Trading cryptocurrencies has much in common with trading other assets like stocks and bonds, but with some important differences. Like more traditional assets, trading cryptocurrency allows someone to own a coin of their choice—either by buying it using a national currency or trading for a cryptocurrency with another cryptocurrency.
An experienced trader of assets should be able to overcome these differences easily to trade cryptocurrencies, however. With more “exchanges” -- places where one trades “crypto” -- coming online, the gap in knowledge is shrinking.
What Are Crypto Trading Basics?
There’s a difference between what people refer to as “buying” and “trading” cryptocurrency. Buying is generally considered to involve the use of “fiat” currency, which is the term for all national currencies (the U.S. Dollar, the British Pound, the Japanese Yen, etc…).
You can use “fiat” currency to buy cryptocurrencies on many different sites. Coinbase is generally considered the safest and most popular option in the United States. As it stands, the number is limited on the cryptocurrencies one can buy using fiat -- but the list has grown substantially in the last few years.
Trading, generally, is done once you have a cryptocurrency already that was bought with fiat. This would be called a “base pair”. Since base pairs form the beginning of most trading, they are often coins with high trading volumes and are more well known. Bitcoin, for instance, is a main base pair.
Beyond base pairs, there are over one thousand different cryptocurrencies in all sorts of categories of use, economics, and underlying technology.
Trading cryptocurrency, as you might imagine, is exchanging one cryptocurrency for another at a rate set by market conditions and factors.
What Are Wallets?
Of course, these coins have to go somewhere when bought, exchanged, or traded. Coins are held in what are called “wallets”. Different types of coins have different types of wallets.
For beginners, you’ll need to know a few things about your wallets.
For one, when you keep coins on an exchange, the exchange owns that wallet. Usually this isn’t a problem. A good exchange will have measures in place to protect your wallet. But do your research before using any exchange.
Next, there are offline wallets and online wallets. Offline wallets are considered more secure since they can’t be accessed by distant third parties. But they require some more movement to secure offline once a coin is traded for.
When you move cryptocurrencies between exchanges (or anywhere really) you’re transferring coins from wallet to wallet. So if you buy Bitcoin using USD, you’ll have Bitcoin in a given wallet by that exchange (e.g. Coinbase). If you want to trade Bitcoin for Ripple, you can send your Bitcoin to a wallet hosted by Binance (a popular exchange) and do your trade from there. Eventually you’ll have a Ripple wallet on Binance holding Ripple.
Do note: your Bitcoin wallet on an exchange is not the same, nor does it have the same “address”, as your Ripple wallet.
What Are Cryptocurrency Exchanges?
Of course, you need a place to be able to make these trades. That’s where ‘exchanges’ come in. These are much like brokers in stocks in that they offer cryptocurrency traders a platform on which to make transactions.
Cryptocurrency exchanges will vary in size, features, as well as coins that they offer for trading. Sites like coinmarketcap.com list the ‘markets’ on which one can trade each coin -- or list all coins open for trading on specific exchanges. So, if you’re looking to trade for a specific coin, you’ll need to find what exchanges it trades on.
Exchanges also come in different forms. Many will utilize the base pairs discussed above and offer trading for coins based on a pairing with coins like Bitcoin (BTC-USD) or Ethereum (ETH-USD). Binance, one of the most popular exchanges, has its own coin (BNB-USD) that users can trade with. Other cryptocurrency exchanges are known as ‘DEX’ which stands for Decentralized Exchange. In this, there is no company (like Binance) that holds funds for trading. Instead, all funds are brought in by traders and coins be exchanged for one another at rates determined by traders.
Like exchanges of other kinds, cryptocurrency exchanges will host coin data like price, volume, and charts with minute, hour, and day candlesticks. Most will also show an open order book so a trader can see volume by trading price.
Of course, one big difference in cryptocurrency trading is that trading is happening at all hours -- 24 hours per day, every day. There’s no market or regulatory which controls when trading can and cannot happen, so transactions are always going on.
Trading Cryptocurrency Stablecoins
Another difference one must know when trading cryptocurrencies are stablecoins. Stablecoins are cryptocurrencies that are pegged to keep their price “stable”—usually tied to a fiat currency like the U.S. Dollar or Korean Won. The most famous of stablecoins is called ‘Tether’ (USDT-USD).
These are important because they figure into a large part of volume for cryptocurrency trading. As such, there’s also been an enormous surge of new stablecoins introduced to the market.
These are made to aid in cryptocurrency trading and investment. How? Well stablecoins let crypto traders trade with these pairs as they would with dollars, euros, or yen. A trader just doesn’t have to move back from crypto to fiat—a process which can take time and often involves a transaction fee.
Instead, if a trader wants to trade gains made on a coin like Bitcoin, instead of trading back to USD, they can trade to USDT, which keeps its price stable to the dollar. Then, if the trader is ready, they can trade USDT back for Bitcoin later on. This can all be done quickly (often within seconds, a benefit of trading with blockchain technology) and for very low fees (another benefit).
It also means the trader can keep funds within “crypto” and on a single exchange, especially if the trading is being done with a smaller volume or market cap coin in which there is no straight-to-fiat trading.
For experienced asset traders, trading cryptocurrency will not pose an enormous challenge in learning. For those that are beginning, this is an introduction to trading with some unique differences.
There are other great guides on the internet on how to buy certain coins (which often can be replaced for the coin of your choice). Here’s a popular and in-depth guide to buying Ripple (XRP-USD) on Binance.
Of course, always do your own research.
You can follow cryptocurrency news through Seeking Alpha’s cryptocurrency news feed.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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