Crypto 101 Session No. 1 - Chapter 1
Today we have prepared for you a comprehensive guide dedicated to
trading in the cryptocurrency market. Here you will learn who a crypto trader
is, where and how you can trade cryptocurrencies, and get acquainted with the
most common terms in cryptocurrency trading.
Chapter 1. Trading Basics
What is trading?
Trading is translated as "trade", and trading is a
fundamental economic concept covering the purchase and sale of assets. This can
be both the case when the buyer pays compensation to the seller, and the
exchange of goods or services between the two parties.
In the context of financial markets, assets that are traded
are called financial instruments. These can be stocks, bonds, currencies,
options, futures, margin products, cryptocurrencies,
etc. If these terms are new to you, don't worry – we'll explain them later in
the article.
Trading is usually understood as short-term trading when
traders actively open and close positions for relatively short periods. But in
fact, trading can be called a wide variety of strategies, such as day trading,
swing trading, trend trading, etc. But do not worry. Below we will look at them
in more detail.
What is investing?
Investing is the investment of resources (such as
capital) with the expectation of making a profit. This can
be financing a business or, for example, buying land to resell later at a
higher price. In financial markets, it is usually about investing in financial
instruments in the hope of selling them at a later price.
Expectations of return (ROI) play a key role in
investing. In contrast to trading, investing usually takes a long-term approach
to wealth creation. The investor's goal is to accumulate wealth over an extended
period (years or even decades). This can be achieved in
many ways, but investors usually use fundamental factors to find potentially
favorable investment opportunities.
Due to their long-term approach, investors usually do not pay
attention to short-term price fluctuations. Therefore, they tend to remain
relatively passive, not worrying too much about short-term losses.
Trading and investing – what is the
difference?
Both traders and investors want to earn income in the
financial markets. However, their methods for achieving this goal vary
considerably.
As mentioned, investors usually seek to generate income over
a long period – years or even decades. Since investors have a longer time
horizon, the desired income from each investment is larger.
Traders, on the other hand, try to take advantage of market
volatility. They are more likely to open and close positions and may look for
less income in each trade (as they often make a lot of bets).
Which is better? Which is more suitable for you? It's up to
you. To begin with, you can learn more about the markets, and then – check in
practice. Over time, you will be able to decide what best suits your financial
goals, personality, and trading profile.
What is Fundamental Analysis (FA)?
Fundamental analysis is a method of assessing the value of a
financial asset. A fundamental analyst studies economic and financial factors
to decide whether the value of an asset is fair. This may include macroeconomic
circumstances, such as the state of the economy in general, industry
conditions, and asset-related business (if any). And
they are often tracked by leading and lagging macroeconomic indicators.
Based on the results of fundamental analysis, they try to
decide whether an asset is undervalued or overvalued. The findings can be used
to make investment decisions.
In the case of cryptocurrencies, the fundamental analysis
could also include a new strand of data science dealing with public blockchain data,
which is called on-chain metrics. These metrics can include network computing
power, largest holders, number
of addresses, transaction analysis, and more. With the
abundance of available data on public blockchains, analysts can create
sophisticated technical indicators that measure certain aspects of the network’s
overall health.
Although fundamental analysis is widely used in the stock and
foreign exchange markets, it is less suitable for cryptocurrencies in
their current state. Since this is still a new asset class, there is no
standardized, exhaustive method for figuring out market value. In addition, the
market is largely driven by speculation and the information field. Therefore,
fundamental factors usually have a negligible impact on cryptocurrency prices.
But when the market becomes more mature, more accurate methods of assessing the
value of crypto assets can be developed.
What is Technical Analysis (TA)?
Technical analysis takes a different approach. Its main idea
is that the historical behaviour of prices can indicate what will happen to the
market in the future.
Technical analysts do not seek to determine the fair value of
an asset. Instead, they study historical trading activity and try to decide
favourable opportunities based on it. This may include the analysis of the
behaviour of prices, volumes and chart patterns, the use of technical
indicators and other tools. The purpose of such an analysis is to assess the
strength or weaknesses of a particular market.
However, technical analysis is not only a tool for predicting
the probabilities of future price behaviour. It can also serve as a useful
method for risk management. Because technical analysis provides a model for
analyzing the market structure, it makes trade management more specific and
measurable. In this context, measuring risks is the first step to managing
them. Therefore, some technical analysts may not be traders in the strict
sense. They can use technical analysis solely as a risk management method.
Technical analysis can be applied to any financial market, and
it is widely used by cryptocurrency traders. But does technical analysis work?
As mentioned, cryptocurrency prices are largely driven by speculation.
Therefore, such markets are ideal for technical analysts, as they can succeed
only by considering technical factors.
Fundamental and technical analysis –
which is better?
It all depends on your trading strategy. Why not use both?
Most market analysis techniques work best in conjunction with other methods or
indicators. So more likely to find more reliable investment opportunities. The
combination of different trading strategies also helps to cut bias from the
decision-making process.
This concept is sometimes called confluence. Confluent traders
combine several strategies into one that takes advantage of each of them. The
bottom line is that the favourable trading opportunities presented by the joint
strategies may be stronger than those represented by any one strategy
individually.
What drives the financial markets?
The price of an asset depends on the balance of supply and
demand. In other words, it is defined by buyers and sellers. Where supply
satisfies the demand, there is a market. What else can affect the value of a
financial asset?
As already mentioned, these can be fundamental factors, such
as the state of the economy, as well as technical ones, such as the market
capitalization of the cryptocurrency. In addition, it is worth considering
other factors, such as market sentiment or the latest news.
However, these are nothing more than factors that deserve
attention. The price of an asset at one time or another depends on the balance
of supply and demand.
What is a market trend?
A market trend is a general direction in which the price of an
asset moves. In technical analysis, market trends are usually decided using
price behaviour, trend lines, or even key moving averages.
There are two main types of market trends: a bull market
and a bear market. A favourable market is a steady uptrend when the price rises.
A bear market is a steady downtrend when the price falls. You can also identify
consolidating, or "sideways", markets when there is no clear trend.
Bitcoin has been in a favourable market throughout its existence.
Source: Binance
It is worth noting that a market trend does not mean that the
price always moves in the direction of the trend. A long-term favorable market
may hold smaller bearish trends and vice versa. Such is the nature of market
trends. It all depends on the perspective and the chosen time scales. Long-term
market trends always matter more than short-term ones.
The peculiarity of market trends is that they can be decided only retroactively with absolute accuracy. You may have heard of
retrospective distortion – people's tendency to convince themselves that they
accurately predicted an event before it happened. As you can imagine,
retrospective distortion can significantly affect the process of deciding
market trends and making trading decisions.
What is the market cycle?
You may have heard the phrase "the market
moves cyclically." A cycle is a recurring pattern or
trend. As a rule, long-term market cycles are more dependable than short-term
ones. Nevertheless, market cycles can be found both on the hourly chart and by
looking at data for several decades.
Markets are cyclical in nature. Cycles can lead to the fact
that sometimes due to different market conditions, some assets will bring more
income, and sometimes others.
It is worth noting that it is almost impossible to decide at
any moment at what stage of the market cycle we are. With
high accuracy, such an analysis can be conducted only after the
completion of a certain part of the cycle. Market cycles also rarely have a
specific start and end point. Analyzing financial markets from the point of
view of the current moment is a very biased approach.
Comments