Cryptocurrency trading – how does it work?

Want to trade cryptocurrencies? It’s not as easy as it might seem. Although the market for digital assets is less predictable than other financial markets, it is governed by certain laws that are worth understanding in order to make a substantial profit from selling.


Cryptocurrency trading requires knowledge

Trading cryptocurrencies can be a lucrative activity – provided that you invest consciously and wisely. Investments made “blindly” are associated with a high risk of quick loss of capital. In order to be able to afford high risk, you need to have enough funds on your account and be mentally prepared for possible failure. Besides, you should know a little about cryptocurrencies and basic exchange mechanisms. If you don’t know how to read a bitcoin chart or don’t understand how CFDs work – don’t invest. First, gain relevant knowledge by using various educational materials (we encourage you to read the articles available on our website). You do not, of course, need to know everything about the blockchain technology to invest – you won’t need such knowledge.

However, if you are interested in trading cryptocurrencies, you should learn the elementary principles of this type of payment system. The most well-known cryptocurrency in the world is Bitcoin (BTC), but you should also learn about other cryptocurrencies such as Ripple (XRP), Ethereum (ETH) or Litecoin (LTC). Any experienced investor keeps track of the value of the cryptocurrency in which they have placed their money, and only on the basis of prior observations do they make choices. What is cryptocurrency trading and what to watch out for when making transactions?

Cryptocurrency trading as a source of income

Since Bitcoin’s launch, cryptocurrency trading has grown in popularity and finally became a widespread phenomenon. Nowadays, no one is surprised by investments in this market anymore, although the turnover of securities is much higher. Perhaps this is due to the fact that despite their growing popularity, cryptocurrencies still remain on the margins of the global financial market. It is possible that in the future they will completely replace traditional money. This is a very likely scenario, given the benefits that virtual cryptocurrency systems have to offer. However, for now – cryptocurrencies for many individuals are rather an object of investment than a means of payment. Some lucky traders have even made several million USD. Media reports about such Spectacular investments spread quickly and encourage new users to purchase cryptocurrencies.

Advantages of digital currencies

Cryptocurrencies were created in response to the new realities in which money began to function with the development of the global World Wide Web. The online environment allows for the creation of a new means of payment, which is governed by different laws as compared to traditional currencies. First of all, no authority exercises financial supervision over it. Every user has access to a record of all transactions and payments that have been made within the system. The cryptocurrency network is decentralized: central banks have no business here. The issuance of successive “coins” is, in a way, a natural result of the work of the so-called “excavators“, i.e. specialized machines engaged in solving Complex cryptographic tasks.

The register of all transactions carried out is publicly available and not subject to change. We should remind you that in the traditional financial system it is the banks that have full control over such records. Authorized persons can interfere with records in the database at any time. In this respect, cryptocurrencies provide greater security.

When it comes to the advantages of using BTC and other cryptocurrencies, it is impossible not to mention the Lightning-fast payment process. While traditional interbank transfers can take up to several days, depending on outgoing and incoming sessions, transferring digital currencies happens in an instant. You simply need to know the public address of the receiver’s wallet in order to transfer funds.

How to profit from cryptocurrency trading?

Currently, there are many self-proclaimed specialists on the market, offering investment advisory services. Not all of them lack competence, of course, but there is no denying that the cryptocurrency market is very unstable – compared to the stability of other financial markets. In fact, it is impossible to predict with one hundred percent certainty that the value of a given currency will Rise or fall within a certain period of time. These scammers take advantage of the gullibility of Novice investors, show off their knowledge and share their predictions based on various data for a fee. These predictions often turn out to be wrong, but the money paid is no longer refundable. So be careful when using such services.

Technical and fundamental analysis

Every investment should be subject to deeper thought beforehand. The cryptocurrency you want to invest in will not keep the same price over a long period of time. Digital assets make up perhaps the most uncertain market in the world. The value of cryptocurrencies can Rise or fall from one day to the next – you never know by how much. The history of Bitcoin, the world’s most popular cryptocurrency, shows that the exchange rate can change significantly even within a few hours. That is why an initial analysis of current trends is so important.

We can distinguish Two types of analysis in the world of financial markets: technical and fundamental. The former is based on the interpretation of current trends and stock charts. Of course, the ability to read them is a crucial skill, without which we cannot achieve much. Candlestick charts in particular should be considered, as they contain more information.

Technical analysis is usually performed for short-term investments. But beware of its deceptiveness – it may not always work. Sometimes the analyses may contradict each other depending on the point of view and criteria used. Fundamental analysis allows to evaluate a given investment in the context of not just economic processes, but also the condition of companies operating in the market. It requires more effort, but generally delivers better results. It is used in the case of long-term investments, where particular caution should be taken.

How to trade wisely? Profits from transactions

Cryptocurrency trading is always subject to uncertainty. The risk of losing money quickly due to leverage is quite high. In fact, you never quite know whether the investment will work out or not. You can trade for many years – experience is not an issue. A significant proportion of retail investor accounts record losses as a result of CFD trading (as much as 76.4%). A high risk of losing money also accompanies investments in new, unproven projects. Investing in well-known digital currencies such as Bitcoin, Ethereum, Ripple or Litecoin, for example, gives you more freedom. Each new cryptocurrency based on blockchain technology is one big mystery.

Cryptocurrency trading: what are CFDs?

CFDs for cryptocurrencies, or contracts for difference, are derivative instruments that use the phenomenon of financial leverage. The seller (the issuer of the contract) undertakes to pay the investor an amount equal to the difference between the current value of the digital currency and the value that the currency will have on the day the contract is set (in the case of a negative value, the buyer pays the seller). CFDs are Complex instruments and involve the risk of losing money quickly. They do not make you the owner of the asset that is the subject of the contract (you do not legally own it). So before you start thinking about CFDs, ask yourself if you understand what CFDs are and if you can afford the risk.

Long-term or short-term investments?

According to experts, long-term investments are safer. In their case, it is easier to make an accurate forecast of exchange rate fluctuations. As we have already mentioned, the prices of cryptocurrencies are relatively often subject to rapid changes in a short period of time. Moreover, some investors conclude transactions under the influence of emotions, without any plan, putting their capital at risk. In cryptocurrency trading, such “spontaneous” action often ends in financial failure. In particular, Novice investors sin by overconfidence – instead of starting with investing small amounts, they throw themselves in at the deep end and invest, for example, half of their capital in a project that has just entered the market and it is unknown whether it will develop. Meanwhile it is better to avoid short-term investments that absorb more than 5-10% of the capital at hand.

A plan is the key

Whether you decide to invest long-term or short-term, you should always have a clear plan. It is very important to set a specific goal. If the goal is achieved, it is not worth risking losing your funds. Many investors get emotional and abandon their prior plan to make risky choices after the original goal has been accomplished. This is not the best strategy and it is certainly better to start with lower risk trades.

Stay focused

To increase your chances of success, you need to stay up to date with what is happening in the market. It is recommended to regularly visit News websites dedicated to cryptocurrencies, as well as follow blogs of famous investors. Analysing the moves of a professional trader is a good lesson for anyone who wants to start investing. It is also worth using educational and helpful materials, which can easily be found online. Some “mentors” run a registered business, which consists in organizing workshops on investing in the stock market – you can take advantage of such an offer, although the Internet is full of free tutorials and guides.

Where can you buy Bitcoin?

The easiest way is to exchange money at a currency exchange: you don’t need to create an account to make a payment, and the conversion is instant. There are many trustworthy companies doing this kind of business. In addition to Bitcoin, you can buy currencies such as Ethereum, Ripple, Litecoin, as well as many others.

An alternative is a cryptocurrency exchange. Some exchange websites do not require you to register, but there are some on which you have to. For some sites, the verification process can take up to several days. Every professional exchange has special security measures to protect personal information and user keys. However, all experts agree that it is better not to keep your funds on an exchange account (due to the risk of possible theft). It is recommended to deposit funds onto the account just before conducting a transaction. See also the guide on how to buy bitcoins in the dedicated article.

SUMMARY

Cryptocurrency trading can be a means of making quite a bit of money. Alternative payment systems based on blockchain technology are gaining popularity, which directly contributes to their development and creation of further improvements. Despite the undeniable risks associated with using cryptocurrencies, Bitcoin and other networks (Ethereum, Ripple, Litecoin) have numerous benefits to offer. The more people become familiar with their potential, the more valuable digital currencies will become, and investments will, predictably, become more profitable. The activity of exchange websites and services will also develop – even now the great interest in cryptocurrencies means that identity verification when opening an account sometimes takes several days.

Either way, whatever the future holds for Bitcoin and other cryptocurrencies, for the time being they represent a potential source of income. Bitcoin is not only a world-renowned means of payment, but also an excellent investment. The same is true for other cryptocurrencies.