The past few years have seen explosive growth in the popularity of cryptocurrency. Bitcoin, Ethereum, and thousands of other digital currencies are all fighting for headlines as we continue to explore the many potential uses of the blockchain technology on which they are based. Blockchain’s versatility has us excited for the future, but it’s cryptocurrency’s appeal as an investment opportunity that has us excited today. It seems that everywhere you turn there are stories of Bitcoin millionaires, and it has many of us wondering exactly how to trade cryptocurrency.
There has been a wide fluctuation in the prices of digital currencies in recent years, and where there’s price fluctuation, there’s money to be made. But it’s not as simple as that, unfortunately, and many have lost money due to poor understanding of this volatile market. Potential investors should acknowledge that this is not the same as trading stocks or other assets, and there is quite a bit to learn for even seasoned economists. Here is a brief outline highlighting what you need to know before diving in.
What Is Cryptocurrency?
The answer to this question can become incredibly complicated very quickly, so we’ll try to keep it simple. Basically, cryptocurrency is “digital money” that exists within a particular software platform. Like regular paper currency, it can be broken up into small units and transferred between two parties to pay for goods and services. Cryptocurrency uses encryption to secure these payments and prevent counterfeiting, with the added benefit of potentially allowing for anonymous transactions. All of this happens outside of the traditional central bank system.
Also, just like regular paper currency, digital currency has a limited supply. This means that as usage and demand rise and fall, the price of digital currency will rise and fall accordingly. As with foreign currencies, the price of cryptocurrency is often expressed using major world currencies like the Euro or U.S. dollar as a base (i.e. you might hear something like “Bitcoin is at $$$” when the value of one Bitcoin is equivalent to $$$ USD).
Bitcoin was the first cryptocurrency to gain international fame as a legitimate form of digital money, and thousands of other digital currencies have since emerged to stake their claim. Among these thousands, there’s an incredible variety in terms of how they’re intended to be used, and this variety makes it a fascinating space for investors. There are, for example, cryptocurrencies that are designed to be used in a specific geographic region or industry or to solve unique market inefficiencies. In this sense, traders can invest in the sectors and solutions they deem most relevant.
The Basics On How To Trade Cryptocurrency
In some ways, trading cryptocurrencies is similar to trading stocks. Investors purchase and sell these digital currencies from various exchanges that are authorized to match buyers and sellers, like a much smaller version of the NASDAQ or New York Stock Exchange. Registered users can buy and sell various cryptocurrencies for one another in search of profits and charge a small fee for each transaction.
As with stocks, traders can think of these as either short or long-term investments. Once they learn how to trade cryptocurrency, day traders may take advantage of news announcements or chart configurations, while long-term holders can wait for desired market conditions before selling for profit.
To get started, first research the various online cryptocurrency exchanges to determine which suits your needs. This is perhaps the most important step while you’re researching how to trade cryptocurrency. Some exchanges are limited to users in certain countries or have highly restrictive registration processes. Not all cryptocurrencies are available to trade on all exchanges, so make sure you choose an exchange that offers trading in those currencies that interest you.
It’s also important to note that only certain exchanges allow you to purchase cryptocurrency with standard fiat currency such as Euros or US dollars. Many will require that you make an initial deposit in a base cryptocurrency such as Bitcoin or Ethereum to open your account and begin trading.
While you’re researching exchanges, be sure to read customer reviews from other users. This is still a new industry, and some exchanges have proven better than others when it comes to important issues like order compliance and customer service. Note that it can take up to several months for some exchanges to process your registration and actually open your account for trading.
Once you’ve registered with an exchange and have funds available to trade, it’s time to log in and buy some digital currency. Each exchange is set up a little differently, but they all share similar features. There are charts and real-time prices for each cryptocurrency on offer, allowing you to do basic analysis and make trades when the price is right.
After buying your digital currency, you can either leave it in your account on the exchange or move it to a separate “wallet”. There are many varieties of these, both on- and offline. You can think of this as an extra layer of security against hacking or online theft.
If you later wish to sell your cryptocurrency, log back in to the exchange where your currency is held, and follow its basic instructions for selling (it’s usually nothing more than a few mouse clicks). You may sell it in exchange for other cryptocurrencies, and some exchanges allow you to sell it for fiat currency. If you moved your digital currency to a separate wallet, simply add the extra step of transferring it from your wallet back into your account on the exchange where you want to sell it. Sounds complicated, but it’s actually quite simple once you’ve done it.
10 Things Beginners Need To Know
It’s Not A Walk In The Park
If you’ve never traded before, understand that it can be both exhilarating and stressful. There’s nothing quite like it, and that could mean dealing with mental states you’ve never experienced before. It may sound elementary, but you should have a plan in place for effective stress management. Find out what works best for you and stick to it.
As you’re learning how to trade cryptocurrency, keep in mind it’s still a very young industry that’s subject to volatility. Many have lost millions in digital currencies due to poor research and reckless decision-making. Do thorough research and, as with any investment, only invest what you can afford to lose.
Use Learning Resources
Before you invest, spend some time watching the price fluctuations of the specific currencies that interest you. Get to know how volatile they are, and note how they respond to different sorts of news and rumors. Websites like coinmarketcap.com are good resources for tracking prices in real time and even provide charts and other analysis tools.
Start With Other Currencies
Generally speaking, it’s a good idea for beginners to focus on more established currencies such as Bitcoin, Ethereum, and Ripple. These will be less volatile than some of the newer currencies, which are far more sensitive to the slightest shift in market conditions. Be especially careful with these so-called altcoins as their prices can collapse with one false rumor. This is the last thing you want to worry about when you’re first learning how to trade cryptocurrency.
Develop A Formula
Develop a basic formula for analyzing different cryptocurrencies. As time goes on, you’ll want to consider investing in other currencies. It makes sense to compile a checklist of factors to analyze with each one, just to ensure you’re being financially rigorous.
Stay Up To Date
Find a good source of cryptocurrency news and follow it religiously. This is your money we’re talking about, and you’ll want to protect it by staying informed. Websites like coindesk.com offer in-depth coverage of all things crypto, from industry news to government regulation and profiles of new digital currency offerings.
Get on your smartphone and download a cryptocurrency price-tracking app such as Blockfolio. There are many such apps to choose from, and some trading exchanges offer this feature as well. Find your favorite one so you can always stay on top of your portfolio.
Learn About Orders
Familiarize yourself with market, limit, and stop orders. This should be one of your first steps in learning how to trade cryptocurrency as they prevent mistakes and impulsive last-minute decision making.
Keep It Safe
Consider using a separate wallet to store your currency. Exchanges are getting better and more secure when it comes to holding currency in your account, but they are still subject to hacking and online theft. The Nano Ledger S is a popular hardware wallet option for storing cryptocurrency, much like a digital piggy bank that resembles a small USB drive.
Have An Exit Strategy
Have an exit strategy and stick to it. This means identifying the price at which you’ll sell your investment and not changing your mind once it hits that price. This goes for both profit and loss, by the way. Don’t get greedy if you’ve already made your profit and don’t hold on to a losing investment out of desperation or hope.
Learning how to trade cryptocurrency is a smart idea for any modern investor. Digital currencies are here to stay, and they will only grow in popularity as we find new ways to safely use them. Technology is improving minute by minute, and structural advancements will allow cryptocurrencies to be used in ways we can’t currently conceive. This means there’s a huge opportunity for investors who do their homework and invest wisely.