How Does Cryptocurrency Trading Work?

July 13, 2022

The cryptocurrency world is complex and can be overwhelming, especially for beginners.

Yet, if you take the time to do your research and use the right tools, your investing journey may be successful. 

Let's go through the basics of crypto trading so you can decide if investing is the right thing for you.

What are cryptocurrencies, and how do they work?

 Blockchain systems and mining

 Cryptocurrencies, also called cryptos, are digital types of currencies.

They are not issued or controlled by a government or a central bank.

Cryptocurrencies are built on decentralized blockchain systems like the Bitcoin blockchain. Before one can invest, they need to be mined first. 

Mining cryptocurrencies is the process of solving complex mathematical problems on the blockchain. For that, miners use special equipment called a mining rig. 

In the case of Bitcoin, whoever solves the problem first gets rewarded with new Bitcoins.

a mining rig
Mining rigs are powerful equipment used for mining cryptocurrencies.

Did you know?

Unlike traditional currencies, cryptocurrencies have a limited supply. For example, as per design, there are 21 million Bitcoins in existence. Out of these, over 19 million are in circulation. 

The more Bitcoins are mined, the more difficult it becomes to mine new Bitcoins. It is estimated that the last Bitcoin will be mined in 2140.

How to trade cryptocurrencies?

Cryptocurrency trading is different from regular stock exchange trading.

Due to limited regulation, the crypto market is volatile, and there is a lot of risk involved.

It is also a 24-hour market, meaning the value of crypto can always change.

Before you dive straight into crypto trading, consider the following three things.

  1. A crypto exchange
  2. A crypto wallet
  3. A list of cryptocurrencies of your choice.


Did you know?

Ovoro is an AI-driven crypto investing app that simplifies and automates crypto trading.

With Ovoro, you do not need a wallet or a crypto exchange.

We have combined some of the most popular cryptocurrencies in custom-made asset collections that help you invest with a tap on your phone.  

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Crypto exchanges

Cryptocurrency exchanges are essentially digital marketplaces.

They list a variety of cryptocurrencies and allow individuals to buy and sell them.

The exchange acts as the middleman between all buyers and sellers.

There are different cryptocurrency exchanges to choose from, so do your research. 

Consider the following when choosing the right cryptocurrency exchange for you:

  • Cryptocurrency availability: Are the cryptocurrencies you want available on the exchange? If not, find another exchange.
  • Minimum investment: Some exchanges may have a minimum investment rule. Make sure you find one that fits your budget and needs.
  • Exchange liquidity: How fast and easy is it to convert crypto assets into traditional currencies? Are trading volumes high enough? If the answer is "yes” - you are on the right track.
  • Reputation and customer service: Good reputation and customer service are also important.

The above list does not exhaust everything you need to consider but, it is a good starting point.

Once you have selected the crypto exchange that best suits your needs, you are ready to create an account and connect your wallet.

Cryptocurrency wallets

To trade cryptocurrencies on crypto exchanges, you will need a crypto wallet. Your wallet contains public and private cryptographic keys.

The keys track wallet ownership and allow you to send and receive cryptocurrencies. 

When you create an account on an exchange, you get an exchange wallet. It is associated with the platform of choice.

However, for added security, many traders use external wallets.

Hot wallets

Hot wallets are online storage solutions connected to the internet. Hot wallet types include

  • Web wallets: Operate through a web browser.
  • Mobile wallets: Specifically designed for mobile devices. 
  • Desktop wallets: Software wallets that are installed on a computer 

Hot wallets are easily accessible and convenient for frequent use. 

Cold Wallets

Unlike hot wallets, cold wallets are offline storage solutions known as hardware wallets.

They are not connected to the internet and are considered more secure.

Consider your options and needs before choosing the right wallet for you.

A lapton with golden bitcoins on it
Hardware wallets are safer than hot wallets.

Deposit funds

Once you have your exchange account ready, it is time to deposit funds that you will use to invest in your cryptocurrencies of choice.

If you are depositing fiat currency, you may have to link your bank account to the exchange.

Some exchanges may also offer other payment methods like credit/debit cards.

Deposit Limits and Fees: See if there are deposit limits or fees associated with your funding method.

Exchanges often have specific rules for deposit amounts. There may be fees for certain transactions.

Once the deposit is processed, check your balance to see if the funds are added successfully.

Choosing your cryptocurrencies 

Choosing which currencies to invest in is probably the hardest part. That is especially true if you are a beginner.

There are thousands of cryptocurrencies to choose from, and that can be very confusing. 

To be on the safe side, do your research using reputable resources. It is important to make informed decisions when choosing which cryptocurrencies to trade.

Also, keep your emotions in check. Strong emotions like greed, excitement, and fear can lead to poor decision-making. That can hurt your success as an investor.

Things to do:

Do your research

Do your research and acquire at least a basic understanding of the different cryptocurrencies you plan to trade. 

Diversify your portfolio 

Diversify your portfolio as much as you can. Do not put all your eggs in one basket.

Bitcoin and Ethereum are the most popular cryptocurrencies, and they seem like the obvious choice.

However, there are other options out there that should not be overlooked. The market is quite diverse and offers many opportunities. Take advantage of that.

For example, the following cryptocurrencies have gained popularity among investors:

  • Ripple (XRP)
  • Cardano (ADA)
  • Solana (SOL)
  • Algorand (Algo)
  • HBAR (HBAR) 

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Ovoro is the go-to app for beginners and experienced investors looking for a way to put their investing on autopilot.

Manage risk

Risk management is a crucial aspect of investing if you want to be successful. Set stop-loss points and take-profit orders to manage potential losses and gains.

Because the crypto market is volatile and works 24/ 7, it is impossible to predict which way prices may go. That is why it is essential to protect your investment. 

Stop-loss points and take-profit orders do exactly that. When you have a predetermined stop-loss point, trading automatically stops if the price level goes down and reaches the stop-loss point.

This way, if the price continues to fall, your investment is protected, and you will not suffer additional losses.

stop-loss point behaviour
Ovoro's custom-made stop-loss points follow the price and act immediately when it drops below its level. (The image was created for illustration purposes only.)

On the other hand, take-profit orders help you secure your gains. With them in place, when the price goes up to the predetermined level, the trade stops, and the take-profit order secures the accumulated gains.

If the price suddenly drops, your profits will not be affected.

In conclusion 

Cryptocurrency trading is not easy but can be rewarding. Understanding the basics, from blockchain systems and mining to choosing the right exchange and wallet, is crucial.

To avoid the most common errors in crypto trading, do not make decisions based on strong emotions. Stay informed, diversify your portfolio, and use the right tools to manage risk.