Crypto 101 — Guide to Cryptocurrency Trading for Beginners

So you have just discovered a new and mysterious asset class — cryptocurrency — and are all excited to start trading immediately.

But before you actually begin, we strongly recommend that you have a basic understanding of cryptocurrency (which is not rocket science we promise).

Here’s a 101 on how to get started on the world of cryptocurrency!

Now, how do you start trading cryptocurrency?

Trading cryptocurrency may sound intimidating at first instance, but the concept is really simple because, in fact, we engage in the act of ‘trading’ in our daily lives.

A trade is established when a buyer and a seller for a product (cryptocurrency in this case) agree to buy/sell that product for a specified price and quantity at any given time.

From a day-to-day standpoint, this is the same as us going to the supermarket and buying a pack of crisps at a specified price from the owner of the supermarket who is the seller of the chips. From a traditional financial standpoint, this is also not much different from buying and selling stocks where buyers and sellers agree to transact a particular stock for a particular price and quantity.

Going back to the crypto world, before trading any cryptocurrencies, you have to first determine how and where to trade. Cryptocurrencies are typically traded on an exchange. A cryptocurrency exchange is a marketplace (virtual in this case) where buyers and sellers gather to buy and sell cryptocurrencies. The prices of cryptocurrencies are quoted in fiat or against another cryptocurrency (also known as crypto pair or trading pair).

For example, the price of Ethereum (ETH) is around $4234.95USD or 0.07 BTC at the time of writing. Further, the cryptocurrency market is open for trading 24/7 — it never sleeps! This means that you can trade at any time of the day, no matter where you are located or which time zone you are in as long as you have an internet connection.

Decentralised vs centralised exchanges

There are two types of cryptocurrency exchanges for trading: 1) centralised exchanges and 2) decentralised exchanges.

Centralised exchanges are exchanges where trading services are conducted through a “middleman” or an intermediary who facilitates the buy and sell transactions between buyers and sellers.

This intermediary governs and oversees the services and transactions on the exchange. It has the authority to regulate and control the entire exchange. For example, it decides the types of services and cryptocurrency pairs that should be made available for its users, the transactions that should be cleared, the people who are allowed to use its services, and the limits that should be put in place for each user, etc. Trading through centralised exchanges is currently the most common method people use to trade cryptocurrencies. Binance is the largest centralised cryptocurrency exchange in the world in terms of volume at this time. This is followed by Coinbase and FTX.

On the other hand, decentralised exchanges are exchanges that are not controlled nor governed by any intermediary. There is no “middleman” between buyers and sellers and trades are executed as long as the conditions (price, quantity, etc) are met.

Decentralized exchanges work in the same way as a blockchain where the exchange network distributes verification powers to anyone willing to join the network and validate transactions. In a simplistic sense, decentralised exchanges operate through a network where sellers offer cryptocurrencies and buyers purchase the cryptocurrencies they are interested in.

There is no corporate authority between the buyers and sellers and the exchange itself is merely a platform for the buyers and sellers to buy/sell cryptocurrencies directly with each other. The largest decentralised cryptocurrency exchanges are Uniswap, dYdX and Pancakeswap.

What you should consider before making your first crypto trade

Before deciding on which type of exchange to place your first cryptocurrency trade, do consider the following factors:

Residency

Depending on where you are residing, certain centralised exchanges may not be operating in that country/state or only the affiliated version of a major centralised exchange is available to you. These restrictions are usually imposed by regulatory prohibition from the government.

For example, US residents are only allowed to use Binance US and not Binance Global. In cases where you are unable to access any centralised exchanges (for example, China residents), you will have to trade in a decentralised exchange.

Availability

For centralised exchanges, only cryptocurrencies that meet the listing requirements of the intermediary governing the exchange will be listed. This means that the cryptocurrency that you are looking to trade in may not be available on the centralised exchanges that you are able to use.

For example, the Binance global exchange supports the trading of more than 500 cryptocurrencies but Binance US only has more than 50 cryptocurrencies listed. While cryptocurrencies with large market capitalisation such as Bitcoin, Ethereum, Cardano, etc are typically listed in most of the centralised exchanges, some cryptocurrencies, especially those with small market capitalisation, may not be listed on any centralised exchanges.

In cases where the cryptocurrency you want to trade in is not available on the centralised exchanges you have access to, you will have to trade on decentralised exchanges. Decentralised exchanges generally have more cryptocurrencies pairs available, including cryptocurrencies with smaller market capitalisation.

In fact, most cryptocurrencies start trading in decentralised exchanges first before being listed on a centralised exchange. However, there are liquidity issues to consider when trading in such cryptocurrencies which we will further elaborate below.

Liquidity

The prices and liquidity of the cryptocurrencies available on any exchange depend on the number of buyers and sellers conducting their trading activities on the platform. Large exchanges generally have good liquidity as they have a big user base and for centralised exchanges, they only list cryptocurrencies that are actively traded in the first place.

Decentralised exchanges may have more cryptocurrency pairs listed but there may be liquidity issues if that particular decentralised exchange does not have many users or that cryptocurrency is not actively traded. When a cryptocurrency is illiquid, there may be difficulties with buying and/or selling the cryptocurrency and the price of the cryptocurrency is likely to be even more volatile.

Fees

There are trading fees involved in trading on both centralised and decentralised exchanges. Centralised exchanges charge trading fees ranging from 0.1% to 2% per trade. There may also be transaction costs associated with transferring fiat into your account or credit card fees.

For decentralised exchanges, the fees for a transaction depend on how congested the network is at the time of the trade, and that is determined by the number of people transacting at that time. The fees at any time also differ depending on the nature of the transaction and the speed of the transaction.

A transfer transaction costs around $25 USD while a token “buy/sell” transaction (sometimes referred to as a swap depending on the exchange) costs around $80 USD at this time. As trading fees will add up quickly and eat into your profits, it is important to consider trading fees especially if you are looking to trade regularly.

Security

No article on cryptocurrency is complete without mentioning security. From a trading standpoint, hackers can hack into an exchange platform and disrupt the network. They may reroute transactions to themselves or even steal cryptocurrencies stored in the users’ wallets. The way an exchange reacts to such incidents varies and there is no guarantee that the exchange will compensate for any losses. Some exchanges may refund losses to their users, while others may not do so. There were also exchanges that never recovered from such attacks.

Therefore, the security of an exchange is vital in considering where to execute your trade. While no exchange is completely immune to malicious activities, some are safer than others and large exchanges with high trading volume are generally safer.

Authority

As mentioned above, centralised exchanges are owned and controlled by a corporate authority while there is no such figure in decentralised exchanges. Some people are used to and want an intermediary to clear their transactions and govern the platform while there are others who simply do not want any control by any intermediary on their transactions.

It is not unusual for people to adopt a hybrid approach and trade using both decentralised and centralised exchanges, depending on the factors listed above.

This article is meant to provide a basic overview of cryptocurrency trading for beginners to trade your first cryptocurrency. As you progress further in your crypto trading journey, there are different types of trading you can explore such as active trading, swing trading, leveraged trading that fit your trading style.

Happy trading!

Text by Yong Xin Kwek