Cryptocurrency Trading is as straightforward and simple as it sounds. It is the act of buying one cryptocurrency in exchange for another or using fiat money (like the US dollar) to purchase cryptocurrency. Just as you would go to the exchange or to a bank that provides the service to convert your currency when you travel abroad, you could visit a cryptocurrency trader to exchange your dollar for any one of the cryptocurrencies that are in the market.
Essentially, you are looking at an exchange-driven transaction between the various cryptocurrencies and the dollar, as well as between one crypto and another. Just as in all financial transactions, there is a trading opportunity that exists when a natural demand between one currency and another exists.
The underlying currencies, let’s say the bitcoin and the dollar, have a natural rate of exchange between the two. This is the activity of the buyers and the sellers around the world who need to conduct their business in Bitcoin (BTC) and still have the US dollar in their hands (USD). When they enter the market and make the purchase, they create demand.
When a person who receives BTC as payment for goods or service goes to the exchange, they are desirous to sell the BTC and get USD for it. When they go to the market and sell BTC, they are creating a supply for it. As with all demand and supply, the balance between how much is demanded and how much is supplied is eventually reflected in the price.
In July 2010, the market-determined price of BTC was 8 US cents for every 1 BTC. In July of 2011, a year later, 1 BTC was trading at $34. That’s $33.92 appreciation in a year, or 42,000% change. In July of 2016, BTC traded at $600. By the end of 2017, the price of BTC reached above $17,000.
When something can be expressed in terms of value, has numerous willing buyers and willing sellers, and has a use beyond the financial markets, what you essentially have is a tool that can be traded, arbitraged and profited from, merely from its financial profile.
Take the US dollar for instance. It satisfies all three of those conditions in the last paragraph. It can be expressed in terms of value against any number of things. Many of the things that you buy, not just at the local grocery store, but also on foreign websites, list their prices in USD. You can use the USD that you earn from your job, received as a gift, or got in return from selling something, and use that USD to buy whatever you want. And anything you want to buy is listed in terms of the price that is quoted in USD. That creates a strong underlying market.
Most sovereign currencies are only accepted within their borders. If you go to South Korea, the Won is what they accept there as currency, but you can’t use that Won if you hopped over and visited China. You would have to go to an exchange with your won and purchase the Yuan. Because there are numerous people and entities constantly buying yuans and selling wons, a price can be derived, and that is called the exchange rate. It is a willing-buyer and willing-seller mechanism.
With the emergence of BTC as a currency, it advanced to become an asset once there was a huge demand for it, and there was a correspondingly large supply of it. That meant, to economists and market watchers, that not only was there a large base of buyers and sellers, but there was also a market that was based on speculation.
There are millions of traders who bet (not used as a gambling reference) on the direction of the USD on a global basis. In total, more than five trillion dollars’ worth of transactions happens in one day, every day. From this amount, less than 1% is transactional. That means that there is an underlying commercial transaction where one party entered the Foreign Exchange (FX) market in order to buy the currency they needed so that they could pay their vendor. Out of the other 99%, it can be easily traced that 80% is purely speculative. That means traders enter and exit the market with the sole intention of profiting from the purchase and sale of the currency and that there is no underlying transactional reason for the entry to the FX market.