What Makes Cryptocurrencies Tradable Instruments?
To those who have gotten a bit tired of trading forex and binary options year in, year out, cryptocurrencies such as Bitcoin, Litecoin, Dash, Monero and Ethereum are providing a very profitable distraction. So much so that in addition to the traditional methods of buying and selling cryptocurrencies using the respective wallets, many forex and binary options brokers are now adding them to their asset list including me.
But what qualifies cryptocurrencies as assets which can be traded for money?
- They are volatile. Prices of cryptocurrencies are known to be quite volatile, moving in ranges of up to thousands of dollars in a few days. This inherent volatility produces the price changes in the value of the cryptocurrency which can be traded for money. In terms of profit potential, volatility is good. The more volatile a cryptocurrency is, the greater the potential for price change and for money-making.
- They are widely acceptable as a tradable asset. No matter how volatile a cryptocurrency is, sufficient liquidity is required to be able to find people willing to buy or sell the asset at any price that is listed on the trading exchange or platform. This is not possible if you only have 50 or 100 people trading them. You need hundreds of thousands of traders with effective geographical spread to generate the required volatility. So global acceptability of cryptocurrencies as tradable assets will lead to an increase in the number of people who want to trade them, which produces the required liquidity for this asset class.
- The cryptocurrency market is not skewed. A level playing field which does not skew the market in favour of a few participants is a cardinal requirement for any tradable asset. Transparency in trading conditions gives all players the confidence that they may be the next cryptocurrency millionaires, which encourages participation. The moment people perceive that the markets are rigged, they will take their money elsewhere.
- Cryptocurrencies can be converted into fiat currencies. It is possible to exchange Bitcoin, Ethereum, Litecoin, Dash, etc into fiat currency. Fiat currency refers to the coins and notes that we use in everyday life as legal tender. To take it even further, many online and a few offline shops are starting to accept cryptocurrencies as a means of payment. This also promotes and increases participation in cryptocurrency trading.
Fundamental Influences for Cryptocurrencies
Prices of cryptocurrencies simply do not rise and fall at will; there are always factors that push the demand and supply of cryptocurrencies. These factors are the same kinds of factors that affect prices in any market. There are fundamental and technical factors.
Fundamentally speaking, the news is primarily what moves prices of cryptocurrencies. Good news and bad news affect prices of cryptocurrencies to the upside and downside respectively. The news could cover the following:
- A new Coin that is gaining market traction.
- Institutional support for a cryptocurrency. For instance, Vladimir Putin’s meeting with Ethereum founder has proven to be a boost for Ethereum. In case you missed it, Ethereum has gained more than 3,000% in 2017 alone, and the year is only 2/3rds of the way gone.
- Sectorial support also seems to be mover of cryptocurrency prices. After sitting in the shadows of Bitcoin for years, Litecoin is starting to exert its own influence on the market as more people start to embrace cryptocurrencies.
It is not enough to simply know the news or to read about it. You need to understand how to interpret the news and implement it on the trading exchange or platform. This is where the knowledge of price action, reading charts and making entries/exits based on technical analysis comes into play.
Where Can You Trade Cryptocurrencies?
Ok, let’s assume you know where to source for cryptocurrency news, and you know how to interpret the news and make technical trades based on the news. Where do you apply this knowledge to make money? This brings us to the markets that exist for trading of cryptocurrencies for money.
There are basically two outlets for trading of cryptocurrencies:
- The exchanges
- The trading platforms
There are many cryptocurrency exchanges. What goes on in these exchanges? Users can register an account, get a free cryptocurrency wallet and load funds to their wallet. They can basically load their accounts with fiat currency or with other digital currencies such as Skrill, Western Union or PayPal, purchase cryptocurrencies such as Bitcoin at a particular price, and hope sell them off to other buyers when prices go up. Basically, the aim is to buy and hold for appreciation of prices before they are sold off to other buyers. So what happens when prices fall? If a trader purchases cryptocurrencies and prices start to fall, then that trader is out of luck and can either cut his losses by selling off at a lower price, or simply holding them in the wallet until prices bounce back (whenever that may be).
There is also the opportunity of trading cryptocurrencies on trading platforms. Many forex and binary options brokers now offer cryptocurrencies such as Bitcoin and Ethereum on their platforms. The advantage is that money can be made by buying and selling off when prices rise, or by short selling when prices are falling. Just like is the case with exchanges, the trader has to open an account, fund the account with fiat currency, and trade. Another advantage is that tools of technical analysis such as charts and indicators are provided for free, giving traders with these tools an edge over wallet traders. Those who have access to trading cryptocurrencies on platforms can also use the knowledge to trade on wallets, giving them the ability to kill two birds with a single stone.
How to Trade Cryptocurrencies Profitably
Make no mistake about it: trading cryptocurrencies is not a walk in the park. It is difficult and the wide range of price movements can take out your entire capital in one fell swoop if you get sloppy. Just ask those who were on the wrong side of the price movements of Bitcoin in July 2017 when prices fell from $3,000/BTC to just above $1,800/BTC. Many of those traders who got their fingers burnt still have their hands in cold water, trying to recover from the shock. So you need to understand the tricks involved in trading Bitcoin and other cryptocurrencies so you do not lose your fingers, hands and all to the market sharks.
Tricks and Tips for Cryptocurrency Trading
Trick Number 1: You have to get access to cryptocurrency charts
Cryptocurrency charts can be obtained from third party companies as well as forex platforms. Those who trade with wallets on exchanges will find that they have no way of knowing where prices will go next. This is because they have no charts to refer to. Charts display pricing information, the latest news releases, technical indicators for analysis, as well as other relevant functions that aid in determination of future price movements. Those who have access to interactive charts for each cryptocurrency are ahead of the rest. This is a no-brainer. Where there are two enemy combatants facing each other at night, the one with night vision goggles is already at an advantage. Having access to cryptocurrency charts is like having night vision goggles. Those who are night-blinded (i.e. those without charts) would never know what hit them when the bullet of adverse price movements strikes.
Trick Number 2: Know How to Read the Charts
You can have ten thousand night vision goggles. Left in your bag, they are useless. You have to put them to use by actually wearing them. Same thing goes for your cryptocurrency charts. You have to know how to read and interpret them. But this is hard work and not many can do it. So what’s the solution? Pay someone to do the chart reading for you. This is basically what you get with a trade alerts service. Better still, get a programmer to code a robot which can read the charts for you and trade on your behalf. There are also various social trading platforms devoted to cryptocurrency trading. You can join them and let others do the chart reading for you.
Trick Number 3: If You Can, Use a VPS
A Virtual Private Server (VPS) is a remote computer, hosted on a server, which allows functions of a host computer to be performed remotely, so as to ensure continuous and uninterrupted operations. One of such operations which is amenable to connection on a remote computer, is the trading of financial assets on a downloadable trading platform. If you trade Bitcoin, Ethereum and Litecoin using the MT4 platform, you can actually run an EA on a virtual private server to provide you with continuous trading, even when your trade station is off. However, this can only work if the EA you use for your cryptocurrency trading is a good one which actually delivers profits.
Trick Number 4: Hold Positions in the Short Term
Many authorities will disagree with this point, but the facts are there for all to see. Price movements of cryptocurrencies are so rapid and trends hardly sustain for a long time. Therefore, it is safer for traders to hold positions in cryptocurrencies for the short term before offloading them. Pick up any cryptocurrency chart and take a look at the trends. Apart from Bitcoin, how many other cryptocurrencies maintain long term trends without wild swings in between?
Trick Number 5: Get Enough Sleep
Cryptocurrencies can be traded 24 hours a day, 7 days a week. Therefore, there is no need to stay up all night chasing pips all over the place. Sleep deprivation is bad for trading and will only lead to problems not just with your health, but with your trading account.
Trick Number 6: Acquire Some Knowledge
It does not hurt to gain some knowledge about cryptocurrencies. Join online forums. Visit blogs like ours. Read all you can to understand where your money is going into. Which is harder? The work you do to get your money, or taking out an hour a day to read and improve your knowledge base to avoid mistakes? The answer is obvious enough.
Trick Number 7: Learn How to Manage Risk
The reason why many trading experts harp on the issue of managing risk is because risk and money management is what keeps traders alive when a losing streak hits the trading account. No more than 3% of a trader’s capital should be risked in cryptocurrency trades at any time. This will ensure that even if a trader loses several trades at a stretch, there will still be a sizeable amount of capital left to proceed with trading.
Conclusion about Cryptocurrency Trading
Implementation of these little tricks will do wonders to a trader’s account. However, there is no guarantee that the trader will immediately get things right. Therefore, you will have to adopt a rational approach to implement these tricks gradually until such a time that the trader can boast of having perfected them. I wish you good luck!