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In this tutorial, you will learn how to trade cryptocurrency in 4 different ways: exchange, margin, lending, and indirect to maximize your profits and hedge the risks. Each of these methods, quite naturally, carries its own benefits and risks.

We will provide simple-to-understand explanations for you to follow.  As a result, you will become capable of making a profit while keeping the risk of losing all your assets to the bare minimum.

What do you need to start trading cryptocurrencies?

Obviously, cryptocurrencies such as Bitcoin, Ether, Litecoin, Ripple, Dash are any of over a thousand that exists now. But to buy the digital currency, you’ll need a cryptocurrency wallet.

Cryptocurrency wallet

This a digital space where you store encrypted passwords that represent coins. It would be equivalent to a bank account where you store fiat currency.

What you need to remember is that each individual cryptocurrency has its own specific crypto wallet.

For example, for Bitcoin, you open a Bitcoin wallet. It may be a desktop, mobile, hardware, web or even a paper type (which is least prone to hacking). You cannot load it with Ether or any other kind of digital currency.

Cryptocurrency Exchange

These are specialized brokerage entities that trade cryptocurrencies in a similar way like the traditional exchanges do.

However, while some enable you to buy cryptocurrency with fiat money such as dollars or euros, others require that you own crypto coins beforehand as is the case with Poloniex, although Poloniex is one of the rare exchanges that allow trading of over a hundred crypto pairs.

We will assume that you are looking for the exchange that allows using both. Thus, focus on Coinbase and GDAX.

TIP: if you are purchasing crypto for fiat money, set up the bank account to remove otherwise low limits that exist when you are using your credit card. It will take up to 3 working days to transfer funds, but fees will be much lower.

How do you trade cryptocurrency on the exchange?

Simply put, the same way you would trade any fiat currency for another. In other words, you pick a specific cryptocurrency on the exchange and buy X number of the coins.

You can then hold on to it as an asset (something you would do with gold, for instance) or exchange it for some other cryptocurrency.

Acquiring a long-term future asset

For example, knowing that by the year 2140 the last Bitcoin will be created (mined, minted); you would want to buy a number of Bitcoins as a long-term investment. They are currently exchanging below $10K per coin but nobody can say that the rate won’t exceed $100K in 5 or 20 years from now.

On the other hand, something may disrupt the market and send the Bitcoin down.

It’s just the way financial markets work. There are no guarantees.

That said, you would want to do something like this only if you believe that Bitcoin, for example, will be treated like gold in the future.

Acquiring a short-term asset

There are at least two situations where you would want to exchange your major cryptocurrencies for those less valued or between one another.

• In the event where your analyses show that the next hard fork in a specific cryptocurrency, for example, may suddenly increase its value
• Or that, for instance, Coinbase might add the new cryptocurrency to the list

Forks can send the currency up like it was the case with Bitcoin when the fork created Bitcoin Cash.

It’s not the rule, but remember that quite opposite trend may occur. Thus, you need to follow the news and be familiar with the reasons about why some specific fork is going live.

Litecoin was trading low until the moment Coinbase has publicly announced that Litecoin would become the third cryptocurrency available on the exchange. The value skyrocketed, moving from below $3 to the current $61.

How do you trade cryptocurrency on margin?

Most recently, major brokerage platforms, like Markets.com are allowing margin trading on cryptocurrencies.

Simply put, trading on margin is trading with borrowed instruments and often with a high leverage. In other words, it’s a risky game where you should tread with needed caution.

On the other hand, margin trading is basically the only type of trading that can generate extremely high ROI in the shortest time. However, due to its nature, it can also lead to severe losses.

For years, Forex and other available CFDs were considered to be the riskiest investments in terms of potential losses due to high volatility and unpredictability. But it was nothing compared to the level of volatility we are witnessing at crypto-trading this year.

Nonetheless, it’s that extreme shift in trends that makes margin trading so lucrative.

The gains in a single day of trading may easily exceed the monthly salary of a medium-paid job. We are, of course, talking about the small-cap retail traders, the everyday Joe’s who invest on margin as a side-kick.

To predict the trend, they are using 3 basic types of analyses. And although they differ from the more conventional CFDs in some core elements, the rules of engagement are more or less the same regardless of your traded instrument.

Fundamental analyses

In conventional margin trading such as Forex, the fundamental analyses are used as the first step of the decision-making process. We are talking about macro and microeconomic indicators, jobless statistics, major investments and announcements, moves made by the particular central bank, and, of course, historical data.

You can already see the handicap with cryptocurrencies.

• No history
• No regulatory body such as the Fed that can move the trend in a predictable way with the single rumor or announcement
• Inability to compare one currency to another based on a specific financial data and historic moves

And we could go on like this for the entire day.

So how do you use fundamentals for cryptocurrencies then?

You focus on that little history you have in front of yourself and

the potential of the specific use of that particular blockchain technology.

In other words, you really need to know what, for example, Smart Contracts™ are or how would some future fork in Bitcoin affect the price. In addition, you must follow the development in regulations because countries worldwide are working around the clock to impose at least some control over the crypto market.

That’s basically all you’ve got to work with.

And when we are talking about emerging cryptocurrencies, you should be able to assess whether the proposed usage of the technology will be widely accepted or not.

Add the extreme volatility caused by the general lack of usual data and you can guess how difficult it is to predict the trend based on the available information.

That’s why almost the entire corpus of cryptocurrency margin traders is relying on…

Technical analyses

Yes, we are talking candlesticks and charts here, moving averages, Bollinger bands, RSIs and every other analytical tool traders are commonly using.

When trading cryptocurrencies on margin, technical analyses will be at the center of your focus.

They will allow you at least some overview of the situation and potential trends, but only if you follow the news and developments in the sector.

Blindly following your indicators without any awareness of what is happening with the potential cryptocurrency or the entire crypto world will get you nowhere.

The news and announcements are the main factors that influence the decision-making process and directly affect the market’s sentiment.

Sentiment analyses

Both fundamentals and technical analyses are generating the specific market’s sentiment or the movement of the herd. It takes a simple rumor to shift the trend against you or in your favor (if you do proper due diligence before you place your order).

That said, sentiment analyses are the final step before you configure and set your trading order.

When it comes to trading cryptocurrencies on margin, the sentiment will be largely influenced by the recent news and announcements. We now have at least some historical data to rely on:

• We’ve seen the impact of the several forks executed so far
• We saw what happened to Litecoin once Coinbase decided to list it on both of their exchanges
• Then, we can have at least some image of what could happen in the hacking event
• We know now how quick the price of some novel cryptocurrency may rise if ICO went well

These are all potential indicators of what might happen with the particular currency in the pair in the short period.

Therefore:

• Going long may not be the most optimal strategy when you are trading cryptocurrencies on margin
• Instead, focus on intraday trading because the level of volatility is simply overwhelming. We are talking about 100+ pips change that occurs in the matter of an hour in some instances
• If that massive peak goes against you, it’s going to trigger a margin call and shut down your trade order if you don’t hold sufficient funds on your balance to endure through the times of extreme volatility
• Stay glued to your chart and monitor the situation development, even on a minute chart, because we are not yet entirely clear about what moves the market’s sentiment other than just following the herd
• Understand the correlation between Bitcoin and altcoins
• Make sure you completely understand the leverage and how it would affect your balance if the trend moves against you
• Major on stop-loss and other security instruments at your disposal!
• DO NOT TRY TO TIME THE MARKET!
• Turn off your emotions
• Be aware that your losses may exceed your available balance

If this is too much for you to handle, then you might consider the lending option.

How to trade cryptocurrency with lending

Let’s say that you are not interested in margin trading but you do hold X number of Bitcoins or Ethereum in your account.

How can you cash in without exchanging BTC for some third cryptocurrency or without entering margin trading?

At Poloniex and some other crypto-trading platforms, you have this neat option to lend some amount of cryptocurrencies to other investors.

You can’t lose your coins because nobody can simply run off with them. They serve as collateral and in the event the trade went against the trader who borrowed your coins, a margin call will shut down the trade and you’ll get your coins back.

Then again, during the lending period, a specific cryptocurrency may depreciate so you have to be extremely careful about your choice.

What would be the most optimal strategy in lending?

1. First and foremost, you open accounts on as many available exchanges as possible to cover the ground
2. You analyze the returns on a specific cryptocurrency to be able to pick the most promising one and prevent losses
3. In the next step, you define the lowest lending rate on the platform and set your offer 0.001% lower to attract the prospects
4. The lending period should last 15-30 days, depending on your availability to monitor the situation

How high is the profit in this type of trading?

So far, not that high because offer really exceeds the demand. In fact, you can consider yourself lucky if someone borrows a Satoshi or few from you.

That’s why it’s important to:

• Cover as much ground as possible to increase your odds
• Rely on strong cryptocurrencies that are less prone to sudden depreciation.

But what if you are not interested in buying cryptocurrencies per se yet still want to invest in the market? How can you do that?

How do you trade cryptocurrency indirectly?

You buy shares in the investment trusts that hold major cryptocurrencies as their main assets. That’s the only way to trade cryptocurrencies on the stock market and without actually buying cryptocurrency.

One example—currently the only example—is the Bitcoin Investment Trust, GBTC.

When you invest in a trust, you are, in fact, buying a share. In other words, you are ending up owning a contract that represents a share in the ownership of an asset held by the trust.

In case of GBTC, that asset is Bitcoin, because the trust is the only entity on the stock market that holds Bitcoin as the primary asset.

Summary

• To be able to trade cryptocurrency, you first need a corresponding cryptocurrency wallet (specific for a cryptocurrency of your interest)
• After setting up a few wallets, the next step is to create an account on any or all cryptocurrency exchanges such as Coinbase
• You then fund your account either with cryptocurrency of fiat money if that option is available (Yes on Coinbase; No on Poloniex, for example)
• The next step is to enter in a trade, most commonly in a simple exchange where you want to acquire a specific cryptocurrency that shows future potential and to cash in on the spread after your asset increase in value
• When you feel comfortable, you may opt-in for margin trading where you’ll use fundamental, technical and sentiment analyses to predict the short-term future move of the currency pair (i.e. BTC/ETH, BTC/USD). If you think the base currency will rise, you’ll execute the BUY order. On the other hand, if your analyses indicate that the base currency will depreciate, you’ll set the SELL order
• All that time you are allocating a portion of your assets on lending to capitalize on the interest rates while making sure you pick the currency that is least likely to depreciate during the lending period
• Finally, you may invest in a trust to own a share of the primary assets, most likely Bitcoin or Ethereum in the near future.

Conclusion

Do not underestimate the potential of the cryptocurrencies. It’s not the hype anymore. We are witnessing a major shift in a way we are handling our finances, transactions and even the contracts.

Already, Bitcoin, the original and predominant cryptocurrency, has exceeded the price of gold. That’s definitely something to keep in mind when you are formulating your trading strategies or contemplating the future of blockchain technology and connected cryptocurrencies.

Because the biggest promises blockchain is making (and already proving) is the complete elimination of the intermediary (i.e. banks, lawyers, public notary) and speeding up the transactions process. What is now taking 3-5 working days is happening almost instantaneously in some instances while, at the same time, decreasing the generated fees to the bare minimum.

And that’s just the fraction of the future potential use of the blockchain technology.

Our world is changing and you really want to board the train at this early stage.

But, don’t forget that cryptocurrencies are not fiat money. There will be no limitless supply as is the case with dollars, euros or any other conventional fiat currency. Once the number is reached, the game will be over for those who stood aside, watching this fast-moving train moving across the globe without them being actively involved. If you want to learn more about cryptocurrency, check out Cryptocurrency Institute.

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