Cryptocurrencies trading versus stock market trading
Bitcoin and cryptocurrencies are very volatile in comparison to the conventional stock market, commodities or forex. There are many opportunities to make money or lose everything. You can trade Bitcoin, Litecoin, and Altcoins the same way and it offers opportunities to a larger public since it is a peer-to-peer virtual currency market.
Unlike the traditional trading, the volatility in the cryptocurrency market requires investors to check their trades and positions more often. The goal is to reduce the risk of losing too much money. In the traditional trading platform, investors hope their assets will grow over time so they keep them for a long period. In the cryptocurrency world, you need to take some precaution. I suggest you don’t leave your coins on the trading platform for more than 48 hours; the best is to move them on a secure cold wallet.
My intention are to explain the basic of trading, so you can have a better understanding of this world. Before you jump in this 24/7 global market, I suggest you read more on the subject and interact with trading specialists before you invest time and money.
What you needs to do
In order to trade bitcoins or any cryptocurrencies, all you need to have is a bitcoin wallet and an internet access. Then you need to create an account on a trading exchange and provide your personal information. The validation process can take a few hours or a few days depending on the exchange. If you want to remain anonymous, you can’t trade bitcoin or any cryptocurrencies.
The trading definitions!
Prior to showing you the different trading platforms, let’s start with common terms you need to get familiar with.
Variance: Is the difference between where the indicators say the price should be and where it actually is.
Fill: An order is filled or completed when it has been validated and ready to trade as a financial asset. It can take a few seconds to a few days depending on the fees.
Yield: Profit earned from an investment.
Short sale: Sell an asset you don’t currently own. Not all the trading exchange will allow you to do that. You need to validate your account first.
Margin: You can buy an asset with money you don’t have. You need to have a validated margin account to be able to do margin trading.
Stop order: Order to buy or sell when its price passes a particular point.
Limit order: Order defined during a period of time, to buy or sell at a specific price or better. If the price is not reached before the order expires, the order is canceled.
You can read more descriptions of all these terms and more on Investopedia.
Now, the fun begins… How can we trade?
Place an Order
An order is a request sent to a trading platform to make a trade on an asset that can be traded. You can buy or sell any asset that you want. You just need to choose the correct trading platform for your needs. CEX, Poloniex, Coinbase are just a few of all the available trading platforms that exist. This part will be covered in more details in a future post.
Buying an asset and selling it immediately to take advantage of the variation of the price between different trading exchanges. You can buy BTC at 1,300 $ USD on trading platform A and sell it right away at 1,360$ USD on trading platform B to make a profit. It looks easy on paper, but you need to buy and sell at the correct time to make money.
The trading option is like gambling, you place a bet and you pray to get a good result. You can bet on the rising or decrease of the bitcoin price.
Put option: A buyer acquire the right, but not the obligation, to sell an asset at a certain price before the option expires.
Call option: A buyer acquire the right, but not the obligation, to buy an asset at a certain price before the option expires.
In the bitcoin world, you can choose between a few trading options: vanilla option, binary option, and exotic option.
Vanilla option: standard call and put option. This means the option has a strike price and an expiration date.
Binary option: Option that can also be called digital option or all-or-nothing options that come with an expiry date from one minute to months. They have a fixed payout and risk. For example, you can decide the direction the price of the underlying asset will move; either up for a call or down for a put. You don’t have the choice to buy or sell your underlying asset.
Exotic option: Those options have a complex structure. This type is commonly transacted over the counter. The date, price and payout structure may vary since it is tailored by the broker according to its requirements. It can be a call or a put and can vary during the option life.
Altcoins can be traded the same way as Bitcoin, you just need to use the right trading exchange.
Pump-and-Dumps: This is not the best way to trade, in the stock market, this is considered illegal but since there are no regulations in the cryptocurrency world, this has become common. You need to buy and control enough assets to influence and manipulate the market. Then sell high before the price return to normal. I don’t endorse this method of trading.
This part will be covered in details in a future post. For now, Bitcoin, Litecoin, Altcoin exchange platforms can be found on BitcoinWisdom.
Many trading platforms exist out there. You need to create an account on each of them if you want to trade. You will not have access to all of them, it will depend on your country and the currency you are using to trade.
Cryptocurrencies open the doors to new trading possibilities. It is tempting to jump on it but you have to be careful. I recommend you to try trading with a small amount first, to gain experience.
Don’t forget, they are no regulation and you can trade in the comfort of your house. If you decide to convert your cryptocurrencies into fiat currency, there are tax requirement which varies in each country. Bitcoin is view as a commodity, where you need to pay tax on your profit. If you leave your assets in your wallet, no taxes will be applied.