What is cryptocurrency trading?

Media is buzzing with crypto news and there are very few people, if any, who haven’t heard of Bitcoins, meme coins, altcoins, and other related terms. If you are new to this world, keep reading to find out what cryptocurrency trading means and how you can also ride the crypto wave, especially as a new bitcoin halving event is right around the corner.

What is cryptocurrency trading?

Cryptocurrency trading refers to buying and selling digital currencies with the aim of making profits by speculating on their prices. This type of trading involves taking advantage of fluctuations in cryptocurrency prices to buy at a lower price and sell at a higher price, or vice versa.

To engage in cryptocurrency trading, you can use various exchange platforms and brokers. These platforms allow traders to buy, sell, and exchange various cryptocurrencies such as Bitcoin, Ethereum, and Ripple, among others.

Depending on the chosen platform, it is possible to trade both directly with cryptocurrencies (spot trading) and with financial derivatives such as futures, options, or CFDs. It’s worth noting that, in the UK, crypto derivatives are banned for retail traders. Hence, you can only buy and sell the real assets.

However, before diving into this world, you should know that trading with cryptocurrencies involves a high level of risk due to the inherent volatility of these assets. Prices can experience strong fluctuations in short periods of time, which can result in both large profits and large losses.

Therefore, it is essential to have a solid investment strategy, carefully analyse the market, and craft a robust risk management strategy.

Which cryptocurrencies to trade?

Essentially, you can find four types of cryptocurrencies in the entire ecosystem:

Bitcoin

Bitcoin is the largest, most popular, and widely used cryptocurrency for trading. As the first cryptocurrency and the one with the highest market capitalisation, Bitcoin has great liquidity and volatility, making it an attractive option for traders.

When trading with Bitcoin, it is common to use the trading pair BTC/USD, which represents the relationship between the price of Bitcoin and the US dollar. However, it is also possible to trade Bitcoin in other trading pairs, such as BTC/EUR, BTC/ETH, and BTC/XRP, among others, depending on the exchange platform you use.

Altcoins

Altcoins, short for “alternative coins”, are all cryptocurrencies that are not Bitcoin. They emerged after the popularity of Bitcoin and seek to offer alternative, improved, or different solutions than those provided by Bitcoin (for example, less energy-intensive altcoins).

Here are 5 of the most popular altcoins:

• Ethereum (ETH): The second largest cryptocurrency by market capitalisation after Bitcoin. It is mainly known for its smart contract platform and a robust ecosystem of decentralised applications.

• Ripple (XRP): Ripple is a digital payment network and cryptocurrency that is used to facilitate real-time transactions between financial institutions. It has gained popularity due to its partnerships with major banks and companies.

• Litecoin (LTC): Created by Charlie Lee, a former Google employee, Litecoin is considered the “silver” to Bitcoin’s “gold,” and is primarily used for faster and lower-cost transactions.

• Binance Coin (BNB): BNB is the native cryptocurrency of the Binance exchange platform. It is used to pay transaction fees on the exchange and also has utility within the Binance ecosystem.

• Chainlink (LINK): Chainlink is a project that aims to connect smart contracts with real-world data, allowing decentralised applications to securely and reliably access external data sources.

Stablecoins

Stablecoins are cryptocurrencies whose value is linked to stable assets, such as fiat currencies or commodities, with the aim of reducing volatility, that is, to continue investing in the crypto ecosystem but without being exposed to the impressive fluctuations it tends to experience.

These are the most popular ones:

• Tether (USDT): Tether is a stablecoin that is linked (pegged) to the value of the US dollar. It is one of the most widely used stablecoins and is used as a trading base on many cryptocurrency exchanges.

• USD Coin (USDC): USD Coin is another stablecoin that is backed by US dollars. Like Tether, USDC is widely used for trading and is considered a more transparent and regulated option.

• Dai (DAI): Dai is a decentralised stablecoin created on the Ethereum platform. Unlike other stablecoins, Dai is not backed by a fiat currency, but by a variety of digital assets through smart contracts.

Shitcoins or meme coins

“Shitcoins” or “meme coins” are terms used in the world of cryptocurrencies to describe digital coins that do not have a clear purpose or even intrinsic value. These coins are often created as a joke or to take advantage of speculation and hype in the cryptocurrency market.

How do they work?

• Creation: Like other cryptocurrencies, shitcoins or meme coins are created through blockchain processes, usually on other blockchains like Ethereum.
• Promotion: These coins are often heavily promoted on social networks, forums, and other media. Many times, celebrities and influencers can promote them, which can quickly increase their popularity. For example, this happened with Elon Musk and Dogecoin.
• Speculation: Most people who invest in these coins do so with the hope of making quick profits due to price volatility. They are not interested in the long-term value or the utility of the coin.

Examples:

• Dogecoin (DOGE): Also known as the Bitcoin of memes.
• Shiba Inu (SHIB)
• SafeMoon

How does the cryptocurrency market work?

Another point that we must take into account before starting to trade cryptocurrencies is the market cycle.

Bullish cycle

In the cryptocurrency market, like any other market, there are bullish and bearish cycles. During the bullish cycles, the price of cryptocurrencies tends to rise due to an increase in demand and greater interest in the market. According to some reports, the cryptocurrency bull market is driven by a series of factors, including:

• Usability: An increase in the use of cryptocurrencies by companies
• Adoption: The growing adoption of blockchain in different industries.
• Monetary policy: Increased monetary stimulus from central banks, lowering interest rates to stimulate the economy.
• Halving: Since Bitcoin represents 50% of the total crypto market capitalisation, every time there is a new halving, the crypto investment fever tends to return.

However, these cycles are not infallible and are also subject to corrections and price drops. In those moments, demand decreases and prices drop until the market stabilises and another upward movement begins. It is important to note that the cryptocurrency market is extremely volatile.

Crypto winter

Crypto winter is a term used in the crypto community to describe a prolonged period of falling cryptocurrency prices. It is also known as the bear market and is often characterised by a decrease in interest and market activity, as well as a large number of selling orders and an increase in market volatility.

The most well-known crypto winter occurred during 2022 and lasted approximately one year, after the bull market of 2020 – 2021 which led to a historic peak where prices of some cryptocurrencies reached new all-time highs. During this crypto winter, many coins lost more than 80% of their value, and some projects and exchanges declared bankruptcy.

Although crypto winters can be challenging for investors, they can also be an opportunity to buy cryptocurrencies at cheap prices.

Pump & dump schemes

The pump and dump scheme is a fraudulent practice that occurs in financial markets, including the cryptocurrency market. In this type of scheme, a group of people or manipulators try to artificially increase the price of a cryptocurrency by spreading false or misleading information to attract more buyers. Once the price has risen enough, the manipulators sell their coins at an inflated price, making profits while buyers face losses.

The most obvious pump-and-dump schemes are around meme coins and are characterised by a completely vertical price curve, and then rectifying again and losing all its value in a few days.

4 aspects to consider about cryptocurrency trading

Federal Reserve monetary policy

When trading with cryptocurrencies, it is important to consider the monetary policy of central banks, such as the Federal Reserve (FED) in the case of the United States. The FED plays an important role in shaping the monetary landscape and can have an impact on the value and volatility of cryptocurrencies.

Changes in monetary policy established by the FED, such as decisions on interest rates or quantitative easing measures, can influence investor sentiment and market conditions, which in turn can affect cryptocurrency prices. It is important to stay informed about any announcement or action taken by the FED that could affect the cryptocurrency market.

In addition, the FED, like other central banks, participates in debates about the development of central bank digital currencies (CBDC). The introduction of CBDC has implications for the cryptocurrency market as a whole, as it may affect the adoption and use of cryptocurrencies.

Fundamental analysis of cryptocurrencies

Fundamental analysis is a strategy for evaluating the value of a cryptocurrency based on economic, financial, and market factors. When trading with cryptocurrencies, it is important to consider some fundamental aspects to make informed decisions:

• Development team and community: Evaluate the strength of the development team behind the cryptocurrency and their track record of achieving goals.

• Technology and functionality: Examine the underlying technology of the cryptocurrency and its value proposition. Consider aspects such as scalability, security, transaction speed, and the blockchain’s ability to adapt to different use cases.

• Adoption and use: Analyse the level of adoption of the cryptocurrency and its real-world utility. Look for real use cases and partnerships with companies or services that can support the value and demand for the cryptocurrency.

• Competition and market position: Examines the competitiveness of the cryptocurrency within its sector and its market position compared to other similar cryptocurrencies. Considers aspects such as market capitalisation, trading volume, and the cryptocurrency’s ranking on exchange lists.

It is important to note that fundamental analysis of cryptocurrencies can be complex and results are not always predictable. Therefore, it is advisable to complement fundamental analysis with other strategies, such as technical analysis, and take into account the inherent risks of trading cryptocurrencies.

Technical analysis of cryptocurrencies

Technical analysis is based on the use of charts and price patterns to determine the best time to buy or sell a cryptocurrency.

In cryptocurrency trading, technical analysis does not differ much from any other type of technical analysis (on stocks, indices, futures…). The same aspects should be taken into account:

• Identify trends: Use trend indicators to identify upward, downward, or sideways trends.

• Identify support and resistance levels: Points at which the price is expected to bounce up or down.

• Use technical indicators: The most common ones include RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), and moving averages.

• Identify price patterns: Such as triangles, flags, head and shoulders, and double bottom/top formations.

The value of Bitcoin

All cryptocurrencies are more or less linked to Bitcoin, and Bitcoin accounts for around 50% of the total crypto market capitalisation.

In other words, monitoring the performance of bitcoin could help you understand how your own crypto investments are likely to behave.

How to trade cryptocurrencies?

There are three different ways of trading cryptocurrencies:

Buy real cryptocurrency

Buying cryptocurrencies on exchanges or via brokers is a relatively simple process, but it requires you to follow some basic steps to ensure that you are making a secure transaction.

1. Previous research: Do your research to find the right crypto assets to buy according to your investment or trading strategy.
2. Create an account on an exchange: The first step is to register and identify yourself on a reliable cryptocurrency exchange. Some popular exchanges include Binance, Coinbase, Kraken, and Bitstamp. You can check our article on the best crypto brokers in the UK as well.
3. Deposit funds: Once your account is verified, you must deposit funds into your exchange account: bank transfer, credit card, or other options.
4. Select the cryptocurrency: After depositing funds into your account, browse the exchange and select the cryptocurrency you want to buy.
5. Make the purchase: Once you have selected the cryptocurrency, enter the amount you want to buy and confirm the transaction.

If you want to buy cryptocurrency to store it or hold it in the long term, you should withdraw your currency from the exchange and transfer it to a crypto wallet instead for security reasons.

CFDs

Contracts for Difference (CFDs) are financial instruments that allow investors to speculate on the price of an asset, in this case, a cryptocurrency, without actually owning the underlying asset. Through CFDs, you can benefit from both the rise and fall of cryptocurrency prices without physically owning them.

However, as of this writing, CFDs on cryptocurrencies are not allowed in the UK.

Futures

Buying cryptocurrencies through futures contracts involves a more complex process and is mainly aimed at experienced investors, as it involves a high level of risk. Futures contracts are financial derivatives that allow you to speculate on the future price of a cryptocurrency without actually owning it.

Although futures trading can be highly lucrative, it’s worth noting that derivatives, such as futures, on cryptocurrencies are banned in the UK.

How to trade cryptocurrencies? | Practical example with eToro

Finally, let’s see how cryptocurrency trading actually works in practice. With eToro, you can trade real crypto in the UK – in fact, it is one of the few brokers that allow you to do that.

With eToro, you can buy and sell over 70 real cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH), and many others.

Remember that, with this broker, you will pay a 1% commission on each transaction.

Step 1: Choose what cryptocurrencies you want to trade

Make sure you do your research and decide which cryptocurrencies you want to trade. The eToro platform is a good source of information as it is one of the best copytrading brokers.

Step 2: Look for the chosen crypto

Once on the eToro platform, it’s time to search for the cryptocurrency to invest in. The eToro platform is very user-friendly – you can browse the crypto category or you can write the name of the crypto in the search bar at the top.

Step 3: Place the order

Next, once you select the crypto, click on the green button on the right side to open a position. Fill in the order details – such as how much you want to buy and the order type (i.e., stop-loss or take profit). Then, click to send the order and check your “Portfolio” section, where the position will now appear as open.

Step 4: Sell the cryptocurrency

Finally, once the crypto reaches your target price, close your position to book profit. From your “Portfolio” section, click on the order, then “close” to sell it at market price. You can sell the entire amount or only a part of it.

Have a look at our eToro review to find out more about this broker.

Cryptocurrency trading | summary

The crypto world is constantly evolving, and with the approach of a new Bitcoin halving, we are likely to see a resurgence in interest in cryptocurrencies. Cryptocurrency trading is based on speculating on prices, and taking advantage of fluctuations to make profits.

However, it is quite a risky endeavour due to volatility. Bitcoin remains the leading cryptocurrency, but there are other options such as altcoins and stablecoins. The former seek to offer alternatives to Bitcoin, while the latter attempt to reduce volatility by being linked to stable assets.

Nonetheless, it is essential to be well-informed and have a solid strategy before venturing into crypto trading. Exchange platforms, like eToro, offer tools to buy and sell cryptocurrencies, but it is crucial to understand the market and its cycles, as well as the associated risks, such as “pump and dump” schemes.

In summary, crypto trading can be lucrative, but it is essential to approach it with caution and do you due diligence.

Pros and cons of cryptocurrency trading

Engaging in cryptocurrency trading has its pros and cons. These are the pros of cryptocurrency trading:

✅ High volatility that comes with high profit opportunities

✅ Global access and flexibility: Cryptocurrency trading is available 24/7, allowing for trading at different times and taking advantage of opportunities at any moment.

✅ Portfolio diversification: Cryptocurrencies can be a way to diversify a traditional investment portfolio.

And, regarding the cons:

❌ Risk of losses: While volatility can be an advantage, it can also be a disadvantage. The volatile nature of the cryptocurrency market implies a high risk of considerable losses.

❌ Lack of regulation: The cryptocurrency market is less regulated, which can increase the risk of fraud, market manipulation, and fund security.

❌ Knowledge and lack of experience: Cryptocurrencies can be extremely risky for novices, it is important to have a robust trading strategy, exit strategy, and risk management strategy and test them thoroughly before risking real cash.

Other trading guides

Here are some more trading guides:

👉 Options trading: Immerse yourself in the world of trading with options, where every decision can unlock unexpected opportunities. Discover how these instruments can enhance your portfolio.

👉 Futures trading: With futures trading, you can anticipate market trends and secure your investments. Do you want to know how big investors take advantage of these derivatives? Dive into this guide!

👉 CFD trading: Learn how to trade the most popular derivatives on the market. CFDs allow you to trade easily and quickly without owning real assets.

👉 Trading guide: If you are new to the trading world, this guide is a must! Learn how to craft your own strategy for trading and how to ensure your success.

In short, if you decide to enter the world of cryptocurrency trading, you must educate yourself and choose exchanges or brokers that provide the highest level of security.

FAQs about cryptocurrency trading