Easy to Learn Crypto-Asset Trading Terminology Outline For Beginners, Experts & Genius' [BEG GUIDE]
The cryptocurrency community, like any community, is packed with its own jargon, and even juicy memes that tell a story of the early ‘good ol' days' as some would surely say.
Many in the last year have probably learned to know what the difference between FOMO and FUD is while everyone is yelling for you to HODL or FODL.
What does it mean when someone recommends dollar-cost averaging your first bitcoin purchase? Today, we’re going to define some of the most common cryptocurrency trading terms in our simple to understand and easy to reference for future use no matter a Beginner, Expert or Genius cryptocurrency trader/investor. We want to say Thanks to SFOX for the inspiration and insight for this post. Lets take a look:
Exchange (Cryptocurrency Exchanges)
A cryptocurrency exchange is an online marketplace where people can buy and sell cryptocurrencies. You visit an exchange like Binance.com, sign up, deposit funds, then start buying or selling cryptocurrencies.
There are a number of major cryptocurrency exchanges available online today. These exchanges are based around the world. Most of the top exchanges offer similar service, similar trading pairs, and a similar trading experience. Some of the smaller niche exchanges, however, can offer more unique trading pairs, including coins you won’t find listed anywhere else.
Major cryptocurrency exchanges include:
- Coinbase / GDAX (based in San Francisco, USA)
- Binance (based in Taiwan)
- Poloniex (based in Wilmington, USA)
- Kraken (based in San Francisco, USA)
- Gemini (based in New York City, USA)
- Bittrex (based in Seattle, USA)
- Bitfinex (based in Hong Kong, China)
- Bitstamp (based in Luxembourg)
- Bithumb (based in Seoul, South Korea)
Typically, you’ll want to choose an exchange based in your country. Some exchanges – like Bithumb – cater specifically to South Korean crypto traders. You’ll also find specific exchanges for various countries. Canadian crypto traders can use Coinsquare and QuadrigaCX, for example, while Australian crypto traders can use ACX.
Bid price refers to the maximum price that someone is willing to pay for a particular asset. The bid price of bitcoin (BTC), for example, might be $8,000 because someone has posted a bid offering to buy 1 BTC for $8,000. This is the “demand” side of the supply and demand that controls crypto markets.
Ask price refers to the minimum price at which someone is willing to sell a particular asset. The ask price of bitcoin (BTC), for example, might be $8,100 because someone has posted an offer to sell 1 BTC for $8,100. This is the “supply” side of the supply and demand controlling crypto markets.
The bid/ask spread is the difference between the bid price and the ask price for a given cryptocurrency asset. Up above, we mentioned that the bid price was $8,000 and the ask price was $8,100. That means there’s a spread of $100. The spread is the profit that market makers can earn by buying and selling the asset on behalf of investors. As the liquidity of an asset increases (and more bids appear on the exchange), the spread will decrease.
Cryptocurrency wallets are the software programs or physical devices used to store your private keys. Your private keys are the unique “passwords” that allow you to access your blockchain-based cryptocurrencies. Each exchange will have its own wallet. You can store your funds in the exchange’s own wallet. Or, you can store your funds in a hardware wallet and connect your hardware wallet to your PC (via USB or Bluetooth) every time you need to access your funds.
Volatility is one of the biggest buzzwords in the crypto industry. Volatility refers to the extent of changes to an asset’s value over time. If bitcoin is priced at $7,000 one day and then rises to $9,000 the next day before dropping to $8,000, then the price is considered to be very volatile. Volatility can be a good thing for day traders and high-risk traders, but it’s a bad thing for those who wish to use cryptocurrency as a store of value or a medium of exchange.
Hodling, or HODL, is a meme in the bitcoin trading community. It can be traced back to a misspelled forum post from December 2013 when bitcoin trader GameKyuubi misspelled that he was “holding” bitcoin despite the falling prices. Today, “hodl” or “hodling” has become a rallying cry for the bitcoin community – especially when prices are dropping. Since the inception of bitcoin, hodling has been the best strategy because bitcoin has reached a new all time high every year. However, that may not be true by the end of 2018.
Fear Of Missing Out (FOMO) is an acronym that refers to traders who purchase a coin because they don’t want to miss out on its meteoric rise. We all want to buy “the next bitcoin”. People have a fear of missing out on “the next bitcoin”. When a coin rises from $1 to $10 in a day, for example, people might continue buying at $10 because of “FOMO”: they fear of missing out when the coin rises to $100 or $1000. In other words, you don’t want to be the guy who didn’t buy bitcoin when it was $1.
Fear, Uncertainty, and Doubt (FUD) are three terms that drive crypto markets down. The media will often spread “FUD” with reports that bitcoin has died, for example. Sometimes, there is legitimate FUD that will cause markets to crash. In other cases, FUD is just a temporary setback driven by a frenzy of media attention. Bitcoin has faced enormous amounts of FUD over the years, for example, but it continues to be the world’s strongest cryptocurrency.
Dollar-cost averaging refers to the practice of averaging out the price of your cryptocurrency purchases over a long period of time. You might decide to buy 1 BTC over the course of a year, for example. You buy 0.1 BTC every month on the first of every month at the market price. By the end of the year, you have 1.2 BTC and you paid the average price for the year. Dollar-cost averaging is a way to combat bitcoin’s volatility. You don’t want to buy 1 BTC at $10,000 today only to watch the price drop to $5,000 next month. By averaging your purchase out over a long period of time, you can gradually take a position in an asset and protect yourself from short-term market swings.
Diversification is the practice of investing in a range of different assets. You can diversify your cryptocurrency portfolio by investing in large cap cryptocurrencies like bitcoin and Ethereum, for example, along with smaller market cap coins like NANO, XVG, SC, and DCR. You get the relative stability of big coins while also enjoying the high-potential upside of smaller coins.
Diversification in the crypto industry is controversial. Many so-called crypto trading “gurus” will explain the value of diversification. These people will claim that you need to diversify your bitcoin investments by purchasing EOS, ETH, LTC, BCH, ETC, or whatever other coin they’re supporting. In reality, it’s impossible to diversify your portfolio across the crypto space. Typically, when the market goes up or down for bitcoin, the rest of the market follows. When bitcoin drops 10% in a day, you can typically expect similar drops in other currencies. If you want to truly diversify, then you need to invest in things outside the crypto space.
Remember: if a country like the United States ever bans cryptocurrencies, then your entire cryptocurrency portfolio will plummet. It’s a bad idea to have your entire portfolio invested in any asset class – whether it’s real estate, cryptocurrency, or traditional stocks.
Arbitrage refers to the practice of buying cryptocurrency low and selling high. It sounds like a basic idea, but it’s a legitimate strategy in the crypto trading space. Some people practice arbitrage with high frequency trading. You buy a large amount of bitcoin at $8,000, for example, and sell it an hour later when the price has risen to $8,100.
In other cases, arbitrage refers to the practice of buying a coin at one price on one exchange and then selling it for a higher price on another exchange. In the early days of bitcoin, arbitrage opportunities were common across exchanges. Today, you typically only find arbitrage opportunities with high-volume trading, high-frequency trading, low-liquidity exchanges, or small market cap coins.
Swing trading is similar to arbitrage trading: you’re buying a coin at one price and hoping to sell it at a higher price. Swing trading is more about the volatility of a cryptocurrency, however, than the price difference between exchanges (like arbitrage). Good swing traders take advantage of the volatility of a cryptocurrency to make money.
Day trading isn’t exclusively for the crypto industry. Day traders are in all different markets. Day trading is similar to swing trading but with a higher trading frequency. As the name suggests, day traders trade multiple times per day. They take a short-term position on an asset. They might trade an asset multiple times per day or hold onto an asset for a few days.
Margin trading is an advanced type of cryptocurrency trading where you buy an asset using funds borrowed from a broker. If the assets increase in value, then you’ve just multiplied your return by 50%, 100%, or whatever margin rate the exchange has provided. If the asset declines in price, however, then your losses are magnified. With margin trading, you can gain more money than you’ve initially invested – but you can also lose more money than you’ve initially invested.
Leverage goes hand-in-hand with market trading. Leverage refers to the additional buying power created by margin trading. It allows you to effectively pay less than the full price for an asset using borrowed funds. An exchange might offer you 2:1 leverage, for example, which means that traders with $10,000 in their account are able to access an additional $10,000, bringing their total tradeable value to $20,000.
Types of Trades
A market order refers to the practice of buying or selling a crypto asset at the best available price on the market. You’re buying a crypto asset at the lowest available price at which someone is offering to sell that asset (or selling that asset at the highest price someone is willing to pay).
A limit order refers to the practice of setting a specific limit at which you’ll buy or sell an asset. You might be prepared to buy bitcoin at $8,000, for example, so you set a limit order for that amount. As soon as someone is willing to sell 1 BTC for $8,000, your limit order will be executed. If bitcoin never hits that price, then your trade will never be executed. You can often set a time limit on your limit order.
A stop-loss order is a trade that will automatically be executed when the price of an asset reaches a certain point. This type of trade is designed to limit your losses. If you bought bitcoin at $8,000, for example, then you might set a stop-loss order at $7,000. This limits your loss to $1,000, helping protect the integrity of your portfolio.
A take-profit order is the other half of a stop-loss order. While stop-loss orders are designed to limit your losses, a take-profit order is designed to maximize your profits. A take-profit order will automatically sell an asset in question if value reaches a certain price. If you bought bitcoin at $8,000, then you might set a take-profit order at $10,000, which means you’ll make $2,000 profit if bitcoin rises to $10,000.
Over The Counter (OTC) trades are the types of trades used by institutional investors and high net worth individuals. If you’re investing a lot of money in the market or frequently making large trades, then you might use an OTC trading platform. Many crypto exchanges offer OTC trading specifically for brokers, high net worth individuals, and institutional investors. Most OTC trading works by matching the orders of a large investor with the orders of another large investor. The main benefit of OTC trading is that you can make large trades without moving the market. Without OTC trading, a large investor might lose money every time they make a trade because they’re frequently moving the market.
Gorilla trades are based on a similar idea to OTC trading. Gorilla trades are a special type of trade designed to move large amounts of assets without moving the market. With gorilla trading, only smaller pieces of a larger trade are displayed on the order book. Instead of a single order to sell 100,000 BTC appearing on the order book, for example, you might see 1000 separate sell orders for 100 BTC spaced over a longer period of time. Gorilla trades, like several other terms listed on this page, were coined by SFOX and are considered SFOX algorithms.
Polar Bear Trades
Like gorilla trades, polar bear trades are SFOX trade algorithms designed to optimize price on large orders. Polar bear trades are hidden orders that will automatically trade on top of an order book without alerting the market. Once a set limit price is reached, the trade is executed.
Sniper trades are also a type of SFOX trade algorithm. Like polar bear trades, they’re hidden trades optimized for speed. Sniper trades are designed to get the best possible price on a large order quickly. They’re typically used when the markets are volatile and you’re worried about prices dropping drastically.
Time weighted average price (TWAP) trades are SFOX trade algorithms that work similar to the idea behind dollar-cost averaging. These trades let you specify n, t, and p. You might specify that you wish to buy or sell “n” units of cryptocurrency over “t” hours at an average price of “p”, for example.
Other Terms You’ll Encounter
The terms listed above are some of the most frequently-cited in the crypto community. Below, however, you’ll find dozens of other terms that frequently appear on crypto discussions online:
JOMO: Joy of missing out – the opposite of FOMO. You might feel JOMO when everyone else bought at an all time high, for example, and the price later dropped.
ICO: Initial coin offerings, or ICOs, are events where a specific coin is sold to the public for the first time.
Dump: When a large group of people sell off a particular coin, causing the price to drop.
Pump: When a large group of people buy a particular coin, causing the price to rise. Also known as shilling.
Pump and Dump: The practice of a large, organized group of people buying a coin, causing markets to rise, and then selling a coin at the peak of the pump to maximize profit, causing a dump. There are enormous pump and dump crypto groups online dedicated to this practice.
TA: Technical analysis of a coin.
FA: Fundamental analysis of a coin.
RSI: Relative strength index, or RSI, which is a form of technical analysis.
MCAP: The market capitalization of a coin.
DYOR: Do your own research.
Altcoins: “Alternative coins”, or altcoins, are coins that aren’t bitcoin.
Shitcoins: Shitcoins are worthless coins backed by nothing but hype. They’re perceived to have no value.
Moon or Mooning: When the price of a coin is preparing to rise “to the moon”, you might see people talk about the price “mooning” or simply “when moon”
Bear or Bearish: Like with traditional markets, bear or bearish markets are markets with negative price movement overall.
Bull or Bullish: Like with traditional markets, bull or bullish markets are markets with positive price movement overall.
Whales: Whales are traders with large amounts of cryptocurrency. A bitcoin whale might be someone who holds more than 10,000 BTC, for example (although there’s no specific limit as to what defines a whale).
Bagholder: A bagholder is someone who continues holding a cryptocurrency after a large market crash. You might be a bagholder if you hold onto a coin with dropping value and few future prospects.
Bollinger Band: A Bollinger Band is the margin around the price of a crypto asset. This margin helps indicate when a coin is overbought or oversold. It’s a type of technical analysis.
Reverse Indicator: Someone might be a “reverse indicator” when they’re frequently wrong about price movements. You’ll want to trade the opposite of what this person suggests.
Fiat: “Fiat” is the Latin word for “by decree”. The US Dollar is a fiat currency because it has value “by decree” of the US government. Fiat currencies, or “fiats”, generally speaking, are government-issued currencies.
Sell Wall or Buy Walls: When too many traders setup sell or buy orders at a specific limit, then the market will face a sell wall or buy wall. For example, many traders set a sell order at $10,000 per BTC, creating a sell wall as soon as the market hits that point.
Going Long: A margin trade that will return a profit if prices increase.
Going Short: A margin trade that will return a profit if prices decrease.
ATH: All time high; the highest-ever price at which an asset was sold.
The cryptocurrency market is filled with complicated terms. With the glossary above, you’ll be well on your way to understanding crypto markets in no time!
Corn: Early decentralized digital currency adopters, long term investors and Bitcoin whales terminology for ‘king of the crops', collecting the ‘one and only' crypto-asset, coin or token commodity equivalent.