With the monthly trading volumes XRP (Ripple) being in the top of the list with reaching at an average of $21 million million in a week, we can say the cryptocurrency markets have grown immensely over the years. If you consider today’s market there are a lot many cryptocurrencies which can be considered for investment with bitcoin being the favorite.
There are a wide range of alt coins other than bitcoin such as Ethereum, XRP, Dash and Bitshares. Also, each transaction is recorded on an associated blockchain (It is an accounting system where record of transactions is distributed among a network of computers).
If you are aware of how the stock market works you will know that the basic idea of investing is to buy an instrument at a certain price and later sell it at a higher price and the difference will be the profit you earned.
A question arises on whether one needs to invest or trade cryptocurrency?
Invest or Trade
Investing and trading are two different things even if the idea leads to similar outcomes. While investing or trading what is one looking for is profit, but the way things are done is different.
For example, if you are investing in Ethereum you are probably investing in it keeping in mind that the crypto will grow in the future and will get you a good number of gains. Here you are dedicated to holding that for a couple of years or even a decade. But in trading there are not commitments to hold it for a long term. Trade is always short termed maybe even minutes as when you trade you look to reach a target and exit as you have reached your goal which sounds similar to intraday trading in the stock market.
To invest or to trade depends on a particular individual’s financial goals and your assessment on a particular instrument behavior in the market.
Buying and selling cryptocurrencies
The buying happens via an exchange, you directly purchase the coin itself. You will need an exchange account, choose a cryptocurrency, put up the full value of the asset to open a position, and store the tokens in your own wallet until you want to sell.
Exchanges bring an exemplary learning curve as you will need to understand the technology involved and learn how to make sense of data. Many exchanges also have limits on how much you can deposit, sometimes accounts can be very expensive to maintain. The exchanges provide liquidity, providing liquidity means the trades can complete back-to-back transactions rapidly in minutes without having to find a buyer or a seller. Market liquidity tells you how easily and quickly can one buy or sell an asset against the orders available in the market, without the trade affecting the asset’s market price. Usually, it is preferred to trade a liquid asset as the volume is high and the price of the asset doe not vary much from trade to trade.
For example, in India you can buy or sell cryptocurrencies with wazirX which supports trading for most of the cryptocurrencies with secure transactions.
Trade order types and uses
The trade orders are alike stock market orders, depending on your goals and strategies you can use different types of trade order types.
Limit Orders
Most commonly used type of order is a limit order which suits both initial traders and experienced traders.
As the name implies, it allows you to define a specific price limit for your buy or sell order, and the market will only match it with the exact price or better.
For example, if you have placed a limit order for 1 Eth at $18, 889, it will be fulfilled if the market has a seller asking for 1 Eth at $18, 889 or less. Sell order is also identical, the sell order with the same details will be fulfilled only if the market has a buyer willing to pay $18, 899 or more for 1 Eth.
Market Orders
Limit orders let you set your own prices and sometimes you will even have to wait for the order to be fulfilled whereas the market orders are fulfilled as soon as an order is placed at whatever rates are available in the market.
Suppose you are selling 1 Eth with a market order, the order placed in the exchange is fulfilled. You place the order at the current price available.
It is crucial to keep in mind that market orders are extremely rare and that you will make some profit in a short time frame. Eventually you will be buying at a higher price and selling at a lower price leading to loss.
Stop Orders
Stop orders involve terms like “Stop Price” and “At Price”, these are conditions which are set by the trader. When these conditions are met spontaneously post buy or sell orders on the market.
While buying you specify at price which is the lowest price at which the order will be executed when the price reaches the target and also specify the stop price which will be the highest price to sell.
Order Book
In any exchange, active bids and asks are listed which is known as the order book, which will be updated in real time and reflects the market’s depth and liquidity. The order book is followed by a transaction history chart that lists the currently successfully executed trade
Also, you should know that the bids and asks that are listed in the order book can be revoked by the trader who posted them and the fulfillment of the order is uncertain.
Market Depth
The bids can be of any price and can go as low as 0.001 ETH. If you want to sell 0.001 ETH and let us assume that it was at the top of the market, then if you try to buy more than 0.001 Eth, you would take the top ask, then the remaining order amount will be in the queue to be fulfilled by the next best bid, until the order is completed.
Now that you are familiar with the terms and the basics of getting started with cryptocurrency trading and investing after which one should be able to start watching and studying the market activity and go on to become a trader and start tying out strategies and using the tools.
