Trading of Cryptocurrencies, Part-II

A beginner's guide to buy and sell digital currencies

Basics of cryptocurrency trading

Bitcoin’s value is determined second-by-second and day-by-day by a market that never sleeps. As an autonomous digital asset whose value is determined by an open market, Bitcoin presents unique challenges around volatility that most currencies do not face. 

Thus, it is important for newcomers to have some literacy of how crypto-asset markets work so that they can safely navigate the markets, even intermittently, and get the most value out of their participation in the crypto trading economy.

Bitcoin trading can range in scale and complexity from a simple transaction, such as cashing out to a fiat currency like the U.S. dollar, to using a variety of trading pairs to profitably ride the market in order to grow one’s investment portfolio. Of course, as a crypto trade increases in size and complexity, so does a trader’s risk exposure.

First, let’s go over some basic concepts.

Structure of a crypto trade

A cryptocurrency trade consists of a buyer and a seller. Since there are two opposing sides to a trade — a purchase and a sale — someone is bound to gain more than the other. Hence, trading is inherently a zero-sum game: There is a winner and there is a loser. Having a basic understanding of how the cryptocurrency markets operate can help minimize potential loss and optimize for potential gain.

When a price is agreed upon between a buyer and seller, the trade is executed (via an exchange) and the market valuation for the asset is set. For the most part, buyers tend to set orders at a lower price than sellers. This creates the two sides of an order book.

When there are more buy orders for crypto than sell orders, the price usually goes up, as there’s more demand for the asset. Conversely, when more people are selling than buying, the price goes down. In many exchange interfaces, buys and sales are represented in different colours. This is to give the trader a quick indication of the state of the market at a given moment.

 

You may have heard the common adage in trading: “Buy low, sell high.” This saying can be difficult to navigate in that high and low prices can be relative, although the adage does give a basic representation of the incentives of buyers and sellers in a marketplace.

Simply put, if you want to purchase something, you want to spend the least amount possible. If you want to sell something, you want to make as much out of the deal as possible. While this is generally good wisdom to follow, there is also the added dimension of longing an asset vs. shorting an asset. 

To go long on an asset (longing) means buying an asset and earning profit based on its upward price movement. In contrast, going short on an asset (shorting) essentially means selling an asset with the intention of buying it back when its price falls below the point at which you sold it, profiting from a price drop. Shorting, however, is slightly more complicated than this brief description and involves selling borrowed assets that are paid back later.

Reading the markets

To the layperson, “the market” may seem like some complex system that only a specialist could ever hope to understand, but the truth is, it all comes down to people buying and selling. How to trade crypto might seem like an esoteric concept at first. Once you begin to understand it, however, the idea becomes a lot simpler.

The totality of active buy and sell orders is a snapshot of a market at any given moment. Reading the market is the ongoing process of spotting patterns, or trends, over time, which the trader can choose to act upon. Overall, there are two market trends: bullish and bearish.

A “bullish” market, or bull market, occurs when the price action appears to steadily increase. These upward price movements are also known as “pumps,” as the influx of buyers increases the prices. A “bearish” market, or bear market, occurs when the price action appears to steadily decrease. 

These downward price movements are also known as “dumps,” as the mass sell-offs result in the price going lower.

Bullish and bearish trends can also exist within other larger opposing trends, depending on the time horizon at which you look. For example, a small bearish trend may occur within a broader long-term bullish trend. In general, an uptrend results in price action making higher highs and higher lows. A downtrend makes lower highs and lower lows.

Another market state called “consolidation” occurs when the price trades sideways or within a range. Typically, consolidation phases are easier to spot on higher time frames (daily charts or weekly charts) and they occur when an asset is cooling off after a sharp upward or downward trend. Consolidation also takes place ahead of trend reversals, or in times when demand is muted                     

and trading volumes are low. Prices essentially trade within a range during this market state.

If you want to learn more about Cryptocurrency Trading, feel free to leave your valuable comments. We are happy to assist you. All the best for your future.

(All the material in this article are only the views of the author, and couldn’t be taken as “Financial Advice”)

To Be Continued..............