The basics of bitcoin and cryptocurrency trading

The basics of bitcoin and cryptocurrency trading

What is trading?

The word trading is generally used to refer to short-term trading, where traders actively open and close positions within a relatively short time. However, this interpretation can be a little misleading. It refers to a wide range of different trading strategies such as day trading, swing trading, trend trading, and many more. These will all be discussed in more detail below.

Trading is a fundamental economic concept that involves buying and selling of assets. These values can be goods or services for which the buyer pays the seller. In other cases, we can talk about an exchange of goods between the parties. 

In the context of financial markets, traded capital is called financial assets. These can be shares, bonds, currency pairs in the forex (foreign exchange) market, options, futures, cryptocurrencies, and many others.

What is investing?

Investment is the use of resources (like capital) to generate profit. It can be, for example, investing capital in start-up businesses, buying land to sell later at a higher price. In financial markets, this usually takes the form of investing money in various financial instruments with the hope of selling them at a higher price later. 

The expectation of a return is key to the concept of investment, also known as ROI (Return of Investment). Unlike trading, investing is generally a longer-term approach to making a profit. An investor aims to generate income over years or even decades. Investors typically look for potential entry opportunities based on fundamental factors.

Because of the long-term approach, investors are generally less concerned with short-term price movements. They view the market as a relatively passive participant without worrying about potential short-term losses.

What is the difference between trading and investing?

Both traders and investors aim to generate profit in financial markets. However, their methods of achieving their goals are pretty different. In general, investors plan for the longer term, thinking in terms of years or even decades. As they aim for longer time horizons, it follows that the returns they seek are also higher. In contrast, cryptocurrency trading aims to take advantage of market volatility. Traders open and close positions much more frequently and try to take smaller profits on each position. Often, several trades are executed at the same time.

Which one is better or which one suits you better? Well, you’ll have to find the answer to that yourself. You can start learning about the markets, then try out your new knowledge and grow through practice and experience. Over time, you will be able to decide better which one suits your financial goals, personality, and trading profile.

What is fundamental analysis?

Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences and financial statements, and industry trends. These can be macroeconomic conditions, such as the broader economic situation, industry conditions, the asset-company relationship. 

Once the fundamental analysis is completed, the analyst’s objective is to determine whether the asset is undervalued or overvalued and then decide whether to invest in that asset.

In the case of cryptocurrencies, fundamental analysis may also mean relying on specific blockchain data. These blockchain-specific indicators include, for example, the hash rate of the network, mapping of important holders, number of wallet addresses, analysis of transactions, etc. This large amount of data, to which the public blockchain provides access, can be used to create our complex technical indicator, which can measure some aspects of the quality of the network.

While fundamental analysis is widely used in the stock market or Forex, it works less well for cryptocurrencies. This asset class is too recent to provide a simple, standardized overall framework for determining its market value. Furthermore, a significant part of the crypto market is driven by speculation. Therefore, fundamental considerations often have less impact on the price of a cryptocurrency than in traditional markets. However, as cryptocurrency trading becomes more mature, this method will also become more suitable for effectively determining the value of assets.

What is technical analysis?

Technical analysis is another type of approach where we try to infer future market behavior from past price movements during cryptocurrency trading.

In technical analysis, we do not try to determine the actual value of the asset. Instead, we try to look for new opportunities by analyzing past trading activity. These activities can be examined using price movements, trading volume, various chart shapes, technical indicators, and other chart analysis tools. The purpose of this analysis is to determine the degree of buying power present in a given market.

In addition to being a tool for predicting the probability of various market movements, technical analysis also plays an essential role in risk management. Furthermore, technical analysis

provides a model for examining the market structure, ensuring that a trade is made within a defined framework and is more measurable. Accordingly, assessing risk, for example, should be the first step in managing it. However, it follows that a technical analyst is not necessarily a trader, and technical analysis can be explicitly used as a risk management tool.

Technical analysis can be applied to any financial market, and its use is therefore widespread among cryptocurrency traders. But does it work? Because cryptocurrency price movements are highly speculative, it provides an ideal environment for technical analysts to achieve success, even if they rely solely on technological tools.

Fundamental or technical analysis – which is better?

It depends entirely on your trading strategy. In fact, why not use both? Most market analysis methods work best when combined with other methods or indicators. Combining different trading strategies can also help to eliminate dubious opportunities.

Cryptocurrency traders can combine the benefits of different strategies. The idea is that the signals from combined strategies can be much stronger than relying on just one of them.

What drives financial markets?

The balance between supply and demand determines the price of an asset. In other words, it is an agreement between buyers and sellers. Where supply meets a need, a market is created. But what else can influence the value of a financial product?

These can be fundamental factors, such as the state of the economy. They can also be technical factors, such as market capitalization. Besides, there may be other factors such as market sentiment or news in the media.

The latter are just aspects to consider, but what determines the price of an asset at a given moment is simply the balance between supply and demand.

What is a trend?

A trend is a general direction in which the price of an asset is heading. Market trends are usually defined by the main direction of price movements, trend lines, or moving averages in technical terms.

We distinguish between two main types of trends: rising (bull market) and falling (bear market). A bull market is a continuous upward trend, where the general direction of the price is increasing. Both the tops and the bottoms are rising.

A bear market is a continuous downward trend, where the general direction of the price is decreasing. Also, we can identify consolidating price movements where no clear main direction can be established. This is called a sideways trend.

What is a market cycle?

A cycle is a formation or trend that repeats itself from time to time. In general, a market cycle is much more reliable over a longer time horizon than over shorter-term views. However, according to our trading strategy, we can also look at shorter cycles on a short time horizon, for example, on an hourly chart.

Markets are cyclical by nature. Cycles result in certain assets or asset classes outperforming others. In different segments of a cycle, differences in the performance of asset classes may occur due to different market conditions.

It is worth noting that it is almost impossible to determine with certainty which stage of a market cycle we are in. It is only possible to decide on this with a high degree of accuracy once the relevant phase has been completed. Market cycles rarely have specific starting and ending points.

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