What is crypto trading? A simple explanation
Crypto trading means buying and selling cryptocurrencies on a crypto platform, with the goal of making a profit from changes in their price. Participants usually observe market trends, study price movements, and respond to market changes.
A defining characteristic of the cryptocurrency market is extreme price volatility. Bitcoin, Ethereum, and other cryptocurrencies, also known as crypto, can shift substantially within brief timeframes, making crypto trading both potentially rewarding and high-risk. Beginners should understand this risk clearly before starting, as it is a highly volatile investment.
How to start crypto trading for beginners: A step-by-step guide
If you are new to crypto trading, the following six steps provide a structured starting point.
Choose a platform: Select a crypto broker or exchange, and look out for fees, security measures, and the range of available cryptocurrencies or crypto indices.
Set up and verify your account: Complete the identity verification and deposit funds only after verification is complete.
Start small: Begin with modest amounts you can afford to lose entirely and avoid committing large sums while still learning how to trade crypto.
Learn the platform: Familiarise yourself with the user interface, order types (market and limit orders), and how to deposit and withdraw funds.
Define your strategy: Decide on a short-term or long-term approach and set clear entry and exit rules before placing any trade.
Monitor and learn: Track your trades, review what worked and what did not, and adjust your strategy based on what the market teaches you over time.
What to look for in a crypto platform
Regulatory status: In the UK, check that the platform is registered with the FCA.
Fees: Transaction, deposit, and withdrawal costs vary significantly between platforms.
Security: Look for two-factor authentication (2FA), cold storage of funds, and regular security audits.
Asset selection: Ensure the platform offers the cryptocurrencies you intend to trade.
User interface: A clear, intuitive interface matters, especially when price movements are fast.
Keeping your account secure
Use strong, unique passwords for your trading account.
Enable two-factor authentication (2FA) on all accounts.
Verify recipient addresses carefully before confirming any transaction.
Review your account security settings regularly.
Short-term vs. long-term crypto trading
One of the earlier decisions a beginner might face is whether to focus on short-term trading or adopt a long-term approach. Both carry risk, but they involve very different levels of activity, time commitment, and exposure to price movements.
Day trading and swing trading cryptocurrencies
Day trading involves opening and closing positions within a single day, aiming to profit from intraday price movements.
Swing trading is similar but holds positions over days or weeks.
Both strategies require close attention to market trends, chart patterns, and price indicators.
Short-term crypto trading carries particularly high risk. Price movements in the cryptocurrency market are unpredictable, and frequent trading increases exposure to losses. Transaction fees may also accumulate quickly and can reduce returns significantly.
Long-term investment in cryptocurrency
A long-term approach, sometimes referred to as "HODLing" (a slang crypto term that was adapted when a user made a typo in a crypto forum back in 2013), involves buying and holding a cryptocurrency asset over months or years, with the expectation that its price may increase over time. This approach requires less active monitoring but still carries significant risk.
Neither short-term nor long-term approaches guarantee a profit. Past performance is not a reliable indicator of future results. Don’t invest without being prepared to lose all the money you invest.
Understanding price movements and market trends
Two main approaches are used to analyse price movements and identify potential market trends in the cryptocurrency market: technical analysis and fundamental analysis.
Technical analysis: Reading price charts
Technical analysis involves studying historical price charts and trading volumes to identify patterns that may suggest future price movements. Common tools include:
Moving averages: Smooth out price data to identify the overall direction of a trend.
Relative Strength Index (RSI): Indicates whether a crypto asset may be overbought or oversold.
Candlestick patterns: Visual representations of price movements within a given period.
Support and resistance levels: Price points where a cryptocurrency has historically struggled to move above or below.
Technical analysis does not predict the future with certainty. It is a tool to support decision-making, not a guarantee of profit.
Fundamental analysis: Following market trends
Fundamental analysis focuses on external events and broader factors that may influence a cryptocurrency's long-term value. This includes news and regulatory developments, technological updates to a blockchain network, adoption market trends, and macroeconomic factors that affect crypto markets.
Keeping track of market trends, such as shifts in market sentiment or changes in regulation, can help traders make more informed decisions.
Spot trading vs. CFDs: What is the difference?
When researching how to trade cryptocurrency, you will encounter two distinct approaches: spot trading and trading via "contracts for difference" (CFDs). Understanding the difference is important for beginners.
Spot trading
Spot trading means you buy and own the actual cryptocurrency asset. When you purchase Bitcoin on a spot exchange, you hold real Bitcoin. Your profit or loss depends directly on the change in the price of that cryptocurrency.
Contracts for difference
CFDs (contracts for difference) are a different type of financial product offered by some providers. With a CFD, you do not own the underlying asset. Instead, you speculate on whether the price will go up or down. CFDs often involve leverage, meaning you can open a larger position than your initial margin deposit. A long position speculates on a price rise; a short position speculates on a price fall.
Important: Leverage and CFDs may significantly amplify both potential gains and potential losses. Losses from leveraged products can exceed your initial margin deposit. The FCA has restricted the marketing of crypto CFDs to retail consumers in the UK due to the very high level of risk involved. Bitpanda offers spot cryptocurrency trading — not CFDs.
Risk management strategies for crypto trading
Managing risk is an important aspect of crypto trading. The cryptocurrency market is highly volatile, and even experienced traders experience significant losses. Several tools and approaches can help you manage your exposure.
Stop-loss and take-profit orders
Stop-loss orders: Automatically close your position if the price falls to a level you set in advance, helping to limit your potential losses.
Take-profit orders: Automatically close your position when the price reaches a target level you define.
Trailing stops: Dynamic stop-loss orders that adjust upward as the price rises, helping to lock in gains while limiting downside risk.
Limit orders: Allow you to buy or sell at a specific price, giving you control over execution rather than accepting the current market price.
Stop-loss/take-profit orders do not guarantee execution at the chosen price and may execute at a worse price in fast-moving/illiquid markets.
Position sizing and diversification
Position sizing means tailoring the size of each trade to your total available capital. A common guideline is to risk only a small percentage of your total capital on any single trade. Spreading your exposure across different cryptocurrency assets, also known as diversification, can help reduce the impact of a sharp fall in any one price.
Avoiding emotional trading
Fear, greed, and FOMO (fear of missing out) might influence trading behaviour, often causing panic selling or uninformed purchases. To trade mindfully:
Set clear entry and exit rules before you open a position
Keep a trading journal to review past decisions and emotional responses
Pause before trading to assess whether a decision aligns with your strategy rather than your emotions
Never invest more than you can afford to lose
The pros and cons of crypto trading
Before you begin crypto trading, it is important to weigh the potential opportunities against the significant risks involved.
Potential advantages
The cryptocurrency market is open 24 hours a day, seven days a week.
High price volatility can create opportunities for short-term traders.
Wide range of cryptocurrencies available across different asset types.
Potential disadvantages
Extreme volatility can lead to rapid and significant losses.
No FSCS protection or FOS recourse if a platform fails.
Scams, fraud, and security breaches are common in the crypto market.
Regulatory changes can affect price and availability at any time.
Start crypto trading on Bitpanda
Bitpanda offers spot cryptocurrency trading for UK users, including limit orders and access to crypto indices. You can explore available cryptocurrencies and manage your trades directly within the user interface.
Please note that you must pass an appropriateness check before you are able to trade on Bitpanda. Fees, limits, and conditions apply. Please refer to the Bitpanda website for full details.
