How to trade crypto

Fundamental Analysis within traditional finance looks at the opportunity to profit by investing in a company - through both public or private equity - by referring to metrics that describe its financial health and forecast future earnings potential.

Unfortunately, cryptocurrencies don’t function like traditional companies, with few generating recognisable revenue streams. They also don't (in general) raise capital by selling shares, but instead issue their own tokens; the value of those tokens fluctuates in relation to the future potential for revenue generation, as well as perceptions of the intrinsic value of underlying blockchains, networks of participants and users or underlying assets.

So any decision around long term investing in cryptocurrency projects, must use a framework that can assess the value of those things, which is what Fundamental Analysis boils down to: the What, Why, How and Who questions.

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There is no one source for the price of bitcoin. If you Google, ‘what is the price of bitcoin’ it will return a number which either comes directly from an exchange, e.g Coinbase, or is aggregated and adjusted across a number of exchanges - which is what Coinmarketcap does.

An exchange brings together buyers and sellers to establish the best price at any point in time where both sides are willing to exchange. More buyers means greater demand so price goes up, excess sellers pushes the price down.

There are hundreds of exchanges, and each independently enables this ‘price discovery’. Where the conditions within which each exchange functions are the same, the prices across them stays roughly in parity, otherwise there is an opportunity to profit from discrepancy (aka Arbitrage). Where conditions are different, a regional premium on bitcoin can emerge.

This has been seen in places like Turkey, Nigeria, Argentina or Venezuela where the local currency is weak, controls restrict access to alternatives, and hyperinflation creates increased demand.

Read a more detailed explanation of where crypto prices come from in our Knowledge Base:

Cryptocurrency trading is the buying and selling of cryptocurrencies using online services called exchanges. 

The word exchange describes exactly what happens. You can, for example, exchange a certain amount of Euros for an equivalent amount of a cryptocurrency such as Bitcoin. The exchange rate between Euros and Bitcoin is known as a trading pair. You can also exchange one crypto for another.

That exchange rate, often just referred to as the price, is simply the point at which those who want to sell and those who want to buy overlap. If demand to buy is greater than willingness to sell, price goes up; if the reverse is true price goes down. Cryptocurrency exchanges just facilitate the exchange process for a small fee.

Successful cryptocurrency trading requires that you are able to sell a cryptocurrency for more than you bought it, making a profitable trade. And repeating that process. If you think that sounds simple, it isn’t.

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Cryptocurrency trading has become very popular because cryptocurrencies have very high volatility - prices change by a significant amount, both up and down, frequently - and some have provided significant longterm returns.

This volatility is what traders seek, as it provides frequent opportunity to profit from buying as price falls and selling as it rises, and profiting from the difference.

Cryptocurrencies are volatile because they are immature assets and their value is largely based on perception, rather than measurable revenues. That perception is constantly changing in response to news, opinion and broader economic factors like inflation or significant events such as Covid19.

Trading may sound simple - buy low, sell high - but in general the vast majority of novice traders lose money. Successful trading requires a huge amount of commitment; if you aren’t prepared for that, investing (aka hodling) is a far better approach.

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Cryptocurrencies are extremely volatile. This means that prices can fluctuate by very significant amounts over short periods of time, putting you at risk of losing some, or all, of any money you invest. Certain trading approaches, such as leverage, amplify those risks and should only be considered by experienced traders.

Trading is a complex skill that requires a significant amount of practice and studying. You put any invested funds at risk by not doing enough research to understand what it is that you are doing. 

There is also what is known as counter party risk, which is the risk of reliance on other parties, such as exchanges through which you trade; many of which have been hacked and had funds stolen.

Some exchanges have folded altogether, leaving customers out of pocket, while trading within DEFI puts you at even greater risk as this simply relies on smart contracts that may not be properly audited or include deliberate exploits.

Read a more detailed explanation of the risks of crypto trading our Knowledge Base:

Cryptocurrency trading and investing both involve the same actions - buying and selling. What differentiates them is the period of time between those actions, how often they happen and the expected profit.

In general Trading relates to frequent buying/selling within relatively short periods of time looking to capture a few percent profit, though there are different types of trading approaches which involve greater/less frequency.

Investing, by contrast, looks to profit by holding a cryptocurrency for an extended period of time with the expectation that its price will increase as adoption grows and it fulfils its potential.

in general trading involves Technical Analysis of price and volume, while investing looks at longer term trends and influences through what is known as Fundamental Analysis.

Read a more detailed explanation of the difference between trading and investing in our Knowledge Base:

Technical Analysis is an approach to predicting future price movement of cryptocurrency purely by analysing historical price data  and how it manifests in technical charts.

The two most fundamental aspects of technical analysis are interpreting price movement and volume of trading.

By analysing patterns in price movement and comparing them against known technical indicators you can make assumptions about future price. The most basic technical indicator is a candlestick chart.

Trading volume literally refers to the amount of cryptocurrency traded in dollar/euro terms. Volume is a crucial dimension to analysis of price movement and has a big impact on the efficiency of any given market.

The number of indicators that can be employed through Technical Analysis is huge. As a trader you have to decide what tools are the most useful and accurate in helping you predict price movement. There is no set approach or combination, though there are some very common indicators as a beginner you should learn.

Read a more detailed explanation of Technical Analysis in our Knowledge Base:

In order to trade crypto you should do plenty of research to understand what it is involved. Assuming you have done that you'll then need: 

Any form of trading is exceptionally challenging; you cannot be ruled by emotion. Have a clear plan guided by reasonable expectation and a follow it.

If you are just starting out this will be a centralised exchange (CEX), but a lot will be dictated by where you are in the world:

Read a more detailed explanation of what you need to start trading crypto in our Knowledge Base:

A cryptocurrency exchange is an online service that facilitates the buying and selling of cryptocurrencies. They are available on desktop, mobile, apps and API.

If you have never bought cryptocurrency before you'll need to create a verified account, then deposit your local currency via card or bank transfer - Euros, Dollars etc - and then exchange it for any number of the available cryptocurrencies listed on the exchange in what are known as pairs - EUR/BTC, USD/BTC.

The exchange rate for EUR/BTC isn’t determined by the exchange but by the relative demand between those customers who want to buy and those who want to sell. You can either purchase at the best available price on the spot, or choose to request a specific price and wait to see if it is matched with a buyer/seller.

Exchanges also enable you to exchange between cryptocurrencies, for example buying Ethereum with Bitcoin (BTC/ETH pair).

The cryptocurrency you purchase is stored in a wallet within your exchange account from where you can withdraw it to any other crypto wallet.

Read a more detailed explanation of what a crypto exchange is in our Knowledge Base:

Cryptocurrency trading charts give detailed historical price information updating in real-time. Basic chart features are offered by cryptocurrency exchanges for free, but to access advanced features you'll to pay a subscription fee.

In their basic form crypto trading charts are standard line graphs plotting price (y axis) as it changes against time (x axis) but they also offer a huge range of additional annotations which traders use to try and find patterns in historical price movement, to then predict where price will move in the future.

In this way trading charts are a fundamental tool of technical analysis. Some of the common chart annotations include:

Experienced traders will discern patterns from charts, and use chart drawing tools to apply their own custom annotations with the aim of predicting price movement.

Read a more detailed explanation of crypto trading charts our Knowledge Base:

Where an individual or organisation wants to buy or sell a large amount of bitcoin, they may not want to go through an exchange because there are unlikely to be enough buyers or sellers at the price they want to execute at. 

And given exchanges expose trading intent, the simple act of placing an order on an exchange can move the price. OTC is essentially offline wholesale purchasing of crypto by negotiation, rather than through an exchange.

This type of transaction is described as OTC - Over the Counter - happening outside of the regular exchange market mechanism. Trades are negotiated through a broker, and involve very large sums.

A Trading Journal is both an objective record of your trading decisions (numbers & dates) as well as a subjective record of why you made specific trades, including how they panned out. 

If you are serious about cryptocurrency trading you must be willing to keep a Trading Journal that is entirely honest. It is too easy to simply screen out the failures and just hang on to successes; that is a guaranteed way to get what is known in crypto as rekt;. In other words, ruined.

Keeping a Trading Journal requires a systematic approach to each trade that you make, split between Objective and Subjective categories. The objective elements are suited to spreadsheet data entry, while the Subjective elements can be in the form of written annotations or notes.

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You can approach trading in whichever way you feel will work best but there are some common styles:

News/Information Based Crypto Trading

Though the market capitalisation of all cryptocurrencies has exceeded $2trillion, the industry is still very immature. Much of that $2trillion is perceived future value rather than projects or businesses generating revenue today. Perceptions shift on news, so on that basis some traders focus solely on trading news and rumours. You’ll often hear the quote ‘Buy the rumour, sell the news’. 

Momentum/Position Trading

This approach is suitable for someone who is just getting started, and maybe lacking in technical understanding and time commitment.

Momentum Trading is essentially a more sophisticated version of hodling. A hodler will buy and hold - that is it. Momentum or Position Trading will be looking for entry points based on significant points of momentum change in the market. This might mean identifying the start/end of specific cycles. 

The most obvious are bull/bear cycle or halving periods, but can include calendar based cycles - such as the significance of March and the end of the financial year translating into price declines, as contrasted by the gains that tend to happen in April. This image from Coin Telegraph tells that story. or anything from political cycles (due to elections), weather and its impact on hydro-electric mining.

Day/Swing Trading

Within traditional stock markets Day Trading relates to trading within the specific hours that markets open and close. Of course crypto markets never close, they trade 24/7/365, so the concept of Day Trading really means someone who is actively trading the markets on a day-to-day basis, opening short term positions, based on Technical Analysis of price movement. The aim is to capitalise on small swings in price that don’t reflect fundamental changes in the underlying market, rather movement within trends.

Read a more detailed explanation of crypto trading strategies in our Knowledge Base: