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What is Crypto Trading & How Does it Work?

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The popularity of crypto trading has gained quite some momentum. It all started with the introduction of bitcoin in 2009. And very soon, we have around 10,000 cryptocurrencies available as of 2022. In this blog, we’ll explore what is crypto trading, and the ins and outs of crypto trading, including its various methods and types. So, buckle up as we dive into the fascinating world of digital currencies!

What is Crypto Trading?

Before going any further, let's understand the meaning of crypto trading. What is crypto trading? Well, to put it most simply, crypto trading is the trade or sale and purchase of crypto assets. However, crypto trading happens digitally in a decentralised manner using blockchain technology. 

Investors prefer crypto trading because of several reasons. First, the crypto assets are not tangible. Second, the transactions are borderless. Further, the market allows you to carry the trade 24*7, any time you want, with utmost transparency and super fast internet speed. 

Ways of Crypto Trading

Now that you know the crypto trading meaning and its few benefits, let's move ahead and see the popular ways of crypto trading. 

  • Crypto Trading Via CFD

    One of the prominent ways of crypto trading is via Contracts for Difference or CFD. This is more like option trading, where traders use derivatives. This derivative is used to predict market movements. Here, you don't need to own the assets. Your position in the market is affected by your prediction. For example, if you predict a crypto value to appreciate, you can buy or take a long position and vice versa. You may leverage your position in the market using small deposits called margins. 

  • Crypto Trading Via Sale & Purchase

    This form of crypto trading requires owning the assets or coins. Here, a trader has to first make an exchange account. Additionally, you cannot deposit small margins, instead you have to deposit the asset’s full price. After this, you are allowed to secure these coins in your crypto wallet. 

Differences Between Crypto Trading and Crypto Investing

Investors often seem to take crypto trading and crypto investing as the same thing. However, the two are quite different in terms of their time horizon, risk tolerance, strategies, etc. Here are some common differences between crypto trading and crypto investing. 

Features

Crypto Trading

Crypto Investing

Time Horizon 

Relatively short-term practice even involves intraday trading 

Long-term practice, with investments made for years

Risk Tolerance 

Market fluctuations and short-term trading making it more risky

Based on long-term market movements and hence, relatively lesser risks involved 

Participation Needed

Short-term fluctuations and market volatility require consistent monitoring and active participation 

Relatively, lesser participation is needed, requires portfolio management and adjustments

Aim

To earn profits using the market's short-term fluctuations 

Wealth creation with long-term savings

Decision-making properties 

Needs quick decision-making based on market short-term changes

Decision-making is more detailed and calculated and requires a fundamental understanding 

Profit 

Quick gains via trading 

Profits are earned over a longer period via interest or appreciation of the assets

Approach 

Needs technical understanding and analysis of short-term trends

Focuses more on fundamental understanding and potential of an asset and market

Tools

Technical tools are used, like charts, trading platforms, etc

Focuses more on tools for research, including asset performance, market potential, long-term growth

Skills needed

Market understanding is needed with specific trading strategies and knowledge 

Basic understanding of digital marketing and blockchain technology is a must

How Does Crypto Trading Work?

Now that you know the crypto trading meaning and its way, let's move forward to see how it works. Crypto Trading functions using a unique technology called “blockchain”. This blockchain is like an electronic ledger recording all the payments. Crypto trading uses this blockchain technology of a decentralised nature. This helps improve security and transparency. Additionally, the blockchain ledger is a rigid one. Here, each transaction is recorded in blocks which are further linked together to make a chain. Once you add a block, it becomes unchangeable here, reducing the chances of it being tampered with. Also, each of these transactions is validated via miners. 

Crypto trading starts via specialised platforms called exchange platforms allowing users to buy or sell their assets. Post-purchase, a trader can secure their assets in wallets. Each wallet has both: public and private keys. The public key refers to the address while the private key is for transactions.

Significance of Blockchain in Trading        

Crypto Trading uses blockchain for several reasons. Here are a few points proving the significance of the technology.

  • Better Transparency

    Each transaction recorded on the blockchain is visible. This provides a clear and unchangeable record. 

  • Improved Security

    With the decentralised and cryptographic design, blockchain ensures the security of each transaction. This helps traders avoid any kind of fraudulent activities. 

  • Self-Executing Smart Contracts

    Some online platforms use self-set smart contracts. These come with pre-written codes making trading easy and efficient. 

Types of Crypto Trading          

Here are some popular types of crypto trading:

Crypto Trading Types

Description

Day Trading 

Involves intraday trading. Here, the traders benefit from short-term market fluctuations. Thus, it is important to consistently monitor and be aware.

Margin Trading 

It involves a margin that is borrowed money from a brokerage to leverage your market position. This trading is considered suitable for individuals willing to take moderate risks. Involves high profits and risk. 

Copy Trading 

As the name suggests, copy trading is replicating the trade practices of experienced and professional traders. The same is used for learning trading and portfolio diversification.

Position Trading 

Involves fundamental understanding and shows less reliance on short-term movements. This trading involves holding your market position for longer periods to gain benefits.

Social Trading 

Social trading, as the name suggests, is a practice where traders form a community to share and learn from each other's trading plans and strategies. This learning helps them make experienced and informed choices. 

Algorithmic trading 

Algorithmic trading is done using algorithms to make trades. These algorithms are helpful in gauging market conditions, to help you trade in the most favourite times. 

Arbitrage Trading 

Arbitrage trading is when a trader earns from assets holding different prices on distinct exchanges. Here, traders buy the same asset on lower exchange rates and sell it on higher exchange to make returns. 

Swing Trading 

Swing Trading is an ideal strategy for those looking for a mid path between long-term trading and short-term position holding. Here, traders hold their market positions for about a few days to weeks and earn from market fluctuations. 

Scalping 

Needs a high level of active participation. Here, traders make profits via the small changes in market prices in a short period. 

What Moves the Crypto Markets?

Crypto markets are moved or affected by a variety of factors. These factors influence the movements of prices and the market. Let’s have a look at some of the common factors affecting crypto markets. 

Factors

Effect

Sentiment on Market

Public understanding and sentiment about the market play a crucial role in affecting sales and purchase decisions.

Regulatory Frameworks

Legal or regulatory changes on crypto and their functioning also have a high impact on the crypto market's ups and downs. 

Technological Advancements 

Technological advancements, like certain upgrades or advancements in blockchain and other trading technologies, impact the market positively. 

Liquidity 

Market liquidity also refers to the ease of sales and purchase of an asset. This liquidity plays a crucial role in affecting price and thus, the overall market. For example, higher liquidity means fewer fluctuations in price. 

Market Predictions

Traders also speculate or predict future market movements based on certain factors and fundamentals. These predictions and analyses also make a shift in crypto markets. 

Macro-Economic Changes

Macroeconomic changes like inflation,  global events, and more also have an indirect impact on crypto markets. 

News and Global Conditions

Latest news like newly announced partnerships, technology upgrades, and global conditions leave a huge impact on the crypto market. 

Mining Rewards and Challenges 

Any changes in mining procedures relating to its rewards or difficulty level also affect the overall market. This includes the effect on demand and supply. 

Manipulation 

Among the several factors affecting crypto markets, manipulation is also one of them. The crypto market is not immune to manipulation schemes which cause drastic market fluctuations. 

Security Factors

Robust security is a must for a positive impact on the crypto market. In case of security breaches or other threats, it leaves quite a negative impact on public sentiment. Traders lose confidence in the market, causing major ups and downs in prices. 

Advantages and Disadvantages of Crypto Trading 

Before you invest in crypto trading, here are some of its advantages and disadvantages to consider. 

Features

Advantages

Disadvantages

Returns

With huge fluctuations and price appreciation of crypto assets, crypto trading shows huge potential for high returns. 

The same high fluctuations also come with associated risks. High levels of market volatility can sometimes lead to huge losses. 

Operating Hours

Crypto markets work 24*7. Thus, traders may trade and make payments anytime they want. 

The 24*7 operations of crypto markets make it difficult for traders to consistently monitor all the market shifts throughout the day. 

Decentralisation 

Cryptocurrencies work using a decentralised technology. This means there is no single government or financial authority in power. 

The decentralised nature lacks strict regulations. This can sometimes lead to market scams and manipulation. 

Ease of Access

Crypto markets are easily available via exchange platforms. Thus, anyone can participate in the trading, promoting inclusivity. 

Though easily accessible, the technical expertise needed to manage your crypto keys, wallets, and more looks like a hassle to several individuals. 

Anonymity 

Some crypto trades are designed with extra protection features. Here, traders may be involved in trading activities while being anonymous. 

The anonymity feature offered also calls for associated risks like theft and more. 

Types of Crypto Analysis

By here, you must have gotten a fair idea of what is crypto trading. But let's go a bit deeper. Here are some common types of analysis involved in crypto trading.

  • Fundamental Cryptanalysis

    This indicates gauging the real value of crypto assets considering the fundamental factors. It may include factors like technology, crypto potential, etc. 

  • Sentiment Cryptanalysis

    This involves market evaluation based on public sentiment and emotions. It considers factors like news ongoing global conditions, and anything else that affects price. 

  • Technical Understanding

    Technical analysis involves market analysis using technical tools like bars, charts, etc to understand market movements. 

  • Quantitative Methods

    Here, a trader uses quantitative and statistical tools to understand previous data and draw market patterns accordingly. 

  • Blockchain Analysis

    This analysis revolves around understanding blockchain and its data. All the related factors, like the frequency of your transactions, trading activity, and more, are taken into consideration. 

  • Conclusion

    Crypto trading offers endless opportunities. The journey is exciting but it needs careful observation. With market fluctuations, public sentiment, global conditions, economic factors, and more, crypto trading offers higher returns with associated risks. So, before you start your trading journey, carefully read and follow the related risks and other factors to make informed decisions.

    Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

    This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

    For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

Frequently Asked Questions

What is the meaning of crypto trading?

Answer Field

Crypto trading is the trade of crypto assets. Crypto trading meaning traders buy and sell their crypto via exchange platforms using blockchain.

How does cryptocurrency trading work?

Answer Field

Cryptocurrency trading works via a unique technology called blockchain. It serves as a digital record of all your transactions and each block is added and made into a chain. Here, miners play an important role in validating the transactions.

What are the different types of cryptocurrency trading?

Answer Field

There are several types of cryptocurrency trading. The most common types include day trading, margin trading, copy trading, scalping, and so on.

What are the risks involved in cryptocurrency trading?

Answer Field

Crypto trading has huge potential for returns, given it is done rightly. However, it involves certain risks like changes in asset prices, market sentiment, and more.

How do I start trading cryptocurrencies?

Answer Field

Starting your crypto trading is quite simple. First, download a trading application. Now, make an account and complete the form, filling in all important details and KYC. Follow the different crypto opportunities available and start your trading once you're done with your research.

What are cryptocurrency wallets and why are they important?

Answer Field

A crypto wallet is where you store your cryptocurrencies. They are considered crucial for storing transactions and encrypting your information. 

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