What is Trading? #
Trading is an economic activity you do when you buy and sell different assets and services. When you purchase Bitcoin (BTC) you are already trading the asset, in this case, from the demand side of the market. You will be offering an asset if you expect a buyer to purchase it from you.
There are different styles of trading that would allow you to profit from buying and selling both assets and services. In this cryptopedia guide, we are going to focus on cryptocurrency styles of trading.
Which are the main Styles of Trading? #
There are different styles of trading that would be suitable for different traders. Some of these styles of trading include arbitrage trading, spot trading, derivatives trading, day trading, swing trading and more. In the next sections, we are going to explain them to you.
Arbitrage Trading #
Arbitrage trading would allow investors and traders to profit from an asset that trades at different prices in multiple markets. Currently, the price of Bitcoin in Nigeria is 17% more expensive than in the United States, Europe and other parts of the world. Let’s suppose you bought Bitcoin at $10,000 on Binance but in Bittrex users are paying for the same BTC $10,100.
You can acquire BTC in Binance, send it to Bittrex, sell it, and make a profit of $100. Although this is just an example, it allows you to understand the dynamics behind arbitrage trading. Take into consideration that price differences between markets do not include transfer fees or commissions paid for executing an order in each of these platforms. Moreover, there is a risk that while you are transferring an asset, the price could fluctuate and make the trade unprofitable.
Spot Trading #
Spot trading is perhaps the most common type of trading activity in the cryptocurrency market. Investors will be purchasing (or selling) a virtual currency at a specified price and settling the transaction immediately after. There are no waiting times.
Traders will be able to receive the cryptocurrency they purchased at the price at which the market was offering the asset. Currently, most crypto exchanges are offering spot trading and some others have also added derivatives trading.
If you are a spot trader, your strategy would be to buy a virtual currency at a price and expect to sell it at a higher price in the future. You can do it in just a few hours, days, weeks or even months. If you want to bet on the price of Bitcoin going down, then the best thing you can do is to trade using derivatives.
Derivatives Trading #
Derivatives trading is one of the styles of trading we are going to be analysing in this section. Derivatives are contracts signed between parties that would help traders speculate on the fluctuations of the price of an underlying asset such as a cryptocurrency or a commodity, among others.
There are different derivatives such as swaps, forwards and futures contracts. In the cryptocurrency market, futures contracts are expanding fast. Binance, BitMex and Bybit are some of the cryptocurrency exchanges offering investors the possibility to trade cryptocurrency futures contracts.
Futures contracts allow investors to trade an asset at a specific time in the future for a predetermined price. This can also help companies reduce their risk to price fluctuations and improve their financial stability.
While trading futures in the cryptocurrency market, you will be able to go long or short. That means that you are betting on the price of a cryptocurrency moving higher or lower. In addition to it, you can use leverage to increase your exposure to the crypto market and also to these price fluctuations.
In short, the practice of trading futures itself is like gambling. You bet on the price going up or down. If you go short (betting the price of Bitcoin going down), it means the lower the price of the asset goes, the more money you make. If the market goes against your bet, you lose money. If you go long, you profit from the price of an asset moving higher.
Swing Trading #
Swing trading is one of the different styles of trading that would allow investors and traders to buy virtual currencies – or any other asset – focusing on short-term profits. In Cryptocurrency, traders take advantage of the sharp ups and downs of the market. Buying low when it crashes and selling high when it pumps.
In order to reduce losses, traders should set tight stop-loss orders. This would reduce the losses and increase the chances of having a profitable trade. Stop-loss orders will allow you to reduce your exposure to a trade. A stop-loss order would close your position if it is moving into the contrary direction you were expecting.
While day traders close their positions in just one or two days, swing traders can wait for longer periods of time. However, swing traders tend to keep their positions opened between days and a few weeks, but not longer.
Holding #
Although holding is not strictly trading, this investment strategy for the cryptocurrency market has attracted many users. If you do not consider yourself a good trader or you just do not want to risk your funds, the best thing you can do is to hold an asset for a longer period of time.
Say, you bought 1 Bitcoin in March, 2017 at a price of $900. In 2020, that 1 Bitcoin is now worth $10,000 meaning that you have made a profit of $9100. This is the ultimate buy low, sell high.
If you bought Bitcoin for $20,000 in December 2017, then you would not want to sell it at a loss. A good strategy could be to hold it until its price would be as close as possible to $20,000 or even higher before selling.
Peer-to-Peer Trading Strategy #
You can also start profiting from Bitcoin and cryptocurrencies by using secondary or peer-to-peer markets. While in some regions you can buy and sell cryptocurrencies using traditional exchanges such as Binance or Coinbase, other regions have fewer exchanges and possibilities for investors to acquire Bitcoin. This is where peer-to-peer platforms such as Paxful can be of help.
Generally speaking, the Bitcoin price in these peer-to-peer platforms tends to be higher. If you have access to traditional exchanges, you can buy Bitcoin (or other virtual currencies), send them to the Peer-to-Peer platform and make a profit.
OTC Trading #
Over-the-counter (OTC) trading could also be a good way to generate income for traders. You can buy or sell Bitcoin using OTC markets. These markets are great for investors that want to trade larger amounts of Bitcoin and cannot do it through an exchange because they will completely eat the liquidity of traditional exchanges. Furthermore, OTC trades can be also helpful to protect your privacy while gaining exposure to digital assets.
You can profit with OTC by buying BTC in a traditional crypto spot exchange and then selling it in OTC markets. You could search for countries where crypto exchanges are not really offering good services but there is still a consistent demand for Bitcoin. These buyers are willing to pay a higher price for your BTC. The funds you receive can then be used to acquire more BTC in traditional exchanges.
