How to trade crypto: A practical guide for beginners

Trading goods and commodities for currency has dominated the global market for centuries, but a new era is here: crypto trading. 

Buying and selling digital assets offers an unprecedented level of financial autonomy and accessibility separate from Wall Street, and the allure of investing in cryptocurrency to seek out returns is increasingly enticing to many investors. However, it's not without risk. The market is highly volatile, with rapid price fluctuations that can lead to significant financial gains or losses. 

To navigate the world of digital asset trading successfully, traders must have a solid understanding of how to trade crypto effectively.

How does crypto trading work?

There are two main ways to trade crypto:

Buying and selling 

Similar to trading stocks, this method involves purchasing a cryptocurrency at its current market price (“spot”) and selling it, ideally at a higher price. For example, suppose an investor purchases Bitcoin when its market price is $20,000. If the price increases to $25,000, the investor might choose to sell their Bitcoin to realize a profit. 

To execute these trades, investors can use market orders, which buy or sell immediately at the current market price, or limit orders, where they set a specific price at which the trade will execute, allowing for more control over the transaction price. Timing and frequency of their transactions influence various investing strategies (more on those below).

Derivatives

With contracts for difference (CFDs), traders speculate on the price movements of cryptocurrencies without owning the actual assets. This allows for the possibility of profiting from both rising and falling prices. CFDs enable traders to control larger positions with a smaller initial investment, but this leverage also increases the potential for greater profits and losses.

For example, if a trader predicts Ethereum will increase and buys a CFD at $1,500, they can profit by selling it at $1,700. Alternatively, if expecting a decline, they might sell a CFD at $1,500 and buy it back at $1,300, profiting from the drop. This method allows traders to leverage their position, amplifying potential gains and losses without owning the actual cryptocurrency.

Four steps to trade crypto

Before trading cryptocurrency, it's important to understand the steps involved to ensure a successful and secure trading experience. Here's how to start crypto trading:

Choose an exchange to trade on

When researching the top crypto exchanges, factors such as good reviews, strong security, and low fees help guide the selection process. For instance, Coinbase, Gemini, and Binance are well-known exchanges that support a wide range of cryptocurrencies and are highly regarded for their reliability and user-friendly interfaces. Traders often view publicly traded companies such as Coinbase as more reputable because they adhere to strict reporting requirements set by regulatory bodies like the U.S. Securities and Exchange Commission (SEC).

Choose a cryptocurrency to trade

Popular currency options include Bitcoin, Ethereum, and newer coins like meme coins such as Dogecoin and Shiba Inu, which have gained attention for their viral popularity and community-driven value. 

When selecting a cryptocurrency, factors like market capitalization, liquidity, technological innovation, and regulatory environment play significant roles. Additionally, the level of community support and development activity are important indicators of a cryptocurrency's long-term viability.

Develop a strategic trading plan

Two common strategies are dollar-cost averaging (DCA) and HODL (Hold On for Dear Life). Dollar-cost averaging involves consistently investing a fixed amount of money at regular intervals, regardless of the cryptocurrency's price, to reduce the impact of market volatility. On the other hand, the HODL strategy entails holding onto assets for a long period, regardless of market fluctuations, based on the belief that their value will increase over time. 

To manage risk and maximize gains, traders often set stop-loss orders to limit potential losses and decide in advance whether to take profits on the full amount or only a portion of their holdings when an investment reaches a desired value.

Start trading

After deciding on a cryptocurrency and developing a trading plan, traders open an account on an exchange, fund it with a fiat currency (like USD or EUR) or, in some cases, a credit card, and execute their first trade. Most exchanges provide user-friendly interfaces to help beginners get started.

Safely store cryptocurrency

After purchasing cryptocurrency, traders can leave funds on the exchange to capitalize on market movements quickly or, for long-term holding, move their funds into self-custody and store them in a cold or hot wallet. Cold (offline) wallets are less vulnerable to hacking than hot (online) wallets, making them safer for long-term storage. Both types require private keys that must be carefully safeguarded as losing these keys can result in losing access to the assets. 

Traders store assets securely in a hot wallet (an online wallet) like MetaMask or Coinbase Wallet for convenience or a cold wallet (an offline wallet) like Ledger or Trezor for added security. Cold wallets are less vulnerable to hacking than hot wallets, making them safer for long-term storage. Wallets require private keys that must be carefully safeguarded as losing these keys can result in losing access to the assets. 

What moves crypto markets?

Unlike the stock exchange, which represents centralized banks and stakeholders, cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are traded on online platforms known as cryptocurrency exchanges. Digital assets traded on these platforms do not have a physical form, such as coins or notes, and exist solely in digital form, secured by cryptography.

While crypto markets are often volatile, they’re not entirely unpredictable. Several key factors can influence their movements:

• Supply and demand: The availability of a cryptocurrency (supply) and its popularity among traders (demand) can significantly impact its price. For instance, if many people want to buy a limited amount of Bitcoin, its price might rise. Think of it like the frenzy over Tickle Me Elmo dolls or the exclusive Hermès Birkin bag, where high demand and limited supply drove prices up.
• News and media coverage: Positive news can drive prices up, while negative news can cause them to fall. For example, reports on a major security breach can significantly impact market sentiment.
• Significant events: Things like regulatory changes, such as a government announcing new laws concerning crypto trading, technological upgrades, or significant partnerships, can move the market. 
• Market capitalization: This is the total value of all coins in circulation and provides insight into the overall size and health of the cryptocurrency market. A higher market cap generally indicates a more stable investment. When the market cap grows, it often attracts more investors, boosting liquidity and potentially stabilizing the market further. Conversely, a declining market cap can signal waning investor interest and lead to increased market volatility.

Ways to actively trading crypto

There are several ways to trade crypto – each with its own strategy and time frame. Here are three of the most common:

Position trading

Position trading is a long-term strategy in which traders hold onto a cryptocurrency for months or years, anticipating substantial price increases. Also known as HODL, this method focuses on long-term growth rather than short-term market fluctuations. Position traders often base their decisions on fundamental analysis, looking at the overall potential of the cryptocurrency. This approach is popular among traders who prefer a hands-off strategy and are willing to wait for significant returns.

Day trading

Day trading is a short-term strategy where traders buy and sell crypto to profit from small daily price fluctuations. Day traders need to closely monitor the market and make quick decisions, requiring significant time investment and a good understanding of market indicators. While it can offer substantial profits, it also carries the greatest risk. Successful day trading demands discipline, quick reflexes, and a well-developed strategy to navigate the highly volatile crypto market.

Swing trading

Swing trading involves holding crypto for several days or weeks to capitalize on expected price swings. Traders analyze price patterns and market trends to make informed decisions, allowing them to take advantage of medium-term market movements without constant monitoring. This method is often ideal for those who want to balance their time and trading activities.

Pros and cons of trading crypto

Trading crypto has its advantages and disadvantages. Before investing in crypto, traders should conduct their own financial analysis, weigh the pros and cons, and ensure they only use funds they can afford to lose.

Pros

• Low fees: Compared to traditional financial markets, cryptocurrency trading often incurs lower transaction fees, which can be especially beneficial for frequent traders looking to maximize their profits.
• Security: Cryptocurrencies leverage blockchain technology, providing high levels of security and transparency. This technology makes altering or faking transactions difficult, enhancing security. 
• Accessibility: Cryptocurrency markets are open 24/7, allowing traders to buy and sell assets anytime. This flexibility benefits those with varying schedules or who want to capitalize on market movements at any hour.
• Diversification: Adding cryptocurrencies to an investment portfolio helps diversify assets, reduce risk, and potentially improve the overall return profile.
• Global reach: Crypto offers seamless cross-border transactions, allowing funds to be traded or moved globally without a currency exchange. 

Cons

• High volatility: Cryptocurrency markets are notoriously volatile, with prices that can change rapidly. This volatility can lead to substantial gains but also considerable losses.
• Lack of regulation: The cryptocurrency market is largely unregulated, which can lead to a lack of investor protection and an increased risk of fraud and manipulation.
• Cybersecurity risks: Digital wallets and exchanges can be targets for hackers. Security breaches can result in the loss of funds, making cybersecurity a critical concern for traders. Many long-term holders transfer their crypto to hard or cold wallets to add an extra layer of security.
• Complexity: Understanding and navigating the crypto market can be complex, especially for beginners. The technology and trading strategies involved require a steep learning curve, but once mastered, they open up new opportunities for potential profit.

CoinTracker makes crypto trading easy

No matter the cryptocurrency or exchange, CoinTracker simplifies the crypto trading process. 

CoinTracker delivers integrations for 500+ exchanges, wallets, and NFTs, and 23,000+ DeFi smart contracts. Track your portfolio, generate accurate reports, and file in minutes with the only solution that integrates directly with TurboTax, H&R Block, or your own CPA.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.