How to start trading on a crypto exchange. Guide for beginners
How to choose a trading platform and when to use limit orders. Learn more about this in our new article.
Interest in cryptocurrency exchanges is at an all-time high over the past five years, according to Google Trends. This indicates that more and more people are starting to use platforms for digital currency transactions. Here's how to get started using a cryptocurrency exchange.
The essence of trading
A cryptocurrency exchange is an online platform where users can sell, buy or exchange cryptocurrency assets.
The main principle of trading on the exchange remains universal - buy the asset at a cheaper price and sell it at a higher price. Speculative trading is based on price movements, just like at the stock exchange. Margin trading with leverage is possible here: the trader borrows from the exchange to increase the order volume.
Exchanges (even the largest and most secure ones) cannot guarantee users the complete safety of their assets. Hacks of online platforms occur regularly. Recent cases include the attack on the Ronin Network's sidechain in March of this year, in which attackers stole $625 million worth of cryptocurrency.
This is not to say that you shouldn't use exchanges. But it is better not to keep all funds in the wallets of exchanges, because there are high risks of losing them.
What else you should know before starting to trade:
- Cryptocurrencies are highly volatile. For example, the value of bitcoin can rise and fall by several thousand dollars in a short period of time. This means that diversification is a must - it is dangerous and short-sighted to invest all the money in crypto.
- It is believed that in the long run, cryptocurrency is characterized by constant growth. So far, this has been exactly the case: the market for digital assets has grown significantly in 10 years. However, there is no guarantee that this trend will continue in the future.
- Bitcoin sets the direction for altcoins (other cryptocurrencies). If BTC goes up in value, the underlying mass of coins will also go up, and vice versa. However, bitcoin's share in the crypto market has been decreasing in recent years as more and more new blockchain projects and technologies emerge.
- The value of digital coins is influenced by many factors. There are short-term and long-term influences. The pandemic, a trade war between China and the US, geopolitical events, and announcements of major upgrades (forks) on blockchains - all of these lead to changes in value. Being able to find correlations and make predictions is an extremely useful skill for an investor. However, buying cryptocurrency based solely on the news is a dangerous strategy that can lead to a loss of investment.
Russian legislation does not prohibit the activities of crypto exchanges in Russia but also does not guarantee full-fledged legal protection to its participants, unlike traders in the stock market. Therefore, citizens should soberly assess all risks associated with cryptocurrency transactions.
How to choose an exchange
There are hundreds of crypto exchanges in the world, so it is worth paying special attention to the choice of a trading platform. In addition, some exchanges block users from Russia as part of the sanctions against Russia. Just recently:
- clients of Coinbase received messages about the imminent blocking of accounts - they are advised to withdraw assets from their accounts as soon as possible;
- as reported by Russian users of Bitstamp, some of their accounts are blocked without the possibility of withdrawal;
- Binance restricted the access to its services to Russians who have more than €10 000 in their accounts.
As an alternative solution, some traders are switching from centralized exchanges (CEX) to decentralized ones (DEX). The latter do not have a single management body, work in automatic mode, and do not impose a mandatory requirement for user verification. However, the trading volume and functionality of DEX are still far from the performance of global platforms.
List of criteria to pay attention to when choosing an exchange:
- Reputation. It is necessary to find out whether the exchange or its founders have been involved in fraud, speculation, and “disreputable ties,” and whether it has not participated (or is not participating right now) in lawsuits related to fraud.
- Security. There have been hacks on many exchanges, including the biggest ones - Binance, Bitfinex. But it is not only the risk of hacking that matters, but also the exchange's reaction.
- Exchange rates and fees. These rates directly affect a trader's profit. Trading platforms charge separate fees for deposits and withdrawals. You will also have to pay for each individual transaction on the exchange. Usually, the fee for order execution ranges from 0,01% to 0,1% of the transaction volume.
- The number of cryptocurrencies. On large exchanges, the choice reaches 500 different altcoins and tokens. There are more modest sites that operate with 20-40 of the most popular coins.
It is also worth considering the payment methods: whether the exchange accepts bank cards or is limited to working only with cryptocurrency wallets.
How to start trading
Trading on a centralized exchange begins with registration. Trading anonymously is not allowed. During the initial registration, it is necessary to specify personal data and confirm the intention to create an account by following the link sent to the specified email. After that crypto exchange services will be available in a limited mode. For full-fledged trading, a verification procedure will be required.
This process is also called KYC (Know Your Customer). Verification allows the exchange to make sure that it deals with respectable adult citizens who are not on the list of wanted criminals and are not engaged in money laundering with the help of cryptocurrencies.
- Account protection. The most reliable way is two-factor authentication with a cell phone ( a one-time login code is sent to it ).
- Setting up payment methods. Deposits can be made from a card, bank account, or e-wallet.
- Connecting a cryptocurrency wallet. You can connect an existing wallet or create a new one directly on the exchange. Please note that on CEX, all wallets are custodial, that is, private keys will be stored on the exchange server.
- Buying cryptocurrency. You can do this with fiat currencies by sending a transfer from your account or bank card. There is another option - to buy assets using P2P from other users, choosing the most favorable rate.
Next, all that remains is to study the products offered by the exchange and start trading. Many of the stock market trading strategies are also suitable for cryptocurrency trading (day trading, swing trading, scalping). Fundamental and technical analysis tools work, but their application has a number of nuances related to the volatility of cryptocurrencies and their variety.
A word of advice. If you have no experience in trading, choose an exchange with a practice account to learn the basic rules of trading.
An order is a key tool for trading assets at favorable prices. The trader has the right to specify practically any conditions for order execution in the DOM (depth of market, also known as the order book). If the order is not executed (there are no conditions for sale/purchase), the order can always be canceled and a new one created.
Users place stop orders, which ensure the execution of an order to buy/sell cryptocurrencies after a specified level of value is reached. This strategy allows you to set the level of possible losses in advance: the automatic mode excludes trading based on emotions and momentary decisions.
There are several types of orders:
- Limit orders. The trader sets the volume of coins and the desired price. As soon as the rate reaches the specified value, the trade is executed.
- Market orders. An order is placed at the current rate and is executed instantly. The trader specifies only the number of coins they want to buy or sell.
- Stop-Limit orders. They allow you to set a take-profit and stop-loss at the same time to limit the possible loss. The order is executed when one of the set conditions is reached.
The use of limit orders greatly simplifies trading on the crypto exchange because they allow the trader to execute pending trades when certain conditions occur. When activating an order, the user does not even need to be in the trading terminal to make a trade. Limit orders can also be used to set take-profits and stop-losses to limit risks.
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