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Practical guide to trading with tokens

Practical guide to trading with tokens

Once a token has been created on a platform like PancakeSwap and a liquidity pool has been set up, there are several ways to influence or speculate on the price of the token. In this article, we will go through these possibilities using a practical example to understand how trading tokens works.

Example: MYTOKEN and BNB

Suppose you have created a new token called "MYTOKEN" and set up a liquidity pool with BNB on PancakeSwap. You have deposited 10,000 MYTOKEN and 100 BNB into the pool, which means that the initial price of one MYTOKEN is 0.01 BNB.

1. adding liquidity

How it works:

  1. Connect your wallet: Go to the PancakeSwap website and connect your wallet (e.g. MetaMask, Trust Wallet).
  2. Navigate to the "Liquidity" section: Click on "Add Liquidity".
  3. Choose your tokens: Select MYTOKEN and BNB as a pair.
  4. Enter the quantity: Enter the quantity of MYTOKEN and the corresponding quantity of BNB.
  5. Confirm the transaction: Confirm the transaction in your wallet.

Why and for what?

  • Increase in liquidity: By adding liquidity, you ensure that there are more funds in the pool, which makes trading easier for other users. Higher liquidity reduces price volatility and allows larger investors to buy or sell larger amounts of your token without heavily influencing the price.
  • Investor confidence: A well-stocked liquidity shows potential investors that there are enough funds to support the trade, which increases confidence in your token.
  • Receipt of trading fees: Liquidity providers earn rewards through the fees that accrue on each transaction. These fees are distributed in proportion to your share of the liquidity pool.

2. removal of liquidity

How it works:

  1. Connect your wallet: Go to the PancakeSwap website and connect your wallet.
  2. Navigate to the "Liquidity" section: Click on "Remove Liquidity".
  3. Choose your tokens: Select MYTOKEN and BNB as a pair.
  4. Enter the quantity: Enter the amount of MYTOKEN and BNB you wish to remove.
  5. Confirm the transaction: Confirm the transaction in your wallet.

Why and for what?

  • Equity release: By removing liquidity, you can recover your invested funds (MYTOKEN and BNB) to use them for other purposes.
  • Market adjustments: You can remove liquidity to reduce supply and stabilize or increase the price of the token if demand increases.
  • Use of profits: If the value of your tokens has increased, you can remove some of the liquidity and realize the profit.

3. buy tokens

How it works:

  1. Connect your wallet: Go to the PancakeSwap website and connect your wallet.
  2. Navigate to the "Swap" section: Select MYTOKEN and BNB as a pair.
  3. Enter the quantity: Enter the amount of BNB you wish to exchange for MYTOKEN.
  4. Confirm the transaction: Confirm the transaction in your wallet.

Effects on the price:

If many users buy MYTOKEN, the price increases due to the increased demand and the decreasing availability of MYTOKEN in the pool. Example: If you exchange 1 BNB for 100 MYTOKEN, the price of MYTOKEN will increase.

4. sell tokens

How it works:

  1. Connect your wallet: Go to the PancakeSwap website and connect your wallet.
  2. Navigate to the "Swap" section: Select MYTOKEN and BNB as a pair.
  3. Enter the quantity: Enter the quantity of MYTOKEN you wish to exchange for BNB.
  4. Confirm the transaction: Confirm the transaction in your wallet.

Effects on the price:

If many users sell MYTOKEN, the price falls due to the increased supply and the decreasing availability of BNB in the pool. Example: If you exchange 100 MYTOKEN for 1 BNB, the price of MYTOKEN decreases.

Other factors that influence the price

Arbitrage

Arbitrage traders take advantage of price differences between different exchanges. If your token is traded on multiple platforms, arbitrageurs can balance the price by buying on one platform and selling on another, ultimately harmonizing the price across the different platforms.

External factors and speculation

  • News and announcements: Positive announcements about your project or partnerships can increase demand and thus the price.
  • Marketing and hype: A well-executed marketing campaign can increase interest and demand for your token.
  • Speculation: Traders and investors can speculate on the price based on market sentiment or rumors, which can lead to price fluctuations.

Conclusion

After the creation of a token and the establishment of a liquidity pool, the price can be influenced by various market activities and external factors. It is important to proceed transparently and ethically in order to gain the trust of investors and avoid legal problems. The actual market price is ultimately determined by the interplay of supply and demand.

By adding or removing liquidity, buying and selling tokens, and external factors such as arbitrage and speculation, you can influence the price of your token.

Further information:

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Disclaimer: Please note that the above dates, tax rates and regulations may change over time. Do not make any independent decisions without first consulting an expert for your individual situation. It is in your interest to always receive individual information from an experienced expert who knows your situation. This information is for informational purposes only and does not promote illegal activities, including tax evasion.

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