Cryptocurrency Trading Explained: How It Works

Cryptocurrency trading has the potential to be a lucrative endeavor for the committed. Like other financial markets, you can access crypto markets on trading platforms where traders buy and sell digital assets. Successful trading involves a plan and strategy, as well as a clear understanding of the pros and cons of cryptocurrency trading, especially due to the volatility of crypto markets. You can start trading cryptocurrency by creating an account on the exchange of your choice. Alternatively, some traders use crypto brokers to execute trades automatically based on specified criteria and timelines. 

What is cryptocurrency trading?  

Crypto trading involves buying cryptocurrency to sell it to make a profit. The goal is to time when you buy and sell crypto to maximize earnings. 

Why trade cryptocurrency?  

For some, trading cryptocurrency is an interactive, first-hand way to learn about digital currency. For others, buying and selling crypto is an investment. The volatility of the crypto market makes it an interesting arena for anyone seeking a new investment. Trading cryptocurrency has its fair share of risk, but the potential reward attracts some people to the space. 

With varying reasons for trading, the end goal is typically the same: turn a profit, minimize losses, and learn a little along the way. These are some common reasons to trade cryptocurrency: 

• Diversify overall portfolio 

• Potential to outpace inflation and regulatory interventions 

• Secure storage of digital assets 

• Potential for high returns over a shorter period of time due to volatility

• Method to earn passive income 

• Improved accessibility for underserved communities in the financial system 

How to trade cryptocurrency

To trade cryptocurrency, you first need to obtain cryptocurrency. The platform you use will depend on the type of crypto you want to trade. Once you find an exchange that handles your currency, you’ll open an account, transfer funds to your crypto wallet, and make your purchase. Using whatever trading strategy you choose, you sell the cryptocurrency when the market is in your favor. 

Choose your cryptocurrency trading plan.

Crypto traders have two options to trade: through a broker or directly on the exchange. The method you choose depends on your overall trading goals. You’ll find pros and cons to each. 

Exchange

You decide when to trade if you buy cryptocurrency directly from an exchange and sell on the exchange. You buy and sell crypto using whatever trading method you choose. You own the currency as you would hold dollars in a bank account, so when you lose money, it will directly affect your crypto wallet balance. When you earn money in a trade, that money is yours to store in your wallet for transactions or transfer to fiat currency. 

Prepare to pay some fees if your trading plan includes an exchange. In most cases, exchange platforms charge either a flat fee for buying or selling or a percentage fee for the transaction. Some exchanges also charge a withdrawal fee if you move your crypto off the platform. Consider all fees and restrictions before choosing an exchange using this trading plan.

Broker

When you use a broker to trade cryptocurrency, you don’t actually own the cryptocurrency. Instead, you tell a broker what and when to buy and sell and enter into a contract for difference (CFD) agreement for the trade parameters. The broker holds the actual currency on your behalf. If using this plan, you open a position in the market and choose either a long or short sell. 

Opening a long position, or buying, means you’re hoping the currency will increase in value. Your goal in this position is to hold the currency long term, waiting for the currency to jump in value. Short positions, or sells, are the opposite. When you create a short position, you’re expecting the value of the currency will decrease, trading against the crypto market. You earn profits from this trading plan if the currency is less valuable when you close your position than when you opened. If not, you lose money and owe the broker the difference. 

Understand how cryptocurrencies work.

Understanding how cryptocurrencies work before choosing a crypto broker or exchange is important. Learn a few common terms and concepts. Research factors that cause market fluctuations and find a good, reliable resource to follow market trends. What makes the value of a currency rise and fall? How can you monitor these fluctuations, and will you know when to buy and sell based on your predictions? 

Learning how to read market graphs helps when understanding how cryptocurrency works. In general, reading the market means identifying trends. A bull market means that the price of a particular cryptocurrency is trending upward, while a bear market means the price is trending downward. In general, common factors that affect the price of a particular cryptocurrency include:

• Basic supply and demand 

• Cost of production 

• The reputation of a particular token 

• Value of competing tokens

• Impending regulation from government agencies 

• Speculation coverage 

Some popular exchanges offer educational resources and even programs for their users to better understand how cryptocurrencies work.

Decide on a trading strategy. 

Choose your preferred trading strategy based on your goals and experience in trading crypto. Think of a trading strategy as a framework. Traders typically choose a strategy in conjunction with either technical or fundamental market analysis. Technical analysis focuses on the movement of a specific currency in the market and historical patterns. In contrast, fundamental analysis takes note of market disruptions that may affect the price now and in the future. Analyzing the market provides traders with helpful insights on what trading strategy would be most helpful to meet trading goals and outcomes.

Consider some common trading strategies: 

• HODL-ing 

  • HODL-ing involves holding cryptocurrency over a longer period of time. Traders typically choose this passive strategy to mitigate the risk from short-term market fluctuations, hoping their currency will appreciate over a longer period. 

• Scalping 

  • Scalping is an incredibly fast-paced, active trading strategy that aims to make many small profits. It’s about volume rather than amount when scalping. Some traders may open and close a position within seconds. 

• Range trading 

  • Traders who use this trading strategy buy and sell within a narrow price range. Before trading, they watch for the price to level out or follow a more “horizontal” pattern. Market lows are referred to as support and market highs are called resistance. This strategy allows traders to take advantage of either oversold or overbought cryptocurrency, buying at support and selling at resistance price. Investors often use range trading as a day trading strategy.

• Trend trading

  • Trend trading relies on information gleaned from fundamental analysis of the market. Traders watch the market and make predictions about how the market will trend, typically in the long term. Many beginners of crypto trading rely on this strategy to minimize risk and maximize profits by buying in when the price is low and closing out when the price has risen. 

Choose your preferred currency. 

You can invest in more well-known crypto like Bitcoin or Ethereum, or newer and smaller cryptos. Investing in established crypto coins tends to have more predictability and stability than lesser-known cryptocurrencies; however, some investors are attracted to smaller coins that can be more volatile and lead to greater gains over a shorter period. That’s not to say that these coins are always stable, but they have a longer history, making it easier to speculate on the price based on market trends. Some crypto traders prefer to have a diverse portfolio.

The value of coins changes daily, and even a popular, well-established coin can experience massive fluctuations. As of February 2025, the top cryptocurrencies based on market capitalization (the current value of a coin multiplied by the number of that coin in circulation) are [1]:

• Bitcoin (BTC)

• Ethereum (ETH)

• XPR (XRP)

• Tether (USDT)

• Solana (SOL)

• BNB (BNB)

• USD Coin (USDC)

• Dogecoin (DOGE)

• Cardano (ADA)

• TRON (TRX)

Select your cryptocurrency trading platform.

The trading platform you choose should be compatible with your cryptocurrency. Many factors impact your decision when choosing a trading platform. Consider these criteria: 

• Security 

  • Look for a trading platform with a good reputation for keeping user data safe and secure. Established platforms typically require a thorough account setup involving identity verification and two-factor authentication. 

• Liquidity 

  • Liquidity refers to trade volume. Larger platforms, by nature, have a larger trade volume. Liquidity is important because you’ll want to find buyers easily when ready to sell. 

• Fees 

  • Understand all exchange fees before choosing a platform. Most exchanges charge fees based on the percentage of cryptocurrency you trade, but others might have a fixed price. Look for other fees, such as a maker/taker fee and transfer fees, when you sell crypto and transfer profits to your bank account. 

• Storage options 

  • Hot wallets are crypto wallets connected to the internet, and many exchanges provide users with a hot wallet that stores crypto on their sites. Hot wallets have some security issues, so it’s nice to have the option to store your cryptocurrency in a cold wallet offline. Be aware that some exchanges require you to keep your cryptocurrency in their wallet or charge high fees to move your currency off the platform.  

• Payment methods 

  • Researching the types of payments an exchange accepts when buying cryptocurrency is helpful. Some exchanges allow wire transfers, credit cards, or other digital payment methods. Choose an exchange compatible with the payment method you want to use. 

Create an account on your trading platform of choice. 

Once you’ve chosen a broker or exchange, open an account for trading on your chosen platform. You'll need a valid ID and basic contact details to open your account, along with identity verification. This verification process varies by exchange. Common ways you may verify your identity include a photo, your social security number, and your address. 

After entering the required sign-up information, most exchanges require you to set up two-factor authentication as an additional security measure. You can transfer funds from your bank account and purchase cryptocurrency once the exchange verifies your identity and completes the account creation process. Expect to wait a few days before your account is active and ready to buy and sell crypto. 

Open your first position, monitor it, and then close it.

When you open a position on an exchange, you set the order type: market order, stop order, or limit order. Your position will automatically close according to the crypto order type.

• A market order automatically and instantly buys or sells at the best market price; you or your broker do not set a target price.

• A limit order allows traders to set a specific price or target. Trades occur only when the currency hits that target.

• A stop order means you set a stop price. A trade is made once the currency hits that stop price. 

Decide on the amount and quantity, buy the crypto, and monitor the market. Accurate tools for monitoring and reading the crypto market are key to knowing when to close your position. Many exchanges offer crypto trading apps that let you track market fluctuations in real time and set alerts to changes. 

When you decide to sell, you close your position by choosing the amount of crypto you want to sell. Exchanges find a buyer for you. Choose which currency you want to receive profits from, then sell to complete the sale. Store any profits in your crypto wallet. 

If you’re trading cryptocurrency with a broker via CFDs, decide how much money you want to invest and the total order value. Trading with CFDs is a form of leverage trading, which means you only pay a percentage of the total order value up front and have the opportunity to gain or lose more than you put in.

For example, say you want to trade $1,000 of cryptocurrency with a broker. If the margin of total order value is 10 percent, you pay the broker $100, but you're actually trading $1,000 in the market. Create a long or short position with the broker by inputting the price and quantity you want to trade. Refer to your CFD for minimum requirements for purchase orders and other criteria. You’re hoping that the price will go up or down, using some of your money and some of the broker’s money

Managing risks in cryptocurrency trading 

Risk management is an essential part of cryptocurrency trading. It involves making smart market moves when buying and selling. It also includes ensuring the safety and security of your digital assets and personal information when transacting and storing your cryptocurrency. Risk management needs to be part of your trading strategy and overall plan in this wildly speculative market.

Determine your goals for trading. Read the market, choose an analysis method, and learn as much as possible before entering a trade. Sometimes, understanding your risks in crypto trading is the best way to manage them. General tips for managing risks in cryptocurrency trading include the following: 

• Take advantage of in-platform educational tools and risk management features on the exchange you use to trade or market alerts via a cryptocurrency trading app. 

• Only invest as much as you can stand to lose. 

• Use a trading strategy with the lowest risk when possible. 

• Choose a trading plan with a clear entry and exit point based on an analysis of the market and stick to that plan.

• Store your cryptocurrency in a cold wallet and only transfer to a hot wallet when completing a transaction. 

• Transfer crypto to fiat currency often versus storing a large amount of crypto in your wallet.

The history of cryptocurrency trading

The concept behind a digitally traded asset dates back to the late 1980s, though a prototype wasn’t created until 1995. Known as “Digicash,” this early form of what would become cryptocurrency was created by David Chaum and required software linked to a user’s bank account—blockchain had not come into existence yet. Chaum may have been the creator of early prototypes of the digital coin, but it was Satoshi Nakamoto who published a white paper on Bitcoin in 2008 and is credited with building the foundation for where cryptocurrency is today.

The first mined Bitcoin cryptocurrency via the blockchain came into existence in 2009. By 2010, Bitcoin was tradable, with a market valuation of half a cent in May 2010 [2]. From 2010 to 2015, the crypto market exploded with the creation of altcoins—competing crypto like Ethereum. Media coverage and increased mainstream exposure have taken the market to where it is today, which is still volatile but moving into a future where crypto is becoming more commonplace and, in some cases, used as legal tender. 

Is cryptocurrency trading safe? 

Blockchain technology ensures that every cryptocurrency transaction is recorded securely on the blockchain. Every computer on the blockchain verifies the transaction, so there is not one central server. Once recorded on the digital ledger, it is nearly impossible to counterfeit or hack cryptocurrency. 

Crypto can, however, be stolen if someone obtains your crypto wallet password or account information known as your public and private key. Storing crypto in your cold wallet or transferring to fiat currency can minimize risk. 

Legal and tax implications of cryptocurrency trading

Though cryptocurrency isn’t subject to the same regulation and management as fiat currency, expect to pay taxes when cashing in your earnings. US taxpayers owe capital gains taxes on any income from converting crypto to dollars. You’ll also incur taxes on any income you earn if you mine cryptocurrency. The good news is that you can claim a loss if you lose money in trading crypto. 

The legality of cryptocurrency for legal tender depends vastly on where you live. As of 2025, only a few countries recognize cryptocurrency as legal tender, and the US is not one of those countries. State governments have been grappling with how to regulate digital currency within the US. It’s a fluid situation, with only a few state regulations on exchanges. To know if any regulations or legal guidelines apply to you as a trader, read through the terms of service for the exchange platform you choose. 

The future of digital currency as a legal tender is still widely unclear. For now, crypto traders can legally exchange certain types of cryptocurrency for fiat currency, depending on exchange rates for that specific currency type. Location-based regulations exist, so prepare for varying legal and tax implications based on where you live. 

Learn more about cryptocurrency trading 

Consider taking an online course to learn about the cryptocurrency market and how to create smart trading strategies. Blockchain and Cryptocurrency Explained, offered by Michigan University on Coursera, can help you gain a foundational knowledge of cryptocurrencies and their strengths and weaknesses as an asset. Learning more about this evolving industry can help you confidently enter the market and develop the skills to make educated cryptocurrency trading decisions.