Skip to content How to trade cryptocurrencies?
That’s usually the first question in the risky, yet exciting, journey of becoming a cryptocurrency trader.
If you are comfortable with taking risks, are a fast learner, and can quickly adapt to a changing market, then you might have what it takes to be successful as a cryptocurrency trader.
Throughout this guide, I will show you the different ways of trading cryptocurrency, some actionable strategies, the risks of trading digital currency, and more.
The goal is to get you to start trading as soon as possible. Let’s get started!
What is Cryptocurrency Trading?
On a top-level, trading cryptocurrency is very similar to trading forex.
Both markets run around the clock, have elaborate derivatives built on top of them (like futures or options), and enable traders to speculate on different currency pairs (e.g EUR/USD in forex and ETH/BTC in crypto).
That said, while forex purely consists of trading fiat currency pairs between each other, in cryptocurrency markets, there are two pair categories:
- Fiat to crypto trading: Where cryptocurrencies are traded against traditional fiat currencies. e.g. BTC/USD
- Crypto to crypto trading: Where cryptocurrencies are traded against other cryptocurrencies and traditional fiat currencies are NOT involved. e.g. ETH/BTC
Generally, if you are just getting started and are looking to make your first cryptocurrency trade, you should stick to fiat to crypto trading. Fiat to crypto trading is mostly done on regulated coin exchanges and is simpler to grasp at first.
Finally, it’s important to note that there are many different ways to trade the above-mentioned cryptocurrency pairs. At the time of writing, there are cryptocurrencies spot markets, futures markets, and options markets.
Next, we’ll outline why trading cryptocurrencies is attractive, followed by the different ways to trade a market like Bitcoin.
Why trade cryptocurrency
Being based on a potentially disruptive technology, cryptocurrencies have been pegged as a potentially lucrative financial instrument, and many early investors have already seen extraordinary returns on their investment.
However, besides being potentially revolutionary, there are several other reasons to trade the cryptocurrency markets.
Cryptocurrencies are volatile
Depending on your perspective, one benefit of cryptocurrencies is their volatility. It’s not uncommon to see the volatility of assets like Ethereum, in the double digit % range.
This makes cryptocurrencies an excellent choice for scalpers, looking to take advantage of transient price movements, by buying and selling volatile cryptocurrencies.
Compared to other volatile asset classes such as pink sheet stocks, major cryptocurrencies tend to help excellent liquidity, allowing traders to quickly exit their positions should the markets turn sour.
Besides cryptocurrencies, where else can you potentially score upwards of 10% profit per day on your trades?
“Dumb” money still dominates
Because the cryptocurrency markets are still relatively new, there is still an abundance of “dumb money” in the system, which means much of the market movements seen are driven by emotion, and hasty decisions based on recent news and rumors.
This makes cryptocurrency trading much more appealing to the casual trader since there is still little “smart money” consisting of algorithmic trade bots, machine learning algorithms, and sophisticated hedge funds.
Beyond this, the cryptocurrency market is not yet dominated by hedge funds and career traders, meaning anybody entering the market with a well-thought-out strategy will already be leaps and bounds more successful than the casual trader.
Solid cryptocurrency exchange infrastructure
The entire cryptocurrency market is just over a decade old, but things have moved at blazing speed. Now, the infrastructure around cryptocurrency trading is already complete enough for most people’s needs.
Today, investors can simply trade cryptocurrencies using standard limit and market orders, or they can go one step further, and trade crypto derivatives such as futures, options, and swaps.
All-in-all, the crypto markets are easily diverse enough to allow traders to see a healthy return on their investment, allowing traders to both long or short, with or without leveraged exposure if they choose to do so.
In addition to this, several Bitcoin exchange-traded funds (ETFs) are currently being reviewed by the U.S. securities and exchange commission (SEC), which could enable institutions to easily get involved in crypto trading without actually holding crypto.
If, or when this happens, it is widely expected that a large influx of new money will occur, potentially leading to another crypto boom.
Ways to Trade Crypto
1. Cryptocurrency Spot Trading
Cryptocurrency spot trading consists of opening a trade in the actual underlying cryptocurrency and not a derivative built on top of it. In spot trading, traders generally do not use leverage, which makes it the ideal starting point for newcomers to crypto.
When using a spot exchange, you will also have the ability to withdraw the crypto assets that you are trading. This makes spot trading the preferred option for high-time frame traders and long-term investors.
That said, when comparing spot exchanges to derivatives exchanges, it’s important to note that fees in spot exchanges are generally higher and there is less liquidity.
The best crypto spot exchanges are:
- eToro
- Coinbase
- Binance
2. Cryptocurrency Futures Trading
Cryptocurrency futures are a derivatives product that enables traders to bet on cryptocurrency prices with high leverage (up to 100x) on both the long and short side. Crypto futures stand out for being extremely liquid and having very low fees, comparatively to the rest of the market.
In the cryptocurrency market, there are two main types of futures: regular futures and perpetual futures. Regular futures have a set expiry date, at which the contract is settled. Perpetual futures do NOT have an expiry date, as their name indicates.
Interestingly, the concept of a perpetual future only exists in the cryptocurrency market, and it also accounts for the vast majority of crypto futures trading volumes.
Some of the most popular crypto futures exchanges are:
3. Cryptocurrency Options Trading
Cryptocurrency options are also a type of derivatives contract. Options enable its owner to purchase or sell a cryptocurrency for a specific price, at a specific date. This level is referred to as the “strike price”, and the date is referred to as the “expiry date”.
Options are highly sophisticated bitcoin trading instruments that enable traders to limit their downside while leaving the upside open-ended. This derivatives product is an excellent tool to hedge a portfolio, but its inherent complexity does not make it a good fit for traders that are just getting started.
The most popular crypto options exchanges are:
How to read a cryptocurrency chart
Not all technical analysis (TA) concepts that work in traditional markets also work in cryptocurrency trading markets. A crucial aspect when learning how to trade cryptos is to understand which tools work, and which don’t.
This section covers some TA principles that also work in crypto. The aim is to give you a handful of tools that help you to get started.
However, to truly become a consistently profitable bitcoin and crypto trader, you’ll have to enhance these strategies with your custom twist.
Ichimoku Clouds
The first cryptocurrency trading strategy we’ll look into is the “Ichimoku Cloud System”.
The Ichimoku indicator aims to help traders find trends in the market price of an asset which can then be exploited through swing trading.
Professional traders can develop very advanced trading systems based on Ichimoku.
However, if you only know the basics you’ll already be better off than most other cryptocurrency investors.
The key concept that you need to understand is that if the coin is trading above the cloud and the current cloud is green, then the asset is in a bull trend. If, on the other hand, the price is below the cloud and the current cloud is red, then the asset is in a bear trend.
You can learn more about the Ichimoku indicator here.
Moving Averages
Just like Ichimoku clouds, moving averages are also used for identifying trends. They act by smoothing the price over your time period of choice, which makes it simple to detect market trends.
To leverage the true power of moving averages, traders combine at least 2 moving averages to get buy or sell signals. The most popular combination is combining the 200 Day Moving Average and the 50 Day Moving Average.
When the 50 Day Moving Average moves above the 200 Day Moving Average, this is a very bullish signal that is referred to as the “Golden Cross”. Major investors often use this as a buy signal.
On the other hand, if the 50 Day Moving Average breaks below the 200 Day Moving Average, that is a sell signal referred to as the “Death Cross”.
Knowing these two signals alone, you will already be miles ahead of most regular investors.
When opening a trade with this strategy, you would simply buy crypto assets that print a golden cross, and short assets that print a death cross.
Candlestick patterns
Many traders chose to use “japanese candlesticks” for keeping track of the price of an asset instead of just a regular line.
The reason being that some of the patterns that these candlesticks form can be used to predict future price development with reasonable probability.
Let’s now analyze some of the most powerful candlestick patterns and what they mean for cryptocurrency traders.
Engulfing candles
Engulfing candles occur when a candle “engulfs” the high or low of the previous candle. They usually signal the start of a strong trend in the direction of the engulfing candle.
Below is an example of a bearish and a bullish engulfing candle.
If the candle engulfs more than just the previous candle (for example the last 2 or even 3 candles), then the trend shift is expected to be stronger.
Hammer candles
Hammer and inverted hammer candles signal strong rejection of the market price from a key level. They are characterized by a long wick, and a small body.
If a regular hammer candle occurs, that means that the price was rejected from the bottom and that a rally is likely to follow.
On the other hand, in an inverse hammer candle, the price was rejected from the top and a price drop is likely.
As a general rule of thumb, the larger the wick in the hammer or inverted hammer candle, the stronger the trend shift will be.
Morning / Evening stars
The final candlestick pattern that we cover is morning stars and evening stars. Both are characterized by being a very small candlestick, looking like a “+”, that signals the end of a trend with high accuracy.
Morning stars signal the end of a bear trend, and evening stars signal the end of a bull trend.
For more accuracy, it helps to wait for confirmation from another indicator like Ichimoku or Moving Averages to be sure that the trend is actually shifting and that it’s not a false signal.
Trend Lines
“The trend is your friend” is decade-old trading wisdom, and drawing trend lines is just another tool that can be used to identify strong trends and trade on them.
To draw a trend line, simply draw a line beneath or above the price that the price has tested on more than 2 occasions and has so far respected.
Once the line is drawn, you can clearly see if the market is trending up or down and trade accordingly.
If a trend line is broken with volume, that may be the first sign of a major trend shift.
Relative Strength Index
The Relative Strength Index (RSI) is a technical indicator that helps to identify momentum shifts in price. It works by quantifying the speed and change of market movements.
The RSI oscillates between zero and 100.
Traders consider the RSI to be overbought when it is above 70 and oversold when it is below 30. Hence, when it is above 70 a trader would start looking for shorts while if it is below 30 the trader would start looking for longs.
Although the RSI is rarely used as the only indicator in a bitcoin trading strategy, it can regardless give solid long and short signals if the trader looks at “RSI Divergences”.
An RSI Divergence happens when the RSI moves in the opposite direction of the price.
There are bullish divergences, and bearish divergences.
That said, again, RSI divergences should not be used as a standalone indicator for buy and sell signals and should ideally be used in combination with a trend following system like Ichimoku.
Risks of trading cryptocurrency (and how to mitigate them)
Coin going to zero
The risk of a particular cryptocurrency dropping to zero is very real. This has happened time and time again, and will certainly happen again in the future.
Some examples of cryptocurrency coins that lost their entire value include Bitconnect coin, SALT, and Medicalchain.
There are two main reasons why the value of a coin could drop to zero:
- Poor technology or zero adoption: Just like when trading traditional markets, a company or asset can become worthless. Fortunately, this usually doesn’t happen overnight and gives you time to exit if you are day trading cryptocurrency.
- Exit scam by the creator: Since cryptocurrencies are often created by anonymous individuals, the risk of the founder doing an exit scam is very real. This is especially dangerous since coin creators usually hold a big portion of the supply, which they can sell at market and drop the coin’s value to zero.
To mitigate the above risks, it is crucial to not put all the coins in one basket.
While it’s true that cryptocurrency prices are highly correlated with each other, it is still important to diversify one’s cryptocurrency bets to reduce the risk of a particular asset becoming worthless.
Cryptocurrencies should also always be part of a broader portfolio, that may include equities, metals, or bonds.
Getting hacked
Cryptocurrencies are a playground for hackers.
Not only is it a highly technical space, where few people understand how the tools they’re using actually work, but the pseudonymous nature of crypto transactions also makes it easier to get away with theft.
Crypto traders can get hacked in a LOT of ways, but the most common ones are exchange account hacks.
To reduce the risk of getting your cryptocurrency exchange account hacked, and your funds stolen, ALWAYS activate two-factor authentication on the account. Please also make sure to use a unique and secure password.
Exchange exit scam
Unfortunately, even the trading venue itself that you are using, could turn against you. For example, exchanges like MapleChange and COSS have both suddenly exit scammed, leaving their users penniless.
To reduce the risk of falling for a crypto exchange exit scam, always only stick to a reputable exchange and do NOT use an exchange to store your money.
Conclusion: Is crypto trading still profitable and how do I start trading cryptocurrency?
Cryptocurrencies are still a very new asset class, that is mostly unregulated in many jurisdictions around the world. While this means that trading cryptocurrency is still VERY profitable, it is also extremely risky.
Aside from sharp adverse market moves, digital currency traders also need to worry about exchange hacks, potential bitcoin network attacks, exit scams, and more.
So, if you are purely learning how to trade cryptocurrency to make money and don’t care about the value of the technology, that is totally fine. But you need to be aware of the risks.
To start conducting your first cryptocurrency trades, the next step is to create an account at one of the largest bitcoin exchanges. For that, you can check our guide comparing the best cryptocurrency exchanges for beginners.
I hope you found this bitcoin trading how to guide valuable.
Safe cryptocurrency trading, and make sure to ask any questions you may have in the comment section below.
Needing information about the whole trading and how to be successful in trading? Could you please assist me and guide or email me some material that way I may be knowledgeable, and educated in CryptoCurrency and Bitcoin trading.
My goal is to be successful, educated in this trading.
Thank you,
Magedeline
Hey Magedeline.
I strongly encourage you to join my free email list if you want some more in-depth crypto trading insights.
You can find a form to subscribe to my list below every single article on the blog.
Cheers.
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Hey, we run our backtests on ProRealTime. However, none of our strategies are publicly available just yet.
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