If you’ve spent any time at all in the crypto world, you’ll know that trading and price speculation is a huge part of the ecosystem. After all, cryptocurrency is a new class of financial asset. Bitcoin has arguably been the best-performing asset of the last decade, and is responsible for minting tens of thousands of new millionaires.
Some of these people have made their money by short-term trading, some by carefully positioning themselves and holding for the long run. So, what do you need to know about markets, exchanges, trading and investing to build wealth in crypto?
Trading Vs Investing
You’ll see and hear the terms ‘trading’ and ‘investing’ thrown around a lot in the crypto world, and might have wondered what the differences are.
The goal, whether you’re trading or investing, is to buy low and sell high. Traders seek to do this over the short term, while investors look to make money over a longer period. In other words, the main difference is one of timeframes.
Crypto has a reputation for being risky, but that’s only really part of the picture. The markets are volatile, but the shorter the time span, the greater the risk. Trading styles are typically classified in the following broad categories:
- Day traders enter and exit trades within a day at most, and sometimes as little as a few minutes. While this can be extremely profitable (especially since day traders often use leverage to amplify their profits), it is also incredibly risky.
- Swing traders work on a timeframe of days, or up to a couple of weeks, at most. The aim is to profit from the medium-term moves of the market.
- Position traders seek to capture a significant percentage of the broad trend in a market, which typically takes months or possibly years. In the crypto markets, for example, this might mean entering around the end of a bear market and selling at a multiple of that price, well into the next bull run (perhaps two to three years later).
- Investors generally hold for many years. They may not have any particular price target for selling, sometimes preferring to hold indefinitely. ‘HODLing’ has often been a successful strategy for crypto investors who have had the nerve to sit through the rollercoaster of multiple market cycles.
How To DYOR (Do Your Own Research)
There are literally thousands of cryptos to choose from. While some are now well-established, including Bitcoin (BTC) and Ethereum (ETH), others are less well-known and more risky – which brings with it the possibility of both higher returns, and worse losses.
Knowing how to assess a crypto can help reduce your risk, and there are several ways you can start that process and focus on the most promising options. The key here is to do your own research (‘DYOR’ is an acronym you’ll see often in the crypto space). Don’t take anyone else’s word for it, as the crypto world is full of fake and unreliable ‘experts’ with their own agendas.
- Check out the website. Does it look professional and credible, or has it been thrown together? Does it explain the mission, vision and use cases for the cryptocurrency or blockchain platform well, and do these seem convincing? Is it maintained with recent news and regular updates, or has it essentially been abandoned?
- Read the white paper or other documentation. (If there isn’t any, that’s a big red flag.) Does it explain the concept and purpose of the platform well? Or is it flashy and impressive-looking, but with no real substance behind it?
- Has it actually launched? Is there a platform you can use, or is it still ‘vapourware’? Does the crypto have real utility on the network, or do the coins just represent the promise of future functionality?
- Find out about the developers and team. Do they have experience in the blockchain space, academic credentials, a good track record, industry connections… or are they anonymous and liable to disappear and leave the project at a moment’s notice?
- Research exchanges and trading volumes. If a project is legitimate, then unless it’s at a very early stage it should be trading on at least a few exchanges, and any reputable exchange that lists it will have done their own due diligence. There should be enough consistent volume to trade into and out of it without slippage.
- Understand the tokenomics. Does the token economic (‘tokenomic’) model make sense, and is it sustainable for the long term? Or does it pay out large rewards to early adopters, with the effect of vastly inflating the coin supply, at the expense of long-term holders?
What Is An Order Book?
There are different ways to acquire crypto, but if you’re starting out then you’ll probably use a conventional, centralised exchange with an order book. This is simply a list of ‘orders’ or offers from other traders to buy and sell coins. For example, take a look at a screenshot from the BTC/USDT order book on TimeX:
This lists the prices at which traders are willing to sell BTC for USDT, or for which they are willing to buy BTC for USDT. If you wanted to buy anything up to 0.2 BTC, you could do so at a price of 52,160 USDT, because there is a sell order at this level.
If you wanted to buy more, you would end up paying more, because there is not enough listed at that price. The screenshot shows that you could buy up to 6.23 BTC at a price of 52,220 USDT per BTC, or less.
Limit And Market Orders
There are broadly two types of orders you can place on an exchange, market and limit orders.
- Market orders execute immediately, at the price offered on the order books
- Limit orders only execute if the market hits your specified price
In the example above, if you wanted to buy BTC at lower than the current market price, you might place a limit order for 51,400 USDT, instead of buying up the order book with a market order. The downside is that there’s no guarantee the price will dip to hit your order.
In other words, market orders give you control over time (they execute now), while limit orders give you control over price (they execute at a given value). Unfortunately, you can’t have both!
Trade And Invest Using TimeX
You can buy and sell popular cryptocurrencies including BTC, ETH and LTC on TimeX – an AUSTRAC-regulated crypto exchange based in Australia. Find out How To Get Started On TimeX and buy your first crypto, and How To Deposit And Withdraw Cryptocurrencies.