Before you start trading crypto, you must learn how this sector works. To do so, you first need to know about a few terms people use when trading cryptocurrency.
#1 Cryptocurrency Prices
The price of cryptocurrencies is always on the move, and you can’t control it. When it comes to trading, though, that doesn’t mean you should give up. There are plenty of ways to make money as a cryptocurrency trader.
Knowing the cryptocurrency prices is essential to successful cryptocurrency trading. The information necessary for your investment decisions comes from the web. That helps you know what’s going on in the market before it becomes relevant for your own trading needs or even when there isn’t any relevant information yet.
#2 Market Cap
A lot of cryptocurrency beginners wonder how market capitalization is calculated. Their confusion is well-founded: the crypto trading scene can be difficult to navigate, and it’s easy to get lost in jargon without knowing what you’re talking about. However, understanding the core terms of market capitalization can help people keep track of how a project is doing as a whole.
Market capitalization refers to the total value of all cryptocurrencies on the market. To find this number take a given cryptocurrency’s price and multiply it by its circulating supply.
The beauty of using this metric lies in its versatility: it allows one to compare different cryptocurrencies against each other based on their comparative size. For example, if someone wanted to find out which coin had a higher value—Bitcoin or Ethereum—they could quickly do so by comparing their respective market capitalizations (it turns out that Bitcoin has a much higher value).
Another useful way to think about the market cap is that it gives us an idea of how much money would be needed for any single person or entity to buy up every single coin on the marketplace. This number gives us some idea as to how decentralized a cryptocurrency is: if you were able to buy up most coins with minimal effort, then that means there aren’t too many individuals holding onto them at once (and they might not be too keen on selling them off).
#3 Fiat Currency
Fiat currency (also referred to as legal tender) is the money that a government has declared to be legal for paying debts. It’s sometimes called central bank money because it is issued by a central bank. That differs from other forms of money such as commodity money and representative money. A fiat currency is different than a commodity currency in that you can’t necessarily redeem it for something useful like gold or silver if you need new pants or groceries.
Fiat currencies are created when governments issue them as legal tender and then regulate their value. If you’re wondering who regulates these fiat currencies, the answer is the government itself.
The government doesn’t want to encourage inflation, so they control how much fiat currency gets into circulation at any one time by issuing bonds, selling securities (such as treasury bills), or creating and spending more fiat currency itself (borrowing).
They also ensure that the value of their fiat currency stays consistent relative to another country’s fiat currency. They do so by regulating its value and buying or selling their own as needed on foreign exchanges to maintain their exchange rate with other countries’ currencies.
#4 Centralized Exchanges
When it comes to cryptocurrency, many people are confused by the difference between centralized and decentralized exchanges. While both can be confusing on their own, you must gain a firm understanding of each before you start trading in earnest.
A centralized exchange is any cryptocurrency exchange website that isn’t peer-to-peer; instead, you trade with the company itself. The company holds your funds and matches your trades. When you want to sell some crypto currencies and get back fiat money (such as US dollars) or another cryptocurrency, the exchange does so for you at whatever price they deem appropriate at that time.
You are limited to selling your coins through whichever method they support (typically wire transfers or credit cards). In other words, centralized exchanges control your private key and have control over your funds; therefore, if something goes wrong on the site like getting hacked or shut down by authorities, all of your cryptocurrency could be lost forever!
With a custodial exchange, it’s the company that holds onto all of your assets when you’re trading. Instead of directly owning them yourself in a non-custodial wallet (which is what happens with most cryptocurrencies), these companies take ownership of them for safekeeping while also ensuring security against bad actors who might try to steal from users.
#5 Cryptocurrency Exchanges
A cryptocurrency exchange is a place that facilitates the buying and selling of cryptocurrency. It’s essentially a site where you can trade one cryptocurrency for another or buy it with fiat currency. With the rise of this new asset class, many exchanges have popped up to capitalize on the demand by buyers (and sellers). You can also use exchanges to quickly and easily convert your crypto into local currency.
#6 Crypto to Crypto Exchanges
Because of their decentralized nature, cryptocurrencies are generally traded through exchanges that match buyers and sellers—typically, when someone wants to buy a cryptocurrency using fiat currency, they must first sell the cryptocurrency they already own. That can be done through crypto-to-crypto exchanges.
For example, if you have Bitcoin and want to purchase Ethereum with it, you’d need to find an exchange where the two currencies are listed under the same heading. You would then trade your Bitcoin for Ethereum on this platform.
This article has summarized some of the essential cryptocurrency terms you should know before entering the crypto trading scene. So, you must understand these terminologies properly before letting yourself loose out there.