What is a Cryptocurrency Exchange?
A cryptocurrency exchange platform is a business that allows you to buy, sell, and trade digital currencies. For example, Phemex has a “Buy Crypto” page that allows you to select the cryptocurrency you wish to buy, the amount, and the method of payment. Options include credit cards, bank transfers, ApplePay, and more. The most important part of this process is to correctly enter your wallet address as the destination for your newly purchased crypto. Recall that although wallets come in a variety of forms, the most convenient option for trading is a built-in wallet. Simply find your target cryptocurrency’s deposit address on the “Assets” page of your account and copy and paste it into the relevant field.
What is a Crypto Spot Market?
A spot market is another service that the Phemex exchange offers where you can trade (buy or sell) your cryptocurrencies with other users. Every transaction settles immediately or “on the spot” once it is filled, hence the name. All spot markets are composed of buyers, sellers, and an order book. Buyers enter the market with a specific bid or buy price, this is the maximum amount they wish to spend. Conversely, sellers enter the market with a specific ask or sell price, the lowest amount they wish to sell their asset for. The order book is the list of all of these prices.
The image above is a snapshot of the BTC/USDT spot market order book. In this particular market, you can buy BTC using USDT or you can sell BTC for USDT. As a reminder, USDT is a stablecoin, covered in our article: What are Altcoins, whose value is always roughly equivalent to the US Dollar. For this example, we will use both currencies (USDT and USD) interchangeably. In red, you can see BTC for purchase at the best prices that sellers are currently willing to sell for. The price is quoted per 1 BTC although the amount available to purchase may vary. In green, you can see the maximum prices that buyers are willing to spend to purchase BTC, again quoted in value per 1 BTC. The “Amount (BTC)” column shows you how much BTC is actually offered for each price, while the “Value (USDT)” column shows you how much each amount is worth in dollars.
How to Trade on A Crypto Spot Market?
For example, if you are a buyer who is happy with the best sell price available, the values on the order book tell you that you can purchase up to 0.519999 BTC or $6,890.39 worth at the price of $13250.78. Any more BTC than this and you will be forced to purchase the remainder at the next best price of $13250.81. As you successfully purchase your desired amount of BTC, the order book will automatically update and remove these quantities and prices accordingly. In other words, you will be taking liquidity (the volume or availability of any asset) away from the order book. This is also known as a market order, meaning an order that automatically executes against the best possible price. This is a fast and convenient way to guarantee the execution of a trade.
Alternatively, you can place an order at a price that is lower than the best sell price. Notice that there is a gap of $2.66 between the best sell and best buy prices. This is known as the spread. Placing an order at any price within the spread will immediately add it to the order book. For example, placing a buy order for 0.5 BTC at the price of $13250.0 will add a new line above the current best buy price seen in our image. In this case, you are adding liquidity to the order book. Your offer will stay in the book until one or many sellers agree to sell you BTC at your desired price. This is also known as a limit order. You control the limit price that you desire, but the disadvantage is that there is no guarantee someone will agree to your price and your order may never execute. As you can probably imagine, liquidity is crucial to any market. The more liquidity there is, the more options (buyers, sellers, prices) you have, and the more likely that your buy or sell orders will actually complete.
Once you and a seller match, your account will instantly be deducted the correct amount of USDT and be credited with the corresponding amount of BTC. Please note that these trading activities can happen for almost any pair of popular crypto assets. Phemex currently offers 14 cryptos against USDT. This is the most basic and straightforward way to trade cryptocurrencies. However, Phemex also offers a derivatives market. This requires much more advanced knowledge that will be covered in our next article: How to trade Crypto Derivatives?
How to Make Money Trading Bitcoin?
Making money trading Bitcoin involves buying the asset at a lower price and selling it at a higher one. This is much easier said than done. Obviously, it is impossible to predict the future with 100% accuracy. However, one can make educated guesses based on some type of informational advantage. By rigorously and meticulously following the news and studying all the factors that affect Bitcoin’s price, you may begin to recognize certain trends or patterns. Finding effective buy or sell signals is not easy, but may just be possible with enough hard work.
(We offer some tips for Bitcoin traders on How to manage emotions during trading)
If you are convinced that you have developed such a system, all that’s left for you to do is to use the knowledge presented above to buy more Bitcoin when the price is low and sell whenever you believe the price has reached its peak or is about to drop. Once it drops, you can purchase more Bitcoin and repeat this process indefinitely.
Arbitrage Trading in Crypto
Another method worth mentioning is known as arbitrage. There are many exchanges besides Phemex. On each, the price of Bitcoin will often be slightly different. This is because the spot price of BTC at any given exchange is based on the forces of supply and demand. If one exchange has a surplus of sellers, the price will be lower, while an exchange with too many buyers will force the price up. One could theoretically find an exchange with a lower price, purchase Bitcoin there, and then sell it at an exchange with a higher price. In practice, it is highly improbable for a beginner to execute an arbitrage operation. One of the first challenges you will face is timing. Any such opportunities will be noticed by other participants in the market, some with sophisticated trading algorithms that automatically make trades on their behalf. Significant price gaps do not tend to last for more than an instant. Next, there are also additional costs to consider. Transfer and transaction fees may exceed potential gains, assuming you perform these before anyone else in the first place. Nevertheless, arbitrage opportunities do exist and those armed with the right tools can still benefit from them.
Investing in Cryptocurrency for the Long Term
Finally, perhaps the best and easiest approach is to look at cryptocurrencies as long-term investments. Study the fundamentals behind a crypto project that you are interested in and determine if it has inherent value and potential for growth. Bitcoin is a great example of an asset that many believe, despite any road bumps, will only appreciate with time. By purchasing and simply hodling promising cryptos, you do not need to actively worry about prices or news. Simply sell when you’ve reached a target profit you are comfortable with.
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