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What to Know About Cryptocurrency Trading?

February 13, 2023
min. read

“...In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent…”

                                                                                                 "Reminiscences of a Stock Operator" by Edwin LeFevre


Trading usually refers to trading any assets on a stock exchange, including stocks or bonds, futures and options, contracts for oil, gold, coffee and other goods. In the cryptocurrency market, trading stands for trading cryptocurrencies, tokens and related financial instruments on cryptocurrency exchanges with the obvious purpose of making a profit on price differences.

Exchange trading is the search for a balance between supply and demand by a huge number of participants on a single platform. Visualize a stadium filled with people who want to buy or sell a single asset, for example, a bottle of cola, then imagine creating an order book from the offered and requested prices, where these prices will converge from the maximum and minimum values. Where they converge, exchange transactions will occur. As bidders change their requirements, transaction prices will move either upward or downward. If there are more sellers, the price will decrease, if there are more buyers – it will increase. Market laws work the same way with any assets and on any exchanges, so it is often difficult to determine which asset a price chart refers to without knowing the source data.

Exchange trading attracts a huge number of non-professional participants, where they have to deal with large capital, trading robots and other realities that affect price fluctuations. The very idea of making money on the price difference seems very simple and fair, however, when everyone wants to make money, there will be losers in the process, because in order to sell something at a higher price, you need someone to buy it. There are two times in a man's life when he should not speculate: when he can't afford it and when he can (Mark Twain). There are dozens of sayings about exchange speculations.

There are many market theories and practices that systematize approaches to stock analysis and trading. For example, fundamental analysis allows you to find an asset that is likely to become more expensive in the future by analyzing its actual value. Technical analysis, on the contrary, allows us to make assumptions about price movements solely in the form of charts, since they have certain historical patterns, features, etc. A novice trader may think that since he is well-versed in theory, he’ll be able to achieve success and "beat the market", which is generally true, if not for one "but". But the point being that stock charts themselves result from the actions of traders seeking to "beat the market", they reflect the fears and hopes, emotions and skills of a whole army of stock market players. Therefore, trying to "beat" them is like trying to "beat" yourself by looking in the mirror. Instead, what you need to do is go beyond yourself and contrast the market not with the exclusivity of your persona, but with complete mediocrity and consent, obeying market trends. Although that doesn’t give you any guarantees either.

So, cryptocurrency trading is a rather risky activity, where you can either lose or earn. By registering on an exchange, a trader gets access to traded currency pairs, for example, BTC/USDT. This means that if you have USDT (tokenized US dollar) on deposit, you can buy bitcoin with it. Or, if bitcoin has already been purchased, it can be sold for USDT. Since cryptocurrencies are very volatile, that is, they trade with impressive price fluctuations, this market makes it possible to earn (or lose) much faster than, for example, the stock market, where fluctuations are much slower. You can limit yourself to working with only one currency pair, or you can monitor several of them. The exchange will do everything to ensure that the trader makes as many transactions as possible, since a commission is taken from each transaction. The exchange will never go negative, no matter what happens in the market. It exists at the expense of its clients' commissions. The more traders and the more intense the trading, the better for the exchange. The only negative scenario for the exchange can only be a hack and withdrawal of client money, so large exchanges are very scrupulous about security and user verification issues. So-called compliance is of great importance for the financial sector, whatever the company’s niche. It allows companies to comply with internal and external regulations in order to limit all potential risks as much as possible. In this sense, the coming of institutional players to the market places even greater demands on exchange security, which, generally speaking, is an additional positive aspect for any private trader.

Today, almost all exchanges offer so-called margin trading. This means that a trader can trade not only within the limits of his deposit, but also by attracting borrowed funds generously allotted by the exchange. It’s profitable for the exchange since it receives its loan fees, as well as increased transaction fees. Trading with leverage is trading with a multiple increase in the position size. For example, the leverage of x10 or 1:10 means that the position size increases tenfold for a trader, which means that both profits and losses increase tenfold. The exchange limits losses to the size of the trader's deposit, though. When the price of an asset falls, a margin trader will lose ten times more than a regular one. If these losses are equal to the total amount of the deposit, such a position will be forcibly closed, the trader will be left with nothing, while the exchange will earn 10 times more commission. Margin trading is the worst thing a novice trader can get involved in, guided by the desire to earn as much as possible and all at once.

Since the cryptocurrency market is overloaded with margin positions due to the market’s tender age and active advertising on the part of exchanges, strong market movements associated with any negative events are accompanied by a so-called short-squeeze (“shooting” quotes down), when, with a significant drop in the price of an asset, the exchange forcibly closes the positions of margin traders whose deposits cannot compensate for losses. These forced sales, like a snowball, pull the market down to an even lower bottom lightning-fast and are accompanied by impressive trading volumes. Very often after such movements you can read in the news that, for example, "yesterday traders lost a billion dollars as a result... the largest loss was recorded in the ETH/USDT pair in the amount of $40 million ...", which indicates that a margin position was forcibly closed in the ETH/USDT pair, and someone, its owner, really lost a deposit of $40 million. But when it comes to such amounts, one shouldn’t think that it was the last of a trader’s money: it’s possible that he earned 400 million a week earlier and now unsuccessfully risked ten percent of the margin.

Nevertheless, novice traders do not typically limit losses in any way, but immediately put "everything on red", even with a leverage, which practically guarantees being swept off the market – tomorrow, if not today. Contrary to the extremely common idea of "beating the market", all a trader who enters the stock exchange can do is limit his risks. Everything else - successes, failures, intuitive and fundamentally sound decisions - are elements of a kind of game, and risk limitation is cold calculation, as a result of which the trader knows exactly what will happen to his deposit in the worst-case scenario.

Cryptocurrency trading carries not only typical risks associated with unsuccessful trading strategies, but also the risk of losing assets for non-trading reasons. Since this industry is not regulated by law in any way, the state does not guarantee the return of the deposit, as it does with a bank deposit. Here everyone is responsible for themselves, and the only one you can complain to is the exchange technical support. However, the quality of its work heavily depends on the quality of the exchange itself, which you usually only find out when something goes globally wrong. When working on a cryptocurrency exchange, it should also be clear that a trader does not control his assets because they are in the exchange's wallets, so until the funds are withdrawn to a personal wallet, the threat of their complete loss is always imminent. Meanwhile, large exchanges that have been operating for more than one year are quite sensitive to their customers, and their technical support really does solve clients’ problems.

In order to engage in trading, cryptocurrency trading in particular, you need to allocate funds in the amount that you are ready to lose. Otherwise, the so-called "overhang" of responsibility will not give you a single chance to dispose of them successfully. There are many pieces of literature praising the stock market game, but this is most accurately stated in the "Reminiscences of a Stock Operator" by Edwin LeFevre: “If you know much about the average customer of the average commission house you will agree with me that the hope of making the stock market pay your bill is one of the most prolific sources of loss in Wall Street. <...> There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.” This refers specifically to the stock market, that is, the sale and purchase of stock market, bonds, etc., however, it is fully applicable to working on any exchange, including cryptocurrency, where it manifests itself with even greater force and inevitability.

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