Cryptocurrencies 101: A beginner’s guide to trading Bitcoin and other cryptocurrencies
4 min readTable of Contents
Cryptocurrencies, once a niche interest, have surged into the mainstream, captivating investors and traders worldwide. These digital currencies, led by Bitcoin, promise potential returns that traditional investments seldom can. However, the world of cryptocurrencies is vast and needs to be explained to beginners. This article aims to simplify the concepts and fundamentals of trading Bitcoin and other cryptocurrencies.
Cryptocurrencies in Australia are digital or virtual currencies that use cryptography for security. Unlike traditional currencies, they are decentralised and operate on innovative blockchain technology, a distributed ledger enforced by various computers. Bitcoin was the first cryptocurrency and remains the most prevalent and valuable one.
Starting with cryptocurrency trading
Firstly, you’ll need a ‘wallet’, an online app that holds your currency to trade cryptocurrencies. You will also need to sign up to a cryptocurrency exchange. Numerous platforms are available, and your choice should depend on your needs, the exchange’s credibility, security measures, and the cryptocurrencies it supports.
Once you set up your wallet and exchange, the next step is to fund your account with traditional currency. You can then use the funds to purchase cryptocurrencies directly from the exchange or through a peer-to-peer transaction.
Understanding trading basics
The price of Bitcoin and other cryptocurrencies is highly volatile and can fluctuate quickly. This volatility makes cryptocurrencies attractive to traders, as it presents an opportunity for significant gains. However, it also carries a higher risk, making understanding the trading basics crucial.
Cryptocurrency pairs
Cryptocurrency trading involves buying one currency using another. For instance, you may buy Bitcoin using Ethereum or US dollars. These pairings are essential to understand as they determine the value of the currency you hold and how it performs in the market.
Bid and ask prices
The bid price is the highest amount a crypto buyer is willing to pay for a particular cryptocurrency, while the asking price is the lowest amount a seller will accept. The difference between these two prices is called ‘spread’ and shows how much return or loss you incur on each transaction.
Market orders and limit orders
Market orders involve buying or selling at the current market price, while limit orders allow you to set a specific price at which you want to buy or sell. Both these types of orders have advantages and risks, and it is crucial to understand them before trading.
Choosing the right strategy
Strategies for trading cryptocurrency vary depending on an individual’s goals, risk appetite, and market conditions. Some popular methods include:
HODL (Hold on for Dear Life)
This long-term strategy involves holding onto a cryptocurrency rather than actively trading it. Supporters of this approach believe that holding onto cryptocurrencies will result in higher returns over time due to their increasing demand and finite supply.
Swing trading
Swing trading is a prevalent strategy in the cryptocurrency market that involves buying and selling digital assets over a short period, typically a few days or weeks. This approach aims to take advantage of short-term price fluctuations and requires a deep understanding of market trends and analysis.
Successful swing traders carefully analyse charts, identify potential entry and exit points, and execute trades based on their predictions. By actively monitoring the market and adapting their strategies accordingly, swing traders aim to potentially maximise potential returns while managing risks. Traders must stay updated with the latest news, market developments, and technical indicators to make informed trading decisions and increase their chances of financial success in swing trading.
Day trading
Day trading is a popular investment approach that involves buying and selling multiple times throughout the day, hoping to find opportunities from small price movements. This dynamic strategy can be highly lucrative, but it is important to note that it also carries a higher level of risk due to frequent trades and potential market volatility.
Before diving into day trading, conducting thorough research and gaining a comprehensive understanding of various strategies is crucial. Doing so lets you choose a trading approach that aligns with your financial and trading goals, risk tolerance, and time commitment. Remember, preparation and knowledge are crucial to success in the fast-paced world of day trading.
Managing risks
Regardless of the trading strategy, it is crucial to manage risks effectively. Some ways to mitigate risks include:
Diversification
Investing in multiple cryptocurrencies spreads the risk, as market conditions may affect each currency differently. It also helps minimise losses if one cryptocurrency performs poorly.
Stop-loss orders
A stop-loss order automatically sells a cryptocurrency if its price reaches a predetermined level, limiting potential losses. It is essential to set stop-loss orders strategically and not too close to the current market price to avoid being triggered by short-term price fluctuations.
Finally
Cryptocurrency trading can be lucrative but requires diligence, research, and a thorough market understanding. It is also essential to continuously monitor market trends, manage risks effectively, and stay updated on regulatory changes.
As the world becomes increasingly digital, cryptocurrencies are here to stay, and their impact on the global economy continues to grow. With this beginner’s guide, we hope you feel more equipped to embark on your cryptocurrency trading journey. Remember to start small, be patient, and always stay informed.
