Cryptocurrencies have attracted millions of individual and institutional traders and investors, even presidents, but their many terminologies, projects, and rapid fluctuations seem complicated for beginners. The cryptocurrency trading method for beginners ensures starting with a small amount to gain experience and learn how the cryptocurrency market works.
What is cryptocurrency trading?
Trading in cryptocurrencies is the process of buying and selling cryptocurrencies like Bitcoin and altcoins like Ethereum and Solana throughout the week to benefit from price movements and achieve profits. Trading in cryptocurrencies differs from investing; while trading aims to benefit from short-term price movements, investing aims to hold cryptocurrencies for a longer time to achieve higher returns.
The cryptocurrency market is a decentralized market, meaning it is not subject to a central authority or government institution; transactions are verified and recorded on the blockchain. The Genesis Block was the first block in the blockchain, created by Satoshi Nakamoto.
General and fundamental concepts of the cryptocurrency market
A cryptocurrency trader needs to be familiar with many trading terms related to digital transactions, in addition to terms related to executing trades, which are common with trading in other markets.
• Cryptocurrencies: are digital currencies that use encryption to secure their transactions. The first cryptocurrency created was Bitcoin.
• Altcoins: These are any digital currencies other than Bitcoin, such as Ethereum and Solana.
• Blockchain: This is a method of storing information in a decentralized manner, typically operated by a community of miners or validators.
• Tokens: These are digital representations of assets built on existing blockchains, such as stablecoins (USDT, USDC) and governance tokens.
• Cold wallet: This is a type of cryptocurrency wallet that remains offline and is one of the safest ways to store digital assets.
• Price spread: Also known as the spread, it is the difference between the buying and selling price of a cryptocurrency. A narrow spread indicates that the asset is liquid.
• Lot: Refers to the size or quantity of the cryptocurrency being traded.
• Leverage: Traders use leverage to open a position larger than their initial investment, allowing them to achieve greater profits if prices move in their desired direction, but it also amplifies losses if prices move against them.
• Margin: This is the amount required by the trader to open a position using leverage.
• Point: A point represents the smallest price movement of a cryptocurrency. A point may equal one dollar or less depending on the cryptocurrency.
How to trade cryptocurrencies for beginners
There are two main ways to trade cryptocurrencies: direct trading, meaning buying and owning cryptocurrencies directly and selling them, and through contracts for difference (CFDs), meaning speculating on the price of cryptocurrencies without owning them.
Trading contracts for difference (CFDs) for cryptocurrencies
Contracts for difference are derivative products that allow speculation on the movements of cryptocurrencies and other assets up and down without the need to own them and use leverage to control a larger position.
Direct trading of cryptocurrencies (buy/sell)
Direct trading means buying cryptocurrencies and owning them through reliable trading platforms and wallets like Trust Wallet. They can be stored in cold wallets, which are offline wallets, or hot wallets, which are online wallets like apps.
The most important trading strategies in cryptocurrencies
In addition to understanding how the cryptocurrency market works, the trader needs to understand how to trade cryptocurrencies and choose appropriate strategies. Cryptocurrencies can be traded using several strategies, and the choice of the most suitable one depends on several factors including the trader's experience, the time spent trading, and their financial goals:
• Day trading: This involves opening and closing positions within the same day, aiming to profit from short-term price movements. Since the cryptocurrency market never sleeps, being open around the clock, traders can seize opportunities and execute trades throughout the week, but they must be cautious of overtrading. Day traders rely on technical analysis and news analysis to track cryptocurrency movements and make decisions.
• Arbitrage strategy: The arbitrage strategy involves taking advantage of price differences of the same cryptocurrency. For example, a trader can buy Bitcoin from one platform and sell it on another at a higher price to make a small profit.
• Speculation: This involves making quick trades ranging from a few seconds to a few minutes to benefit from small price movements. Traders often use highly liquid cryptocurrencies with low fees.
• Buy and hold (HODL): This is the easiest way for beginners to trade cryptocurrencies, meaning buying the cryptocurrency and holding it for a long time, such as several years, aiming to profit as the price of the cryptocurrency grows over the long term.
• Futures trading: These are contracts to buy or sell a cryptocurrency at a predetermined price in the future. Futures trading requires the buyer to buy Bitcoin, for example, and the seller to sell it at the agreed price, regardless of the market price of Bitcoin at the expiration date of the contract.
• Trading options on cryptocurrencies: This is a type of financial derivative that gives the holder the right, but not the obligation, to buy or sell the digital asset at a previously specified price before the contract's expiration date.
What are the main factors influencing cryptocurrency prices?
Cryptocurrencies, like other assets, are affected by supply and demand, along with other factors such as political and economic factors, as well as other factors related to the cryptocurrency market. Influencing factors in cryptocurrency prices include:
• Supply: This includes the current circulating supply, total supply, and maximum supply. Some platforms actively burn their tokens (Token Burning) to reduce supply.
• Market capitalization: The market capitalization of the cryptocurrency market is $4.5 trillion, with Bitcoin controlling 56.49% of this market cap. If Bitcoin's market share decreases, this is positive for altcoins.
• Key events: important news such as the approval of Bitcoin exchange-traded funds (ETFs) and the rise in Bitcoin prices in the following weeks. Security breaches, economic recessions, and other factors also affect cryptocurrency prices.
• Integration of cryptocurrencies with financial markets: Investment products such as exchange-traded funds (ETFs), futures, and others provide a greater opportunity for investors and institutions to invest in cryptocurrencies, increasing demand for them.
Pros and cons of cryptocurrency trading for beginners
Cryptocurrency prices are highly volatile, meaning traders must exercise caution in their trades. Therefore, it is important to master risk management and analyze gains and risks when investing in cryptocurrencies.
Some advantages of investing in cryptocurrencies:
• Potential for significant profits: Due to the rapid movement of cryptocurrencies, especially Bitcoin, many investors have managed to achieve substantial wealth.
• Diversifying the investment portfolio: Diversifying the investment portfolio across different assets and sectors helps mitigate the impact of poor performance on the entire portfolio. Cryptocurrencies offer a lot of diversity as they cover many sectors.
• Cryptocurrencies operate in an advanced technological sector: The working system of cryptocurrencies is based on blockchain technology, which records transactions securely and transparently. Many cryptocurrency advocates believe this technology will be the future of the financial system.
Some disadvantages of investing in cryptocurrencies:
• High risk of loss: Cryptocurrency prices are influenced by market sentiment, and they are affected by promotion and media hype and discussions. While many traders profit from price fluctuations, others may incur significant losses of all they invested in a particular coin.
• Extremely high price volatility: Cryptocurrency prices are characterized by significant fluctuations, as they are not tied to physical assets, and their prices largely depend on investors' willingness to pay for them.
• Scams: There are several ways to scam in cryptocurrencies, and traders need to be aware of them to protect their funds.
How to teach cryptocurrency trading to beginners?
There are many ways for traders to learn cryptocurrency trading, including:
• Free and paid trading academies: such as the Binance Academy, which offers courses in digital currencies to elevate traders' skills.
• Books: Through books, beginners can learn the basics of trading, risk management, and how to evaluate cryptocurrency projects, among others. Here are 6 books to learn cryptocurrency trading like professionals.
• YouTube: YouTube is full of channels that teach how to trade cryptocurrencies and how to evaluate them and understand how they work.
• Joining communities: such as the communities found on Reddit, Discord, or Telegram.
How to start trading cryptocurrencies?
Here are the basic steps to start trading cryptocurrencies:
• Creating an account: It is essential to choose one of the secure, reliable, and licensed trading platforms regulated by a top-tier authority to open an account. Opening an account requires filling in personal information, creating a password, and passing the Know Your Customer (KYC) verification procedures.
• Funding the account: The account can be funded through several methods, including bank transfers, credit cards, or transfers from a cryptocurrency wallet.
• Choosing the cryptocurrency to trade: Traders select cryptocurrencies to trade based on fundamental analysis and technical analysis. Traders use technical analysis, charts, and indicators to predict the upcoming price movements. In fundamental analysis, traders assess the true value of the cryptocurrency.
• Executing the trade: The trader selects the cryptocurrency, then decides whether to buy at the market price or at a specified price, and must determine the amount before executing the trade.
• Storing cryptocurrencies: Traders can store their cryptocurrencies in crypto wallets if they wish to hold them for a longer period.
The best licensed and reliable cryptocurrency trading platforms
One of the most important steps that beginner traders should take before starting to trade is to choose trading companies licensed by top-tier regulatory authorities such as the British FCA, Australian ASIC, or Cyprus CySEC to ensure the safety of their funds.
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