Crypto Trading: How Does It Work?

If you’re new to the world of crypto trading and looking for more information on how it works, we have you covered! As you keep reading, we’ll guide you through the basics of this process.

Crypto Trading: How Does It Work?

Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.

And we’ll do it in a way that makes sense. Too many other websites read like a graduate-level course on crypto, which can put people off. But here at Pluto, we want to ensure you’re comfortable with every step and explanation.

First, we’ll answer the obvious question:

What Is Crypto Trading?

Let’s start by defining crypto, which is short for cryptocurrency.

Cryptocurrency is a digital currency. Unlike physical dollars, you can’t hold it; this is entirely virtual.

The “crypto” part of the word comes from the fact it is secured through cryptography. This makes it very, very difficult for counterfeiting or double-spending to occur.

There’s also no central authority issuing cryptocurrency. In other words, it’s decentralized. That means the government or any banks, for example, can't interfere with it.

No official authority can.

There are also many different types of cryptocurrency. Just like “traditional” money, there are different currencies: dollars, pounds, and yen.

Same with cryptocurrencies.

So now that we’ve clarified what crypto is, let’s talk about cryptocurrency trading. Surely, you’ve heard of the stock market. This is where assets are bought and sold. Crypto trading is sort of like that.

(There are differences, to be sure. And we’ll get there.)

Cryptocurrencies are bought and sold through an exchange. People speculate on price movements and make financial decisions in a way that will earn them the most profit.

How Does Crypto Trading Work?

As we mentioned before, these trading markets are decentralized. No banks or governments have authority over them. Everything is done through a network of computers.

Once you have digital assets ready for selling or if you intend on buying, you enter the exchange or trading platform. You examine prices, what’s available, and current trends.

And then you buy and sell — intending to amass as much value or profit as possible.

That’s the simple version.

Of course, there are tons of different trading strategies. Crypto traders will give you wildly different investment advice, recommend various coins such as Ether (ETH) or Litecoin (LTC), or suggest getting into NFTs, crypto ETFs, or staking.

Don’t get lost in the noise. Ensure you do your research, and talk to professionals (like us).

What Moves Crypto Markets?

Supply and demand are the most significant factors that move crypto markets. They have a tremendous influence on the rising and falling of cryptocurrency prices.

But other factors impact values in the crypto market as well, such as:

  • Utility: People want something they can use, like using a specific currency as a form of payment (as just one example).
  • Scarcity: A certain level of scarcity is suitable for a cryptocurrency because there’s a lower chance for the supply to outweigh the demand.
  • Perceived Value: How people view a particular currency will impact its value. If people believe it’s valuable, this will grow its demand. The more people buy it based on that perception, the higher the demand rises.

(Note that the market is very volatile; as perceptions change, so can values. And it can all happen very quickly!)

How Can Beginners Trade Crypto?

Has the information so far whet your appetite to begin cryptocurrency trading?

While the market is admittedly volatile, it’s also absolutely rife with the opportunity to amass wealth.

Our first recommended step is to contact us. We’d love to offer some in-depth advice, answer your questions, and ultimately just talk with you about cryptocurrencies — no obligations or pressure.

In the meantime, here are some essential tips to help you get started.

1. Get an Account on an Exchange

Start researching exchanges and decide which one is best for you. Investopedia has created a list of the Best Crypto Exchanges of 2022. We believe they offer sound advice, so we wanted to share it here. Give these a look before you start your journey toward cryptocurrency trading.

They also offer this warning, which we support:

Unlike traditional brokerage firms, cryptocurrency exchanges like Binance are not members of the Securities Investor Protection Corp. (SIPC). Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as unsecured creditors.

In short, be careful. Know how it all works. That’s why we’d love to at least converse with you before you move. Just to protect you, if nothing else.

2. Put Funds in Your Account

This is where you link your bank information to your crypto account and put money into it. This will help get you started on your journey as a cryptocurrency investor.

A special note: As some cryptocurrency exchanges differ, follow their directions on depositing funds into your account with them.

3. Research and Choose a Cryptocurrency

Simply guessing what kind of cryptocurrency you want to begin with is a terrible idea. Do your homework. Visit the websites of the currency you’re eyeing, read the latest news, talk to experts (like us), and think critically.

4. Get Started

So you’ve chosen an exchange, funded your account, and selected a currency. It’s time to enter the market and do your best in cryptocurrency trading!

Again, we hope you seek trusted advice as the market is volatile. Think of it like learning to drive and entering a busy highway. Things move fast, and it’s easy to become intimidated if you don’t have experience or confidence.

5. Keep Your Crypto in a Wallet

Maintain your chosen cryptocurrencies in a “wallet.”

But this crypto “wallet” of yours will be very unlike the one carried in your pocket or purse.

These “wallets” are either pure software or a piece of hardware with the software on it. They store your private passwords that guard your crypto assets.

Money has shared a list of the best crypto wallets on the market as of December 2022. Here are their picks:

Now, let’s talk a little bit more about trading. Not all trades are the same. So, let’s explore some.

What Types of Crypto Trading Exist?

Day Trading

This is when you buy and sell on the same day. (Thus, “day” trading.) You need to gauge how something is moving in a particular way to make a profit. And as you can tell, this moves reasonably quickly.

Position Trading

This is very different from day trading. In short, you hold your position for a more extended period. Weeks, months, even years! That way, you can detect overarching trends instead of the temporary fluctuations that happen daily.

Swing Trading

This is similar to position trading, but you don’t hold onto your asset for quite as long. It is between day trading and position trading in terms of length of time. This is where you’re checking the market several times a week.

How Do Crypto Trading and Stock Trading Differ?

1. Crypto Trading Is 24/7

The stock market is only open during business hours, Monday through Friday. But crypto exchanges are active at every moment of every day. This is a plus if your schedule makes it easier for you to trade at night or on weekends.

2. Crypto Stocks Do Exist (and May Be a Good Option for Beginners)

Some crypto companies are on the traditional stock market, which has much less volatility than the crypto market.

These stocks can give you an idea of the financial health of a particular crypto company. This can be a great way to dip your toe in.

3. Crypto Assets Are More Volatile Than Stocks

As we keep mentioning (because it’s essential!), the crypto market is volatile. That means values can make drastic changes in a concise amount of time.

The stock market experiences fluctuations, to be sure. But it typically doesn’t happen in such extremes that can be wildly unpredictable.

In short, it can be riskier than the stock market.

4. Crypto Exchanges Are Distinct from Traditional Stock Markets

Understanding the fundamental differences between the stock market and crypto exchanges is essential.

For example, purchasing stocks means you have tangible ownership of that organization.

Big or small, you own it.

Cryptocurrencies are utterly different. There’s no intrinsic value there; it’s always subjective.

And you don’t necessarily own any piece of a company with it. Their value can go up and down at a moment’s notice. And as we mentioned above, they’re not as restricted by governmental regulatory agencies as fiat currencies such as the U.S. dollar (USD). That makes it a bit less safe, which is why you need guidance from trusted professionals like Pluto.

Crypto Trading FAQs

How Can You Choose the Right Crypto Exchange?

There are several factors you should look at when it comes to crypto exchanges, including:

  • The number of currencies you’re allowed to trade
  • The amount of liquidity (can you quickly turn your coins into cash and vice versa?)
  • Your understanding of their fees
  • If they’re secure from being hacked, what controls do they have?

What Are Crypto Pairings?

In short, these are assets that you can trade for one another on an exchange.

For example, you can purchase Solana with Bitcoin or sell Solana for Bitcoin.

What Is the Difference Between Brokers and Exchanges?

Both will allow you to trade crypto, but the broker acts as an intermediary between the trader and the market.

The exchange allows for direct trades between traders.

What Is Crypto Mining?

Miners use powerful computers and cutting-edge mining hardware to generate new blocks and coins. These block rewards are at the core of crypto as we know it.

For example, bitcoin miners use networks to generate new bitcoins (among other cryptocurrencies) and verify recent transactions that will be added to the bitcoin blockchain.

Bitcoin mining is prevalent. It’s all a cycle that works like this:

  1. Bitcoin miners work to verify the new transactions, adding to the blockchain.
  2. Individual miners are rewarded with newly generated bitcoins.
  3. The coins then incentivize crypto miners to keep maintaining the bitcoin network.

What do we mean when we say blocks or blockchain? Allow us to explain.

What Is the Blockchain?

When you purchase cryptocurrencies, you have a shared digital record that you own that asset. And that record is on what’s called a blockchain.

They are like databases, but they organize data into chunks or “blocks.” And these blocks are connected like a chain.

Block … chain.

They’re essential because they help trace and verify multistep transactions. They are secure, speed up data transfer, and can reduce compliance costs.

It also can’t be changed. This reduces the worry of nefarious actors coming in and manipulating data for their own ends.

Blockchains, such as Bitcoin or Ethereum, are at the core of crypto. Blockchain technology may well be the future of finance, so it’s a good idea to study up.

The Bottom Line

We hope you now understand that crypto trading is when digital currencies are bought and sold through an exchange. People speculate on price movements and make financial decisions in a way that will give them the most profit.

We also want to be sure you understand the best ways to trade crypto so you can grow your wealth. You may want to consider using automated investing to help you strategically move through the market.

Pluto is an investing app that helps you automate investing in stocks and cryptocurrencies by building a portfolio of "strategies" or rules for when to buy and sell.

With Pluto, you can quickly build a portfolio of strategies to watch your investments and make better decisions with your own rules, like “if Bitcoin dips below $20k, then buy.”

Please share this page with others interested in learning more about cryptocurrency trading. You can either post it on your preferred social media channel or text it to a friend or family member.

And if you’d like to learn even more, visit our blog, which is full of essential and updated information. And don’t forget to contact us so we can help answer all your important questions.

The cryptocurrency market is exploding and rife with opportunity. More and more people are joining the trading world, entering crypto exchanges, taking calculated risks, and growing their earnings significantly.

This is the future, and Pluto is here to help you find tremendous success in it.

Sources:

Best Crypto Exchanges of 2022

Explained: What Is Position Trading vs. Swing Trading? | Bybit Learn

How to Choose the Best Crypto Exchange for You | WSJ

What are "Trading Pairs" in Cryptocurrency? | CryptoCurrency Facts

Crypto basics | Coinbase