Since Bitcoin’s inception in 2008, the market of cryptocurrencies has evolved significantly. There are more than 5500 cryptocurrencies and tokens available in the market today. Moreover, in recent years, cryptocurrency trading and investments have attained mainstream adoption. An increasing number of investors, both institutional and retail, are keen on trading and including crypto-assets in their investment portfolio. 

However, trading in cryptocurrency works on different functionality than forex or stock markets. A beginner starting to trade in this space may find it challenging as the mechanism to store and trade digital currencies is pretty new. In this guide, we decode the different ways on how to trade cryptocurrencies, trading with cryptocurrency exchanges and brokerage firms, as well as risks and tips in trading digital currency. 

What is Cryptocurrency Trading?

cryptocurrency trading

Cryptocurrency trading enables users to trade digital currencies with fiat currencies or with each other. Traders speculate the price movements of a crypto-asset and accordingly make a profit or loss from a trade. Unlike any other markets, trading in crypto markets works round-the-clock, 365 days a year. More information about cryptocurrency technologies you can find on popular crypto related website, also you might be interested in DeFi technology, it’s the ecosystem comprised of decentralized financial applications developed on top of blockchain networks.

Cryptocurrency traders either invest in long-term trends or short-term day trading. With the long term, traders usually buy and hold a crypto-asset for investment purposes. In day trading, traders indulge in buying and selling of a crypto-asset within a shorter time duration. In this scenario, traders leverage volatility in cryptocurrency price movements.   

Let’s understand the two popular ways of how to trade cryptocurrencies. 

Trading via Cryptocurrency Exchange

Trading on a cryptocurrency exchange requires you to open an account and buy or sell cryptocurrency tokens directly from the exchange platform. Furthermore, you can store crypto tokens on the exchange platform (if available) or directly store them on crypto wallets. Trading via an exchange allows you to hold the asset and further trade or exchange it.

Exchanges charge a transaction fee for each time that you make a trade on their platform. Depending upon the exchange platform that you choose, there may be limits imposed on deposits, withdrawals, and value of trade. Prominent cryptocurrency exchanges also enable advanced security protocols to secure their client’s crypto funds.

Cryptocurrency Brokerage Trading

With the rising popularity of trading in cryptocurrency markets, traditional instruments have started paving their way. A common tool in forex markets, CFD trading instruments are now offered in cryptocurrency trading as well. In this method, traders do not directly buy or sell a crypto token. Instead, contracts are handed out by cryptocurrency brokerage firms that follow the price movements of a defined crypto-asset. 

With this instrument, a trader can bet ‘long’ or ‘short’ positions. With a long position, a trader bets that the price of a particular crypto asset will move up, while in a short position, a trader bets that the price of a crypto-asset will move down. With CFDs, a trader can make profits if the market movement directions are in their favor. 

Since a cryptocurrency is not held directly, these brokerage firms also offer the option of trading with leverage. A trader can place a huge bet even with minimal deposits through leveraged trading. However, please note that leveraged trading comes with its own set of risks. Moreover, cryptocurrency markets are highly volatile, and even a small difference can result in potentially huge losses. 

Cryptocurrency Trading Risks and Tips

Cryptocurrency Trading

Since the cryptocurrency industry is still nascent, trading in cryptocurrencies comes with its own set of risks. Additionally, cryptocurrency markets are highly volatile. In other words, there are rapid price movements in crypto-assets. 

Another challenging factor in cryptocurrency trading is regulation. Although governments across the world have started defining legal compliance of crypto trading, it yet falls into grey area in many countries. A trader should conduct due diligence and take into consideration all the risk factors before diving into crypto trading. 

Listed below are some of the tips that a trader should consider before trading in cryptocurrencies. 

  • Research – Do your research and conduct thorough due diligence on how trading in crypto markets work.
  • Build a trading plan – As markets are highly volatile, it is better to prepare a trading plan defining parameters including your goals, assets, limits, and other risk management tools. 
  • Diversify – Build a diversified cryptocurrency portfolio. This minimizes risks of your losses while trading in crypto markets. 
  • Start small – Practice with minimal amounts and build your cryptocurrency portfolio gradually. Do not overindulge while accessing leveraged trading as it carries high risks of losses. 
  • Invest what you can afford to lose – Trading cryptocurrency comes with its own set of risks. Always invest what you can afford to lose. 

Final Thoughts

In recent years, cryptocurrency trading and investments have drawn attention from retail as well as institutional traders. Moreover, it is a new asset class that holds a multitude of possibilities and potential for profits. The markets have moved beyond speculation and are now gaining mainstream adoption. Even crypto and blockchain projects carry strong fundamentals and applications that have the potential to transform industries. 

The present scenario strongly suggests that digital currencies are drawing attention as investment vehicles. While trading in crypto markets carry huge potential, always tread safely, and conduct your research.