Crypto trading is speculation on the price changes of digital currencies. This type of trading includes the exchange of one cryptocurrency for another, for example, BTC to ETH exchange, buying and selling coins, as well as exchanging fiat money for cryptocurrency.
Crypto trading is usually based on buying and selling assets rather than owning any of the actual coins. The goal is to exchange one cryptocurrency for another with the hope of selling the asset at a better price.
How trading is different from investing
There is a difference between trading cryptocurrencies and investing them. It is rather conditional and consists in the time period during which a market participant holds a position on the stock exchange.
There are different approaches to determining the time limits, after which transactions are transferred to the investment category. In general, transactions that last more than a year are considered investment, and transactions of a shorter period are considered trading.
Trading, in turn, is also divided into categories depending on the duration of transactions:
- Intraday trading – trades remain open for less than 24 hours.
- Day trading – trades can remain open for up to two weeks.
- Medium-term trading – transactions can remain open for up to several months.
The currency exchange or stock market works in much the same way, although this concept acquires some specific features when applied to the crypto market.
Types of crypto trading
Cryptocurrency trading can be divided into several categories depending on the instruments used. The most widely represented on cryptocurrency exchanges are:
- Spot market.
- Derivatives markets.
- Markets that support margin trading.
The spot market is the most common type of cryptocurrency trading. It is available on all cryptocurrency exchanges and is carried out through the trading terminal. In this market, the cryptocurrency instantly passes from the hands of the seller to the hands of the buyer, and the exchange acts as an intermediary that regulates the transfer of the asset at a specified price (purchase or sale price).
The derivatives markets are divided into several types. The most common of these include futures, options, and swaps. Futures are derivatives that are an agreement between a seller and a buyer to buy an underlying asset at a specified price in the future. Upon the expiration of the contract (expiration), the buyer undertakes to pay the seller a fixed amount.
Cryptocurrency futures are contracts for the future supply of cryptocurrencies. When trading crypto futures, a trader bets on the rise or fall in the price of the underlying asset without receiving the asset itself after the futures expiration date. Cryptocurrency futures have a formal expiration date of 1 trading day, but immediately after it ends, they are extended to the next day, that is, they can be considered infinite.
Options are contracts that give the buyer the right to buy or sell the underlying asset at a specified price in the future. Unlike a futures holder, an option holder is not obligated to buy or sell an asset after it expires. In the cryptocurrency option market, a trader bets on the change in the price of an asset without owning it.
By buying a call option if he expects an increase, or a put option if he expects a decrease, a trader can sell the option and make a profit if the price reaches the required level. When buying an option, the buyer is charged a premium – this is the price of the right to sell or buy the option.
Мargin trade market
Many exchanges provide the opportunity to margin trade Bitcoin and other cryptocurrencies in the spot and futures markets. Trading platforms that support margin trading allow traders to use leveraged funds to increase their investment opportunities and potential profits. However, when trading on margin, not only the potential profit increases, but also the risk. Therefore, beginners should not start their acquaintance with crypto trading with margin trading.
Other investment strategies
In addition to classic speculation, investors can use other strategies, such as investing in new projects at the initial stages of development. Methods such as Initial Coin Offering (ICO) and Initial Exchange Offering (IEO) may be suitable for this.
ICO is a method of attracting investment in a project, which is the sale of a certain amount of cryptocurrency to the first investors, which may grow in the future. This method is not regulated by strict rules, which can lead to the risk of cheating. Recently, it has become more common to invest in projects at the initial stages through IEO, where the exchange acts as a guarantor of the reliability of the project and participation in it is safer for investors, although this does not guarantee the success of the project.