Crypto trading has gained enormous popularity over the years as crypto assets have proven to be a profitable investment instrument. While buying and selling different digital assets can be worthwhile, one should be fully aware of the associated risks before joining the bandwagon.
As the industry continues to expand, several crypto trading types have been introduced to give market participants a variety of options. Notably, each type of trading has its unique characteristics, strategies, advantages, and demerits.
The choice of which cryptocurrency trading type to engage in typically depends on individual inclinations, risk tolerance, skills, knowledge and investment goals. Here, we will discuss extensively some of the prominent crypto trading types you can engage in to make profits.
What is Cryptocurrency?
For the uninitiated, cryptocurrencies or crypto assets are digital currencies or virtual forms of money that can be moved on a peer-to-peer blockchain network without the need for any centralized authority such as banks.
Introduced in 2008 by an individual or group of individuals with the pseudonym Satoshi Nakamoto, bitcoin (BTC) became the first cryptocurrency to go mainstream. Following the success of the leading crypto asset by market capitalization, thousands of other cryptocurrencies (known as alternative coins or altcoins) have been rolled out.
Cryptocurrencies are classified as coins and tokens. Coins are crypto assets that have their independent blockchains while tokens are those digital assets developed on other blockchains. Notably, a blockchain is a decentralized and transparent digital ledger where transactions are stored immutably and can be accessed by anyone.
What is Crypto Trading?
Akin to conventional trading, crypto trading entails the buying of a particular crypto asset at a certain low price and selling at a higher price later for profit-making.
Said differently, it entails taking advantage of the unending volatility in the price of crypto assets to amass income. Cryptocurrency trading can be done directly between two market participants or by using either centralized or decentralized exchanges.
Centralized exchanges are crypto trading platforms controlled and governed solely by a central authority. Meanwhile, decentralized exchanges (DEXs) are crypto trading platforms governed by community users, who also provide liquidity for the exchange. On DEXs, crypto trading is executed with the aid of Automated Market Makers (AMMs).
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Top 4 Crypto Trading Types
There are various types of crypto trading that market participants can engage in. Here, we discuss the 4 most popular types including arbitrage trading, futures trading, spot trading and peer-to-peer (P2P) trading.
Arbitrage Trading
Arbitrage trading involves the buying of digital assets on one exchange and selling them on another exchange to take advantage of price differences.
Let’s say bitcoin trades for $25K per coin on Binance while it trades for $26K on Coinbase. A user can buy BTC on the first exchange and then sell on the second exchange to make a $1,000 profit per bitcoin. This approach is known as arbitrage trading.
Arbitrage trading can be a relatively low-risk strategy since it takes advantage of market inefficiencies that typically exist for only a short period. However, the profit margin for each trade is usually small, and the trader must have access to multiple exchanges.
Spot Trading
This is the most common form of crypto trading as it is relatively simple and easy to understand. Notably, spot trading involves buying crypto assets at a certain low price and waiting for them to rise in value.
It can also be described as the immediate trading of cryptocurrencies at current market prices. In spot trading, traders invest in digital assets with the expectation that the price of the cryptocurrency will increase in the future. It is based on the simple principle of “buy low and sell high.”
Spot trading is typically executed with the use of either a limit order, a stop-limit order or a market order. A limit order is an order to buy or sell a digital asset at a preferred future price, while a market order is an order to trade a crypto asset instantly at the prevailing market price.
P2P Crypto Trading
Also known as peer-to-peer trading, it is a type of crypto trading where two parties directly exchange assets or currencies using designated platforms or through over-the-counter (OTC) methods.
In P2P trading, buyers and sellers can interact directly with each other, negotiate the terms of the trade, and agree on the price and payment method. One of the major benefits of this crypto trading type is the increased level of privacy and security.
P2P trading platforms typically use encryption and other security measures to protect users’ personal information and digital assets. Additionally, P2P trading can be more flexible and convenient than traditional exchange trading, as it allows traders to set their own prices and terms and can be done 24/7.
However, P2P trading in crypto also carries certain risks. One such risk is the potential for fraud, as P2P transactions are often conducted between individuals who do not know each other and may not have a trustworthy reputation. More so, P2P trading can be less liquid than exchange trading, meaning that it may be more difficult to find a buyer or seller at a particular price or volume.
Futures Trading
As the name implies, this crypto trading type allows traders to speculate on the future price of cryptocurrencies. This trading type allows participants to make profits when crypto prices are either increasing or dipping.
It is commonly considered the most risky type of crypto trading as participants could quickly lose their capital if their predictions go wrong. Futures trading is popular for allowing users to trade crypto assets with leverage.
Leverage enables traders to increase their margin size, which can lead to higher profits or losses. For example, if a trader has $1,000 in his account, he can enter a $10,000 trade by using a 10x leverage size.
Final Thoughts
The goal of every crypto investor is to make profits. However, several market participants record losses instead. Regardless of the crypto trading type you choose, profitability requires patience, skill and a proper understanding of crypto market cycles.
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