As part of HedgeTrade’s crypto trading education center, we’ve set up resources to help you learn the basics and get you on your way to successfully trading crypto and other digital assets. This Cryptocurrency Trading for Beginners Guide starts with understanding the basic terminology and ends with the essential tools and mindset need for crypto trading.
***This is not financial advice. Always do your own research and understand the risks. These resources are for educational purposes only.***
Basic Terminology for Trading Cryptocurrencies
Cryptocurrency trading for beginners starts with understanding the language of crypto trading. So in this first section, we’ve curated a list of the top terms with a definition, as well as a link to further reading on the term in question. At the end, we’ve linked the HedgeTrade Encyclopedia to give a more expansive crypto language immersion in addition to some of the slang used by crypto market participants. This is not alphabetical like the Encyclopedia; instead we tried to introduce the most basic terms first and build up to the more complex crypto trading terminology.
A cryptocurrency is a digital currency that operates on a blockchain, where all of its transactions are permanently stored without using personally identifying information. Cryptocurrencies all utilize encryption technologies to regulate how many units of currency will be minted and how transactions are carried out. Additionally, crypto enables secure, peer-to-peer payments and other economic opportunities that rest outside of 3rd party financial institutions and central banks. Read more: How Do Cryptocurrencies Work?
A blockchain is an online database of transactions that lives in real time on a cryptographically secure distributed network of many computers. Anyone can access the transactional information on any public blockchain (such as Bitcoin and Ethereum). Transactions are stored in blocks of data that are all connected in a chain leading back to the original “genesis” transaction. This is accomplished through a system of hashing algorithms, making it particularly difficult to alter and manipulate the blockchain’s data. Cryptocurrencies are issued on blockchains and their movements are found on each blockchain’s Explorer. Read more: What is Blockchain Technology?
Centralized Exchange (CEX)
A Centralized Exchange (CEX) refers to an online platform for buying, selling and trading cryptocurrencies that has a central governing authority such as a CEO or Founders or Board. A CEX normally has strict KYC and AML policies in place. Crypto private keys of CEX users are held by the company behind it or a 3rd party. Examples of popular centralized cryptocurrency exchanges include Binance, Coinbase and Gemini. Read more: CEX vs. DEX Which is Best?
Decentralized Exchange (DEX)
A decentralized exchange (DEX) is a cryptocurrency trading market that has no central authority and allows for peer-to-peer crypto trading. A DEX is trustless in nature, meaning you don’t have to trust a third party to make financial transactions. Everything runs according to the algorithmic, automated protocol. Additionally, DEX’s do not require investors to give any personal details about their identity to transact in crypto trading on the exchange. This means that the DEX does not need to collect or store its users’ data. DEXs also enable traders to engage in token swaps and defi farming activities. Examples of decentralized exchanges include Uniswap, Idex, and Bancor. Read more: Understanding Decentralized Exchanges
A crypto wallet stores the public and private keys that enable you to access your digital assets. Wallets come in different forms, each with their own benefits and drawbacks. An online (‘hot’) wallet stores the keys in an online location. A hard wallet stores them on a piece of hardware, similar to a flash drive. Paper wallets mean you have simply written down your keys and stored them physically someplace safe. Hard wallets and paper wallets are known as ‘cold storage’, meaning they are safely kept offline. Hot wallets are not considered as safe but they do offer more convenience. Read more: What is a Hard Wallet?
Self custody of crypto assets means that you and you alone possess the private keys that allow you access to your cryptocurrency and digital assets. Private keys generally consist of a long string of random words that you can put into cold storage, such as using a paper wallet (printing out the words and storing safely) or storing in a hardware wallet (similar to a flash drive). You utilize the private keys when you want to move your crypto assets.
With self custody, you are also in charge of securing the private keys. If they are lost, there is no one to turn to to retrieve the lost keys. DEXs now offer many different types of activities for trader, such as yield farming and staking, all while their assets are in self custody. Centralized exchanges store each user’s private keys, which sometimes creates an attractive ‘honeypot’ for hackers. Read more: What is a Private Key?
An order book in crypto trading is a visual and in-real-time list of outstanding buy and sell orders on all the crypto assets listed on a particular exchange. When a trader logs into a crypto exchange, they use the exchanges order book to place their buy and sell orders.
Short/Shorting vs. Long/Long Position
Shorting a digital asset or taking a short position means that you’re betting that the price of an asset will fall. Going long or taking a long position means you are betting that an asset will rise in value. Ways that traders can short or long cryptocurrencies include futures, options, margin trading and prediction markets.
A return on investment (ROI) signifies what a trader receives in gains (or losses) from the time they buy a digital asset until they exit the trade. It can also refer to a cryptocurrency, where the ROI signifies the return on investment from the digital asset’s first price until the current day.
Once you have these essential terms nailed down, feel free to delve deeper into crypto trading terminology by visiting the HedgeTrade Encyclopedia
Now that you’ve familiarized yourself with the basic terminology of crypto trading, the next stop in our Cryptocurrency for Beginners Guide is learning how to buy and sell cryptocurrency so you can get started. This section will provide the top resources for walking you through the process of buying and selling crypto so you have the knowledge needed in becoming a crypto trader.
The Novice Trader’s Toolkit
This list will include the essential tools and things you need to begin your crypto trading adventure.
- Cryptocurrency! – Starting out with some of the major coins that have proven themselves over time, including bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB), can help get the ball rolling. These coins have strong liquidity in hundreds of markets. There’s also an incredible amount of content around these cryptos for people to study. To buy crypto, you’ll need a fiat onramp such as a centralized exchange. Alternatively, maybe you know a friend who is willing to send you a little ETH or BTC to get you started.
- A Wallet – Once you have bought your crypto on an exchange, you may want to transfer it to cold storage, such as a Trezor hardware wallet or a paper wallet. If you decide to keep your digital assets on a centralized exchange, they will custody your crypto (and private keys). Decentralized exchanges allow traders to use trading platforms while maintaining ownership of their digital assets through the use of a Web3 browser wallet such as MetaMask.
- An Exchange Account – If you want to just hold (HODL) your cryptocurrency, you may store in cold storage. But if you want to use a trading exchange, you can select the platform and set up your account. Some trading desks such as Quadency and TradingView enable you to set up multiple exchanges in one trading platform. But newcomers can start out with one and expand as they improve their skills. Familiarize yourself with whichever trading venue you decide on. Be sure to watch any video tutorials offered on how to use each exchange in question.
Evaluate your risks
Create a personalized risk assessment by determining the following factors, by yourself or with an investment advisor:
- Factor 1: Your Time-Frame – What is your age and how long do you have to use your determined amount of money for investing?
- Factor 2: The Size of Your Risk Capital – Meaning what can you afford to lose? Cryptocurrencies are highly speculative and risky investments. Generally, the more capital you have to invest, the higher the tolerance for risk.
- Factor 3: Your Experience – Risk taking often increases as traders become more confident with successful trades under their belts. Copy trading and social trading platforms are great for easing in new traders. They allow novices to study and copy the trades of professionals.
- Factor 5: Your Goals – What are your long term and short term goals for the investment amount you have allocated? Are you investing for retirement or looking for passive income?
- Factor 6: Your Psychological Profile – High stress and high anxiety individuals may not enjoy the volatile crypto markets. This in turn may make it difficult for them to stick to their trading plan. If you are the type of person who gets upset when things go wrong, crypto trading may not be for you. On the other hand, if you have a sense of adventure, are willing to take risks and face consequences of those risks, then trading may not seem so stressful.
Cryptocurrency trading for beginners – 5 helpful hints for getting started
- The level of profit you are hoping for is directly related to the level of risk you are taking.
- The greater your expectations are about profit, the more likely it is that you may lose part or all of your investment over the short term.
- Your goals and investment time frame may increase or reduce your risk tolerance
- Generally, you can afford more risk with longer term investments and less risk over the short term..
- Whatever level of risk you are taking should not stress you out. Make your risk level something you can live with without it ever causing you hardship.
That’s all for this Cryptocurrency Trading for Beginners Guide. But before you go, be sure to follow us on Twitter to get all the latest updates on Hedge Trade v3.