How to Trade on Cryptocurrency
Trading in cryptocurrency world is extremely intimidating, especially when you’re dealing with a subject matter that is naturally complex. Not only do you have to deal with the complexities of understanding the tech behind cryptocurrencies, but you’d also have to deal with the difficulty in knowing the intricacies of trading cryptocurrencies. Like it or not, anyone who wants to enter the Crypto world must have a basic understanding of how to trade. Why? Because if you want to own cryptocurrencies, you must know how to buy or sell them in an exchange, what factors to look out for and how to manage your coins, amongst other things.
Before going into the specifics, it’s important to understand the general overview of the Cryptocurrency trading process:
The first stage entails buying the base currency of the Cryptocurrency world, in the form of Bitcoin using your domestic currency.
There are more than 1,200 cryptocurrencies in existence, in which all of these coins can only be bought using Bitcoin and they cannot be bought using your domestic currency. That is why Bitcoin is considered the gateway to the crypto world and thus, a base currency for cryptos. This stage converts your fiat currency (paper currency) into the crypto base currency.
Some domestic exchanges allow you to buy Ethereum and Litecoin using your domestic currency. Therefore, ETH and LTC would also be considered as base currencies alongside Bitcoin. In fact, ETH and LTC are even more preferred as confirmation times are much faster and they are much cheaper to transfer.
Stage 1 requires you to open a local crypto exchange that accepts your domestic currency (e.g. USD, CAD, GBP, EUR). More often than not, local cryptocurrency exchanges do not offer a wide variety of coins to trade, and that’s the main reason for buying the base currencies.
If your only objective is to buy and hold a base currency of BTC, ETH of LTC, then Stage 1 is sufficient. If you want to buy any other coins besides those 3, then you would proceed to Stage 2. It should be noted that in both Stages, you shouldn’t store your coins in an exchange but instead in a private wallet that you control, so as to secure your coins safely.
Assuming that you’re planning to buy other altcoins besides BTC, ETH or LTC, you must enter into Stage 2. This rate requires you to open a cryptocurrency exchange that only accepts Cryptocurrency deposits. Unlike the crypto exchange in Stage 1, the crypto exchange in Stage 2 DOES NOT accept fiat money or your domestic currency. You can only use the base currency that you’ve bought in Stage 1 – BTC, ETH or LTC to buy any other altcoins. Here’s the list of differences between a fiat-accepting exchange (Stage 1) and a Crypto-accepting exchange (Stage 2).
Understanding Cryptocurrency Trading Pairs
After understanding the cryptocurrency trading process, it’s time to dive deeper into the mechanics of the cryptocurrency trading pairs and how it works.
In the first stage, the base currency of BTC, ETH, or LTC that you buy will be quoted in your domestic currency. This is straightforward as you will be aware of the value of coins you’re buying with your domestic currency. For instance, if the current price of Bitcoin is USD $20,000 and you’re planning to buy USD $1,000 worth of Bitcoin, you’d get 0.05 BTC for your USD $1,000. If the price of a Bitcoin goes up 50% to USD $30,000 each, then your BTC has also increased by 50%, thereby valuing your 0.05 BTC at a great USD $1,500. You would get a profit of USD $500 if you sold all your BTC and cashed-out your investment.
This is the more complicated step; understanding the trading pair ratio when buying altcoins using BTC (or ETH/LTC) as your base currency. Since you cannot buy altcoins directly from Stage 1 exchanges, the price of the altcoins is not quoted in your domestic currency. Here’s an example:
In this example, we’ll look at the ticker Monero (XMR) / Bitcoin (BTC) or simply XMRBTC. In other words, I’m using BTC to buy XMR. The price of a Monero is quoted in BTC rather than USD. It’s current price of 0.025 simply means that with it costs you 0.025 BTC to buy 1 XMR. This “price” is just a ratio between the value of BTC against the value of XMR (the USD value of BTC was $14,800 while XMR was $370, which gives a ratio of 0.025).
What Makes Cryptos Ideal for Trading
Cryptocurrencies allow traders to diversify their investment portfolio, as their price is mainly determined by demand and supply; Their value has a low correlation to national economies or political scenarios. Once Bitcoin surpassed the price of gold in 2017, US markets introduced 2 ETFs on Bitcoin and drew more and more institutional money into the world of cryptocurrencies. In 2017, Indian PM Narendra Modi has announced the gradual replacement of paper currency with electronic currency; In March 2018, the Marshall Islands announced that they would be introducing a cryptocurrency to replace US dollars as their main currency; other central banks are investigating the adoption of blockchain-like technologies… in short cryptocurrencies are probably here to stay. A growing number of crypto investors all over the world have already discovered the benefits:
- Cryptocurrency trading allows traders to diversify their investment portfolio, as cryptocurrency price is mainly determined by market sentiment, demand and supply.
- Benefit from a wide range of today’s top traded cryptocurrencies
- e-coins offer a new form of high-volatility investment
- Cryptos are traded 24/7, even during the weekend