Basic concepts of buying and selling cryptocurrency
Are you one of our regular readers whose primary purpose for owning cryptocurrency is online gambling? If so, have you considered going beyond playing something like slots with bitcoins to actually consider investing? Assuming that is the case, this post is for you; it is a guide to the basic concepts of buying and selling crypto.
Buying and selling (a.k.a. trading) takes the concept of digital assets to a new level. Rather than simply acquiring bitcoins so that you can pay for things online, you acquire coins in the hopes that future price increases will put profit in your pocket.
Investing in crypto is very similar to investing in traditional securities like stocks and commodities. In the simplest possible terms, your goal is to buy at the lowest possible price and then sell at a higher price. The higher the sale price, the more you profit.
Understand that buying and selling crypto is not as easy as this basic description makes it sound. But it is also not tremendously complicated once you understand its fundamental principles. With a little bit of knowledge and some practice, you can get very good at digital asset trading.
The supply and demand principle
The first thing to know about buying and selling crypto is something we address quite frequently in our posts: supply and demand. While there are a variety of factors that affect cryptocurrency prices, the single biggest one is supply and demand. This is easy to understand if we think of it in terms of another valuable commodity.
Let us say there is two sellers each with a gold coin and 50 people looking to buy those coins. Your two sellers will allow the 50 buyers to compete among themselves to see who is going to pay the highest price. A seller willing to accept anything less than the best offer would be regarded as foolish.
Likewise, let's say you have 50 sellers with one coin each trying to sell their coins to just two buyers. Now the sellers compete to see who will offer the lowest sale price. Smart buyers will wait until all the jockeying stops before going with the cheapest deal.
This is literally how cryptocurrency trading works. Unless you are buying and selling on a platform like Binance - meaning you are trading on a traditional exchange - you will be interacting with buyers and sellers all jockeying for the best possible deal.
Choosing your exchange
We have covered how to choose an exchange in detail in other posts, so here we will just review the basics. Note that not all exchanges operate in the same way. Some act as an open market listing a full range of buy and sell orders while others give traders very few options. They work on 'take it or leave it' offers for all intents and purposes.
Your best bet is to go with the first kind of exchange. The more buy and sell offers you are exposed to, the better your chances of getting the kind of deal you are looking for. Note that you might have to visit several exchanges before you find one you like.
Another thing to be careful of are exchange fees. Exchanges make their money by charging transaction fees on both sides of the trade. Whether you are buying or selling, you will pay a fee for that privilege. It should seem obvious that you want the lowest fees possible.
We recommend reading online reviews before choosing an exchange. Users are not shy about relating their own experiences. Use these online reviews to find exchanges with good reputations among their customers. Once you find a few worth investigating, do some additional research to see if they have ever had any trouble in the past.
Reading the trading charts
New traders often start out with just a small purchase intended to test the waters. If that trade makes a little money, they might make a second and third purchase. Eventually the new trader may find him or herself in a position of being willing to go all in. At this point, it becomes critical to understand trading charts.
Trading charts may look complicated, but they really are not. They actually make trading research a lot easier once you understand what they are telling you. A comprehensive trading chart can give you good insight about the trade you are contemplating.
The candlestick chart
The most common form of trading chart is known as the candlestick chart. It consists of four primary components:
- Volume - Trading volume is represented as a bar graph that runs along the bottom of the chart. It is generally a neutral color so that it doesn't distract from the rest of the chart.
- Loss/Gain - A crypto's loss or gain is represented by a colored rectangle. A red rectangle indicates the price has dropped. The bottom of that triangle indicates the price at the time you are looking at it. A green rectangle represents a gain. The highest point on that rectangle represents the current price.
- High Point - Above the rectangle should be a line indicating the crypto's high point for the day.
- Low point - Likewise, there should be another line under the rectangle indicating the crypto's low point for the day.
On most exchanges, candlestick charts can be modified to reflect a certain time frame. You will typically see buttons underneath the chart allowing you to get numbers for anywhere from 5 minutes to a full month. Most experienced crypto traders like to look at charts covering the last 30 minutes, the last 24 hours, and the last week.
Note that shorter time frames do not give you a complete picture of volume and momentum. That's why it's good to look at longer time frames as well. A short time frame can give you a good idea of the here and now, but you need longer periods to help understand the direction a particular crypto is taking.
The price chart
Another common chart is known as the price chart. This chart is perhaps the simplest of all to read. It offers nothing more than a list of cryptocurrencies along with their prices, volume, and changes for the day. If you can read a spreadsheet, you can read this sort of chart fairly easily.
Your typical price chart allows you to sort by any one of the primary columns. If you want to sort by price, just click the top of the price column to see prices in descending order. Click it again for prices in ascending order. You can also sort by volume, name, symbol, etc.
This sort of chart is most helpful in understanding momentum. By looking at both volume and price change over the past 24 hours, you can get an accurate picture of a particular asset's direction.
Some exchanges list prices based on the current price of a single coin. For example, one exchange might list Bitcoin (BTC) at $8000. However, Bitcoin is divisible down to eight digits. So another exchange might list the value of a single satoshi (SAT) rather than a full coin. A single bitcoin is worth 100,000,000 satoshis.
When it's time to buy
Once you are comfortable with the inner workings of your chosen exchange, it is time to make your first buy. You have three options, all of which you should research before you make a purchase. These are as follows:
- Limit Order - A limit order allows you to buy at a specific price point. You set that point, then allow the system to buy the desired amount of coin when the price gets there.
- Market Order - A market order is a straight up purchase at the going price. You simply indicate how much you want to buy and click the button.
- Stop-Limit Order - A stop-limit order allows you to set specific limits for both buying and selling. This sort of order is the most complicated for new traders.
Selling involves the exact same three options. After making a few purchases, you should be able to sell some of your coins without much trouble. A limit order allows you to set the price at which you want your sale to be triggered. A market order sells immediately at the going price while a stop-limit order allows you to set more specific parameters.
Storing your assets
To close this post, let us talk a bit about storing your digital assets. Leaving your assets on an exchange alone is risky. You are trusting that the exchange is protecting your data, both in its original form and with backups. This is a bad move. It is best to not store your assets on an exchange at all. But if you do elect to do so, make sure you utilize cold storage as well.
Cold storage is any kind of storage method that is both offline and off your main computer or mobile device. Examples include USB flash drives and paper ledgers. Cold storage is the best option because it is easily backed up, you can create multiple backups and store them in separate locations, and they are easy to protect using a safe deposit box.
You should now have an understanding of the basic concepts of crypto trading. For more information, feel free to take a look at some of our other posts covering this topic.