What is crypto trading and how does it work

Crypto trading means buying, selling, or exchanging digital assets like Bitcoin and Ethereum with exposure to price changes in a 24/7 market. Unlike long-term holding strategies, active crypto trading typically focuses on shorter-term price movements within broader digital asset markets.

As crypto continues to evolve as an asset class, understanding how these markets function, including their risks and limitations, may be relevant.

Trading in crypto markets differs significantly from traditional financial systems. They are , offering a level of accessibility not typically seen in equities or fixed income.

Table: Types of crypto assets traded

Unlike stock markets, where trading is limited to specific hours, crypto markets operate 24/7, allowing participants to respond instantly to global events, macro trends, or market sentiment. However, crypto asset markets involve a range of risks, including significant price volatility, liquidity risks, operational and technology-related risks, regulatory changes, and the risk of loss.

The ecosystem largely includes a mix of participants:

• Retail traders
• Institutional investors
• Market makers and liquidity providers

Crypto trading happens through exchanges, which act as marketplaces for buying and selling digital assets.

Table: Crypto markets vs traditional markets

Centralised exchanges (CEXs)

Centralised exchanges are that facilitate trading and hold user funds on their behalf. They typically offer:

• High liquidity
• User-friendly interfaces
• Integration with fiat currencies

They are often the starting point for beginners due to their simplicity.

Decentralised exchanges (DEXs)

Decentralised exchanges allow users to trade directly from their wallets, without an intermediary. Transactions are executed through smart contracts.

They offer:

• Greater control over assets
• Increased transparency
• Reduced reliance on intermediaries

However, they can be less intuitive and may offer lower liquidity for some assets.

At the core of crypto trading is blockchain, a distributed ledger that records every transaction.

When a trade is executed:

• The transaction is broadcast to the network
• It is verified by miners or validators
• Once confirmed, it becomes part of the blockchain

Different networks use different mechanisms, for example:

• Proof-of-work (PoW) used by Bitcoin
• Proof-of-stake (PoS) used by Ethereum

These systems are built to ensure that transactions are secure and cannot be altered after confirmation. However,these are not foolproof and are open to several risks

Spot trading

Spot trading involves buying and owning the actual cryptocurrency. The features of spot trading include:

• It is simpler and more transparent
• Spot trading minimises additional risks associated with leveraged products, such as liquidation and margin calls

Derivative trading

Derivatives are financial contracts whose value is based on an underlying asset. They enable market participants to manage risk or obtain market exposure through a contractual instrument rather than direct ownership of the asset.  These include:

• Futures
• Perpetual contracts
• Options

Derivatives often involve leverage, which come with the risk of losses.

Table: spot vs derivatives trading

*However, other risks related to crypto, including financial, technical, and other risks will continue to exist.

Crypto traders make money primarily by capitalising on price changes.

Common approaches include:

• Buying low and selling high in rising markets
• Short selling in falling markets using derivatives
• Short-term trading (day or swing trading)
• Long-term holding based on market conviction

Regardless of strategy, success depends on:

• Consistency
• Discipline
• Risk management

*Profits are not guaranteed and there are associated risks

Crypto trading represents a new and evolving asset class that is increasingly relevant for modern portfolios, albeit it comes with its own set of risks. It typically offers, among other things,

• Global accessibility through 24/7 markets
• Transparency via blockchain technology
• Opportunities from volatility
• The possibility of direct ownership of assets through self-custody, reducing reliance on intermediaries

For TradFi professionals, the key takeaway is understanding how crypto markets function and how to evaluate them with the same discipline applied to traditional assets.

Crypto trading may play a role in diversification, but it requires education, structured risk management, and a clear strategy.

1. What is crypto trading?
Crypto trading is the process of buying and selling digital assets like Bitcoin or Ethereum based on price movements.

2. How does crypto trading work?
Crypto trading works through online exchanges where buyers and sellers place orders. Prices change based on supply, demand, and market sentiment, and transactions are recorded on the blockchain.

3. What is spot trading in crypto?
Spot trading in crypto means buying or selling a cryptocurrency at its current market price for immediate settlement where onedirectly owns the asset after the trade.

4. Is crypto trading profitable?
Traders make money by buying assets at lower prices and selling at higher prices, or by profiting from falling prices using derivatives. It can be profitable, but success depends on strategy, timing, and risk management.

5. How does one trade in crypto?
Individuals must carefully evaluate their risk appetite and investment strategy when evaluating whether or not trade crypto. Typically, crypto may be traded via exchanges.

6. Do I need a wallet to trade crypto?
A wallet is usually used to store your crypto assets. Exchanges may offer built-in wallets, but separate wallets may also be opted based on your technical understanding and risk appetite.

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