In the previous article, we talked about all the basic things related to cryptocurrency and all the basic things you need to know to get started in crypto. If you haven't read that yet first read that here.
Today we will discuss cryptocurrency trading and how you can make money from it.
What is Trading?
Trading means buying or selling something. In crypto, trading refers to buying a coin at a certain price and when the price gets up you sell it and make a profit.
At present, crypto trading has a huge potential and it is a great time to start your journey at crypto trading. Now let's discuss some things you should know before trading:
Types of Trading in Crypto:
- Spot Trading
- Future Trading
1. Spot Trading:
Spot Trading is a low-risk trading method and the best one for beginners to get started. In spot trading, you buy a coin after doing your research, and proper analysis, and after buying it you hold it and wait for the price to increase when the price goes up you make a profit, and when you realize the price will now go down you sell it.
Why Spot Trading is Safer?
Spot trading is very much safer than future tradingwhich you will know later why but in spot trading if the price of the coin you bought goes down you simply hold it until it goes up again because in crypto if a coin goes down it definitely moves up again. That why Spot trading is a safe option and for beginners it is the best one.
2. Future Trading:
Future trading works on future contracts which are agreements between a buying party and a selling party to buy or sell a coin at a certain price which is predetermined which is why it is called future trading. In future trading, you do your analysis and determine whether the price will go up or down in the future, and then open your position based on your analysis. When you make a trade on futures it is called opening a position. There are two types of positions in futures:
- Long Position
- Short Position
Long position:
When you determine that the price of a coin will go up and open your position on upward movement it is called a long position.
Short position:
When you determine that the price of a coin will go down and open your position on downward movement it is called short position.
There are a few things which are involved in future trading you need to know:
1. Leverage:
Leverage means you can borrow money from the exchange to open a more large position that cannot be down with your capital so you borrow money from the exchange.
Let's understand it with an example:
Suppose you have your 10$ investment and you are sure about a long or short position in a coin and want to make more profit from it then you can take leverage from the exchange. Leverage can be 2x, 5x , 10x, 50x etc. If you take 10x leverage your money involved in the position will be
Your capital * 10 = 10*10=100$
Now you can trade with 100$ and the profit will be according to 100$. If the price goes up 10% you will make 10$ profit with 10$ capital means you will get 20$ from that trade sounds good but it is not as sweet as it sounds. If the price goes down 10% then you will lose 10$ which will be deducted from your capital and eventually, your position will be closed automatically by exchange to prevent them from loss and you will end up losing money.
Your capital * 10 = 10*10=100$
Now you can trade with 100$ and the profit will be according to 100$. If the price goes up 10% you will make 10$ profit with 10$ capital means you will get 20$ from that trade sounds good but it is not as sweet as it sounds. If the price goes down 10% then you will lose 10$ which will be deducted from your capital and eventually, your position will be closed automatically by exchange to prevent them from loss and you will end up losing money.
2. Margin:
Margin is your personal capital that you put up in a trade. In the example above, that 10$ investment is your margin in the trade.
Why future trading is risky?
Future trading involves much more risk than spot trading because when a price movement goes against your position you lose money. Like in the above example, if you don't have much margin to keep the position going you get liquidated (means you lose your while investment) and you can't hold that position like you can hold the coin in spot trading in case of loss.
An Important point to know
Risk is both in spot and futures trading but risk is a part of life and no doubt that in the beginning, you will lose money, prices will go against your analysis and you will be in loss but a trader is not afraid of losses because it is part of their business. So, don't lose heart and keep going with proper risk management and first and most important thing to get started in crypto is that first crypto, learn trading, learn all the factors involved in trading, learn to do analysis, do paper trading, and see if you can make profit in real trades if you would have taken that base on your analysis and when you are confident in your knowledge start without looking back.