more profits, but if you’re wrong, your losses are multiplied by 100x. Futures trading isn’t advised for beginners.
Conclusion
Crypto trading can be very profitable if you understand how the market works and use technical analysis tools to find profitable trading opportunities.
However, it’s also risky because cryptocurrencies are volatile and unpredictable. You can never know whether a cryptocurrency’s price change will play out according to your estimate. That’s why you should be very careful no matter your type of trading strategy.