How Does Crypto Exchange Trading Work?

Introduction

Digital currencies such as Bitcoin and Ethereum have caused a financial frenzy in recent years. Powered by blockchain technology, crypto is being used to perform functions that were hitherto thought impossible. It serves as a payment system, store of value, and plays a significant role in cloud computing, among other things. Besides, it offers privacy, anonymity, and fungibility – all of which have helped to create a cadre of believers who believe in its vast potential to revolutionize our lives.

That being said, getting involved in cryptocurrency goes beyond just being interested. You’ll have to take actionable steps such as buying and selling if you’re looking to be actively involved with digital currencies. Crypto exchange trading is the buying and selling of cryptocurrencies on an exchange platform.

Cryptocurrency trading works precisely the same as forex trading. Here, you buy and sell cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc. Cryptocurrencies are listed in pairs. So you can have a pairing of a crypto and a fiat currency (e.g. BTC/USD), or a crypto-crypto-pair (e.g. ETH/BTC). If you think the price of the base crypto will rise, you will typically “go long” on it. If on the other hand, you believe the value of the base crypto will decrease, you will initiate a “short” trade. So it is important that you learn about trading pairs if you plan to expand your cryptocurrency holdings beyond the popular coins.

When searching for a crypto exchange, you may have to do a bit more research before signing up with any platform. Most exchange platforms only accept crypto deposits. Only a handful of platforms like Coinbase, Gemini, and Kraken accept fiat/bank deposits. The main downside of these exchanges is that they offer limited cryptocurrencies.

Cryptocurrency-only exchange platforms usually allow you to explore the broader range of exchange features and asset offerings than fiat-friendly exchanges.

Setting Up an Account on a Crypto Exchange Platform

Before you proceed to trade cryptocurrency on exchanges, you need to have a trading account. You must be very careful when choosing a crypto exchange to trade with. Crypto exchanges are mostly unregulated across the world, and there have been instances of exchanges closing and clients’ funds disappearing (Mt.Gox and QuadrigaCX come to mind).

Setting up a trading account on a cryptocurrency exchange platform involves the following necessary steps:

Step 1: Create an Account

The first step to trading cryptocurrency will usually involve exchanging fiat currency such as USD, EUR, etc. to your chosen digital currency on a fiat-friendly platform. This guide will use Coinbase as an example. To create an account, go to https://www.coinbase.com/signup to get started. Fill out the spaces provided and select your location. Tick the agreement box to verify that you’re at least 18 years old. Click “Create Account” to proceed.

Step 2: Verify Your Email

After creating an account, a verification email will be sent to your email address. Log into your email to verify your registration using the link sent to your address by selecting the “Verify Email Address” button.

Step 3: Login to Your Account

Clicking on the “Verify Email Address” button will redirect you to the Coinbase login page where you’ll be required to log in to your account. Enter your email address and password in the spaces provided, then click the “Sign In” option to log in.  Choose your location, add your phone number, then select the “Send Code” button to verify your phone number. Enter the verification code sent to your phone in the space provided in the next screen. After that, select the “Submit” option to continue the registration process.

Step 4: Add a Payment Method and Depositing Your payment

To add a payment method to your account, select the “Add a payment method” option. The available options include bank account, debit card and wire transfer. For safety reasons, we would recommend the bank account option over the others. Follow on-screen instructions to link to your preferred payment option.

That said, it is critical to bear in mind that each exchange platform has different accepted payment methods. This usually includes any of the listed cryptocurrency, local bank transfer, credit card, or international wire transfer methods. What this means is that you can either fund your trading account or withdraw your earnings through one of the payment options mentioned, depending on the platform.

Step 5: Verify Your Identity on the Exchange

Here, you will be required to send proof of identification, such as a scanned copy of your driver’s license or other photo ID, and provide other information to conclude the registration process. Once you confirm your identity, you’re set to begin trading cryptocurrency.

Funding Your Trading Account

To deposit funds into your trading account;

  • Visit the deposit page on your selected crypto exchange.
  • Select the deposit options available.
  • Select the currency type and choose your preferred currency (or cryptocurrency).
  • Click on the bank account tab and select your financial institution if you will be sending fiat. Complete the process by sending funds from your bank or credit card.
  • If you will be sending cryptos, you should choose the coin you want to make your deposit/withdrawal crypto coin. Then select the wallet address (be very careful here as you do it as any mistakes are irrecoverable). Go to your exchange wallet and enter the exchange’s wallet address for the deposit crypto, then transfer the funds. After confirmation, those funds will be deposited into your account.

Trading Cryptocurrency

In crypto exchange trading, you trade actual cryptos. To trade cryptocurrency, you’ll need to:

  • Find an exchange: if you’re looking to trade altcoins that aren’t available on a fiat-friendly platform like Coinbase, then you’ll have to find an exchange that suits your needs and transfer your crypto holding there.
  • Create an account: after deciding to trade with a particular website, create an account with them by following the sign-up procedure.
  • Select your preferred coins: With thousands of cryptocurrencies out there, it’s impossible to trade them all. So you’ll need to choose the ones you want to invest in or speculate on.
  • Set the amount you wish to invest depending on your trading goals and risk appetite.
  • Analyze the charts and market events before you make a trading decision.
  • Leverage your tools: choose your order type. Depending on the website you’re trading on, this may include limit order, stop market, stop limit order, trailing stop, fill or kill, one cancels other.

While cryptocurrencies are potent and promising, they are still considered risky. This is because their value is fueled by a speculative bubble that could eventually come crashing down. As always we recommend that you never invest money that you can’t afford to lose. Also, it is advisable to conduct your own research and due diligence before purchasing or sending cryptocurrency.