Crypto Trading 101: A Beginner's Guide

INTRODUCTION

Crypto trading is the buying and selling of cryptocurrencies with the purpose of realizing a profit as a result of the price changes of these assets.

As compared to more traditional markets like stocks or bonds, the crypto market is highly volatile - prices can fluctuate quite significantly across assets, and make double digit percentage moves within mere minutes or hours. This volatility provides for greater upside as well as greater risk for traders, making crypto trading appealing to aggressive traders.

This guide goes over the basics of crypto trading, including where to trade, common trading strategies, and popular crypto trading tools.

WHAT IS CRYPTO TRADING?

Crypto traders buy and sell cryptocurrencies to try and make money from price changes. The most common and basic way of doing this is by buying a token and selling it if the price rises.

Here is an example:

1. Let’s say that Bitcoin’s price is $40,000. A trader might believe the price will go up, so they will buy 1 Bitcoin for $40,000, then wait patiently to see whether the price goes up or not.
   
   
2. If the price goes up (let’s say it moves to $45,000 after 2 days), the trader is in an unrealized profit of $5,000. They might then choose to sell this Bitcoin for $45,000, thereby earning $5,000 in 2 days.

Making $5,000 in two days just for buying and selling an asset is very appealing. But of course you could just as easily lose $5,000 in two days if the price goes down. Successful traders need to make good predictions about the price change of assets.

Crypto traders will typically do this basic process repeatedly across multiple assets - in doing so, they may build up (or reduce) the size of their portfolio over time.

WHERE TO BUY & SELL CRYPTOCURRENCIES

Traders trade on exchanges - these are websites where they can buy or sell cryptocurrencies for a small fee, typically assessed as a percentage of a trade’s value. There are 2 major types of exchanges in crypto markets:
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Centralized Exchanges (CEX): Similar to traditional financial exchanges these are marketplaces with a centralized custodian and broker. Examples include Coinbase, Binance or Gemini. To get started, users must create an account on the exchange (going through KYC and compliance onboarding) & can then deposit either fiat currency (USD, GBP, EUR) or crypto (BTC, ETH, USDT) and then buy/sell the assets they wish to trade.

Decentralized Exchanges (DEX): There are software programs which exist on a blockchain and execute trades programmatically without a central broker or custodian. The most well-known DEX is Uniswap.- The code for the program was typically developed by a software company - in Uniswap’s case Uniswap Labs - but once the initial development is complete the development company often takes a more hands-off approach to the continued development of the dex.

To get started with a dex, users must have an existing crypto wallet using an app MetaMask or Rabby, and have some cryptocurrency in this wallet to buy and sell other cryptocurrencies e.g. ETH, ARB. They connect to the dex using a web app and can then trade using the dex web app interface. It is also possible to trade on a dex by directly interacting with its software (its smart contract), but this requires greater sophistication.

Both CEX & DEX trading have their advantages & disadvantages - your preferred choice of exchange will depend on a variety of factors, including things like your personal circumstances, TRADING experience, and the types of assets you’d like to trade. Additionally, different CEX & DEX platforms have their own advantages & disadvantages - more advanced traders seeking certain types of products to trade, or levels of liquidity to accommodate their positions, might prefer certain exchanges over others.

Once you’ve setup your exchange trading account/wallet address, you’re ready to begin trading. However, many traders undertake rigorous preparation, research & analysis before deciding which tokens to buy & which to sell. Additionally, they may enter the market based on a pre-prepared strategy and an understanding of their preference for the time horizon of their trades.

GETTING STARTED WITH TRADING:

Here’s a simple series of steps which people may take when they get started with trading:

1. CHOOSE AN EXCHANGE TO TRADE ON
2. CREATE AN ACCOUNT (CENTRALIZED EXCHANGE) OR SETUP A CRYPTO WALLET & CONNECT IT TO THE EXCHANGE (DECENTRALIZED EXCHANGE)
3. RESEARCH TOKENS/MARKETS YOU WISH TO TRADE & DETERMINE YOUR STRATEGY
4. (OPTIONAL) PRACTICE TRADING IN A SIMULATED ENVIRONMENT FIRST
5. ADD FUNDS TO YOUR EXCHANGE ACCOUNT/WALLET
6. EXECUTE YOUR FIRST TRADE

TRADING VS. INVESTING

Trading refers to the buying & selling of assets on a shorter time horizon, typically holding them for less than a year, with the aim of profiting off of short-term price fluctuations, whereas investing involves buying and holding assets for a long period of time, typically over a year, with the aim of realizing a gain from the long-term appreciation of the asset. While the terms are sometimes used interchangeably, this different time-scale orientation captures the core difference in connotation. 

Some traders make trades which are months long (known as positional trades). Others may enter in and out of positions in minutes (called scalping). Others might even do this in seconds or fractions of a second - however this is typically too short of a time frame for human beings to operate on and as such, anything below this is typically done algorithmically, by machines.

Trading has become a common way for people to try to make money in the crypto market. While there’s no guarantee that the price of the asset you’re interested in will go up, many traders are willing to speculate that it might - and as such, are willing to accept the risk that the token may go down, with the hope or belief that it might go up. Traders might be willing to trade the actual asset itself, alongside perpetuals, options & futures contracts - whereas an investor might typically only buy the underlying asset & custody it for the long term.

Traders frequently open multiple positions. As such, a trader who makes multiple successful trades in a short period of time can see the value of their portfolio rise quickly. However, this comes with additional risks, as unsuccessful trades would see the value of their portfolio rapidly decline.

TYPES OF CRYPTO TRADING

There are many different trading strategies one can use. These strategies can be applied to different assets or sectors within the crypto market, each of which may differ from another in the expected behavior of the market, or in the way the position being traded actually works. Because of all of these factors trading is highly context-dependent. Let’s look at some common general types of trading:

Spot Trading: This refers to buying & selling the actual asset you’re interested in - i.e when a trader says they’d like to spot buy 1 Bitcoin, it means they’re actually buying 1 Bitcoin, which they can subsequently trade further or take off an exchange & store in a cold wallet.

Derivatives Trading: This refers to the trading of contracts whose value is dependent upon price movements in the spot markets of underlying crypto assets. You trade these products to speculate on future price movements in the underlying crypto asset and, depending on the type of derivative product traded, may do so without ever actually owning the underlying asset. 

An example of this is BTC-PERP - a perpetual futures contract for the Bitcoin price. Let’s say that Bitcoin’s price is still at $40,000 and you believe the price will go up. You can buy BTC-PERP at $40,000, and sell the perpetual at $45,000 for a $5,000 profit - all without buying the actual Bitcoin.

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There are a number of advantages in doing this - traders using derivatives may more easily use leverage (i.e., the borrowing of money to make bigger trades), short sell (bet that the price will go down) and take other positions without dealing with the complexity of custodying a token like Bitcoin or Ethereum.

Leverage Trading: Crypto leverage trading involves borrowing money to make bigger trades. To borrow this money, you are required to put down a deposit, known as ‘margin’ into an account on an exchange or a lending platform. This then lets you borrow money from the exchange to make bigger trades, at the risk of losing your collateral and potentially much more, including more than the value of your entire portfolio with the platform. It’s essentially a high risk, high reward approach to trading which lets you trade with more money than you have. 

Learn more through Arkham’s complete guide to leverage trading.

COMMON TRADING STRATEGIES

There’s no one way to trade in crypto markets, but an assortment of approaches taken by different people with different skills/aptitudes. In this section, we’ll first take a look at the different timeframes across which traders operate, before moving onto the methods of analysis which traders use.

TIMEFRAMES

SCALPING

Scalping focuses on making trades on short timeframes. Scalpers typically make trades across seconds or minutes, and will frequently take 10s to 100s of positions a day. They seek to profit from frequent, smaller price changes.

This approach to the markets requires rapid execution & focus on candle movements, with scalpers required to react quickly in their analysis & execution. Both The precise value and timing of entries & exits matter much more for scalpingthan those trading on longer timeframes. As such, scalpers spend much of their time observing & analyzing charts.

DAY TRADING

Day traders typically open & close their positions within the same day & will trade on minute to hour time-scales. They won’t necessarily trade as frequently as scalpers, but will be more active in the markets than a swing trader. Day traders typically make use of chart patterns, technical indicators, and methods like orderflow analysis in their trading research. 

This is one of the most common approaches taken by traders & is frequently popularized by those who offer trading education courses. It is alsoas well as the typical strategy used by full-time traders who aren’t working in a professional fund.

SWING TRADING

Swing traders usually seek to benefit from longer term shifts in the direction of a market. They may make use of technical, as well as fundamental analysis to evaluate market wide or sector wide shifts/catalysts, and will take positions accordingly. 

Swing traders take positions over days, or weeks - and have both long & short biases according to their analysis of the market’s direction.

POSITION TRADING

Positional trading is the most long term oriented of any trading style. Positional traders seek to benefit from market trends over the course of weeks or months. They typically spend less time thinking about short term market movements & employ a more fundamentals oriented research style.

ANALYSIS METHODS

‍Before taking positions in the market, traders use one or more methods of analysis to decide where to enter & exit a position. These analysis methods include (but are not limited to) the following:

Technical Analysis (TA): This is another way of referring to price chart analysis. Technical traders will examine patterns, indicators & levels on charts of an asset’s price over time, to determine their preferred buying & selling point for a trade. While not all traders use technical analysis, many use price charts in their analysis or monitoring of a position, as price charts provide a clean & clear way of assessing an asset’s performance over time. Technical analysis as a method, however, takes this a step further & combines actual historical pricing data with an analysis of patterns & the use of indicators, to determine future prices of specific tokens.

It’s grounded in the idea that human psychology, trading & emotion follow set & predictable patterns of behavior, which can be inferred from a price chart’s movements or psychological ‘levels’ of support & resistance which appear on a chart at certain prices.

Fundamental Analysis: This refers to the analysis of the entity or economic reality underlying an asset to determine how valuable it should be, and then trading off of discrepancies between the fundamental value and the market value of an asset. Fundamental analysts in crypto might look at qualitative factors like the caliber of the founder(s)/team, partnerships, and any moat/competitive advantages built by the company.

They also typically use quantitative data like cash flows, revenue, user numbers etc. They may also situate this in the context of a specific market or sector, & take market wide/sector wide bets on whether an asset or series of assets will appreciate or depreciate in value.

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On-Chain Analysis: This method makes use of actual blockchain data to inform one’s trading positions. Blockchains differ from traditional financial systems, in that they function like open, public databases, in which everyone can actually see the movement of funds & who owns what amount, by default. 

Given this, traders can use on-chain data to track the movement of money to try to predict price movements. Traders can also use aggregated on-chain data on an entire ecosystem’s activity to understand which protocols might be or become popular and where capital may flow in the ecosystem. Because raw blockchain data is not easy to analyze, on-chain analysts use tools like Arkham to investigate blockchain data.

THE EVOLUTION OF CRYPTO TRADING

Crypto is no longer the same market as it was when Bitcoin first launched. Over the 2010s & early 2020s, more tokens have launched, more startups have grown, and more capital has been deployed into the ecosystem, giving traders many more markets to trade in. In crypto’s early days, the lack of liquidity, counterparties & infrastructure meant that a sophisticated trading environment was absent. Despite this, some traders recognised that cryptocurrency was an asset class which could lend itself well to trading: it runs entirely online with no physical settlement, 24/7, and - at least at the time - was significantly less regulated than traditional markets.

Since then, crypto has attracted more professional players seeking the infrastructure necessary to facilitate the rapid trading of tokens at scale. Exchanges are one such piece of crucial infrastructure. BitcoinMarket, founded in 2010, was the first dedicated crypto exchange. Since then, many other exchanges have launched - with some like Mt. Gox and FTX rising to great prominence before notoriously collapsing.

There has also been a huge influx of venture capital to crypto. Most of the biggest projects in crypto are VC-backed., enriching VCs and their LPs and fuelling further investment. Paradigm & a16z are two of the biggest and most active VCs in crypto.

Furthermore, a number of crypto market makers, such as GSR & Wintermute, have arisen, providing liquidity and profiting off of the spread just as in traditional markets. Certain professional trading firms like Jane Street & Jump Trading, who have been market making in traditional equity markets for years, have also entered the fray & each deployed hundreds of millions into the space.

Note on Market Cycles:

Crypto is well known for having volatile market cycles, in which markets rapidly rise into a bubble & then collapse. There have been three major cycles of this kind, peaking in 2013, 2017, and 2021. During these bull markets many retail traders entered the market on the assumption that prices would continue to rise endlessly and that they’d be able to get rich quick. In each case, this was accompanied by a later market crash as fresh capital entering the space slowed and more & more participants decided to exit their positions simultaneously. After the crash the market has historically entered a long bear market, in which crypto prices remain depressed & considerably less volatile.

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CRYPTO TRADING TOOLS

Traders use different tools depending on their preferred style of trading & timeframe. Their workflow will typically involve some measure of analysis before making positional entries on a centralized or decentralized exchange. For a complete guide, see Arkham’s article on 12 leading tools used by traders. Tools used by traders include:

TradingView: TradingView offers a selection of tools for traders to see price charts & do chart analysis on cryptocurrency markets. This is commonly used by technical analysts as well as general users seeking to track a token’s price with a high degree of precision.

Arkham: Arkham is the leading platform for on-chain analysis and allows traders to understand the people & companies behind crypto market activities. Through a series of profile pages, as well as a range of tools to help traders understand blockchain data, Arkham helps users learn more about individual wallet holdings, tokens, and presents raw blockchain data in a clear & intuitive format for anyone to use.

TRADING CHARTS

While chart pattern analysis is typically favored by technical traders, all traders are likely to be familiar with traditional trading charts, as this helps them understand the price of the asset(s) they’re interested in & to track their performance over time. Many traders view TradingView as the gold standard for charting software & it is among the most commonly used products for tracking prices. 

Here is an example of a TradingView chart for ETH:

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Charts like this are referred to as candlestick charts. Each candle represents a certain timeframe, which shows the open, close, high & low prices for that specific period. Standard charts usually use green when the price in that period went up and red when it went down

Green Candle: 

• Base: Price at the start of that period
• Top: Price at the end of the period
• Wick: The highest and lowest prices to which the asset went in that session

Red Candle:

• Base: Price at the end of the period
• Top: Price at the start of that period
• Wick: The highest and lowest prices to which the asset went in that session

For any candlestick chart like this, you can change it to a line, should you simply wish to track the beginning and end price of the asset in each period. Additionally, you can change the time period under analysis by clicking on the 1D, 5D, 1M etc respectively, to move from days, to months, to years. These options are largely consistent, regardless of which chart analysis tool you use.

At the bottom of the chart we can see RSI - this refers to the Relative Strength Index, which is a technical indicator that helps traders understand whether a certain token could be overbought, or oversold. Indicators like this are frequently used by technical analysts, in combination with chart patterns, to gauge a sense for where price might be going in the near future. These are not required to use when trading and the RSI is simply shown for illustrative purposes.

FAMOUS CRYPTO TRADERS

Social media is a popular place for traders to share their market analysis, show off their knowledge, & build relationships with others in the market. X, formerly known as Twitter, is the go-to place for crypto traders to publish their knowledge. ‘Crypto Twitter’ has come to refer to the group of traders & investors interested in cryptocurrency markets who exchange ideas, jokes & spend time listening to & interacting with a subset of influencers who are either successful traders or popular market commentators.

Crypto traders also typically spend time on Discord & Telegram, which are more oriented toward community building and private interactions than the open nature of X which serves as a more public content sharing hub.

Here’s a list of some prominent traders:

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RISKS & CHALLENGES IN TRADING CRYPTOCURRENCIES

Crypto trading is a high risk, high reward activity. There are several risks a trader has to prepare to face when trading this market. Some include: excessive volatility, unclear regulation, unproven technologies, project team behavior, macro market declines, exchange insolvency, over-leveraging, the lack of liquidity in a market, as well as one’s own emotions.

Each of these can affect individual token prices, as well as the broader market, or a trader’s personal portfolio. When placing specific trades, seasoned traders usually always deploy a stop-loss and/or take-profit order - which automatically executes a trade if the trade either loses or gains a certain amount, allowing a trader to cap their downside & automatically exit the market if the token they’re trading hits a certain price, whether up or down.

HOW DO I START TRADING CRYPTO AS A BEGINNER?

Like any profession or skill, crypto trading involves deliberate practice, learning & execution in order to become better over time. Just as traders can go from rags to riches quite rapidly in a bull market if positioned correctly - they can just as easily lose it all through using excessive leverage, a lack of sensible risk management, or simply having bad luck.

As such, many traders spend extensive amounts of time & resources in studying the markets & learning from those who are more seasoned players of the game. A beginner may wish to explore some of these resources:

• Read Arkham’s Crypto Trading 101 series.
• Watch Crypto Cred’s Trading Education series

Additionally, many exchanges offer a demo trading platform, allowing traders to trade with an artificial amount of funds without any risk to their portfolio. Beginners may wish to test out their ideas & strategies in a simulated environment, before deploying significant funds into live markets.

HOW MUCH MONEY DO I NEED TO START TRADING?

There is no set required amount of money to begin trading. Some traders suggest trading with only that which you are prepared to lose, while others recommend deploying from 1-5% of your total portfolio size on any single trade. Extrapolating from this will give you the amount you might wish to trade with in total, but ultimately this depends on your personal circumstances & what you’re willing to risk.

CONCLUSION

We've looked at the fundamentals of crypto trading, from understanding why people trade crypto, to where you can trade crypto - as well as the different styles of trading you can use in crypto markets. There is no single way to trade, but a variety of methods, timeframes & tools which traders make use of. As you begin trading yourself, you’ll begin to develop your own style & preferences for how you wish to approach the markets which will accord with your own aptitude & expertise.