What is Cryptocurrency?
Looking at the tremendous rise in bitcoin’s price, more and more people are considering cryptocurrency (crypto) as a potential investment. If you are one of those people, read this article to learn more about cryptocurrency trading.
- Cryptocurrency or crypto is a digital currency that works through a decentralized system maintained by blockchain technology.
- Unlike fiat currencies, cryptocurrency is unregulated and governed exclusively by blockchain protocols.
- Cryptocurrencies are extremely volatile but offer high potential returns.
- The main cryptocurrency risks are associated with increased volatility and storage security.
As of 2021, there are thousands of cryptocurrencies available out there. The ones you have probably heard of are Bitcoin, Ethereum, and Ripple. All of them rely on blockchain technology, which serves as a basis for a decentralized currency system not regulated by the government. Cryptocurrencies are intangible assets. So basically, what you acquire when you buy crypto is a record of ownership in a ledger.
The Advantages of Cryptocurrencies
Let’s look at a few reasons why buying crypto might be an excellent idea.
Potentially huge returnsJust think of it, bitcoins bought for $1000 in 2013 cost over $400,000 today. The impressive results of trading bitcoin give the hope that the other, the newer and cheaper, cryptocurrencies will soar as well. When corporations like Microstrategy and Square invest in crypto, it brings even more enthusiasm and belief in the rise of this digital asset.
User autonomyCryptocurrencies are unregulated, which means that it is not as dependent on financial institutions as fiat currencies. In theory, it means that crypto users don’t have to deal with banks and the government while managing their funds.
Hedge against inflationCurrencies like bitcoin have a finite supply, which hedges them against inflation. They are designed in a way that doesn’t provide for the release of more coins.
Easy to start tradingHaving little time spent on identity verification, practically anyone can get into cryptocurrency trades. All you need is an internet connection and some money to spare.
Cryptocurrency Trading (Investment) Steps
To have a more clear understanding of how to trade cryptocurrency, read about the five basic steps of the crypto acquisition process below.
Choose a strategy
Start your acquaintance with cryptocurrencies by choosing a strategy or simply deciding whether you want to invest or trade digital currency. While investing implies the acquisition of an asset for a long-term period, trading is short-term speculation on price movements when a trader conducts multiple transactions, trying to get profit in a short period of time.
Depending on what strategy you choose, you can then make optimal decisions regarding the way you store coins. For investments, cold wallets are the best solution. Keeping cryptocurrency on a computer or USB flash drive is considered more secure so that no one can steal crypto without direct access to it. The drawback of this type of storage method is that it takes more time to sell the asset in case of its rapid depreciation.
If you are willing to trade, exchanges are best suited for you. Exchanges allow you to buy and trade cryptocurrency at any time. On some exchanges, you can make a deposit in cryptocurrency or use the staking function, enabling you to receive passive income for storing coins. However, holding funds on exchanges is risky. There has been evidence of exchanges being hacked and the funds being stolen. The steps you can take to protect your funds are choosing a reliable exchange and withdrawing your coins to a software wallet.
Choose an exchange
When picking an exchange, make sure to find answers to the following questions:
- Does an exchange accept users from your country?
- What payment method does it accept?
- What fees does it take (deposit/transaction/withdrawal fees)?
- What is the exchange rate?
- What are the buying limits?
- What is the exchange’s reputation?
It is in your best interest to find an exchange that offers the most beneficial conditions and the safest transactions. If an exchange doesn’t accept users from your country or doesn’t support a convenient payment method, keep looking. Also, remember to look at fees and exchange rates. Some exchanges have small fees, which sometimes means that the part of the fees is hidden in the exchange rate. Buying limit depends on the payment method you use and your identity verification level. Finally, don’t disregard checking the exchange’s reputation. The least you can do in this field is to read reviews. To sign up for an exchange site and complete the registration, you will often need to confirm your identity, address, and sometimes even proof of income.
Decide on the size of your investment
The next step we recommend taking is defining the amount of money you are willing to allocate to cryptocurrency. As with any kind of investment, we advise you not to make it 100% of your portfolio. An additional factor that makes it dangerous is that cryptocurrency is an extremely volatile and risky instrument. Some people choose to allocate 5% of their overall funds, and some make it 20%. The main rule is straightforward – never risk more money than you can afford to lose.
Make the trade
Once you have completed the registration and identity verification process, you can finally buy cryptocurrency. You can do it via the trading platform that allows you to buy coins through various payment systems such as PayPal or simply using your bank card.
Regardless of what strategy you choose, you want to buy at the lows and sell at the highs. Determining a potentially good time for purchase and selling is quite tricky as the instrument is relatively new and highly volatile. Nevertheless, it is a good idea to wait for a dip in price and buy then. Refer to technical and fundamental analysis to find the optimal time for entry.
Transfer your coins to your wallet (optional)
For security purposes, it is advised not to hold cryptocurrencies on an exchange but to move them to your wallet. There are software and hardware wallets. Hardware wallets are considered the safest and recommended for big funds and/or long-term investments. Software wallets, on the other hand, provide more flexibility and ease of transactions.
Frequently Asked Questions
Are cryptocurrencies a good investment?
The tremendous growth of bitcoin has shown a pattern which other digital currencies are expected to repeat. Additionally, fundamental news about big corporation investing in cryptocurrencies and central banks creating their own digital currencies contribute to the appreciation of these new types of money. Still, there is no unanimous point of view about the future of cryptocurrencies. Nobody can tell for sure whether crypto will surge in price or such currency as bitcoin is just a bubble about to burst. But if you believe that the future belongs to technology and crypto, investing in it might be a good idea.
Why are cryptocurrencies so popular?
Crypto has many advantages over other types of assets. The ones that make them particularly popular are low transaction fees, ease of purchase, and promising profit potential. Another important thing is that crypto represents a major technological innovation that addresses the issues faced by fiat currencies, including overregulation and inflation.
Are cryptocurrencies legal?
Even though the attempts to take crypto under control are being made, it is designed in such a way that keeps it unregulated and consequently difficult to use as a legal tender. As of today, the approaches to cryptocurrencies vary from country to country. While some states move in the direction of their legalization, some choose to prohibit them fully or partially, fearing the technology will contribute to money laundering. If you are thinking of buying cryptocurrency, it makes sense to check if there are any restrictions that your country imposes on this type of asset.
What cryptocurrency to buy?
Like any kind of investment, the first thing one looks at when choosing crypto is the potential gains. As of today, the most popular cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin. Plus, there are others less known but high-potential coins. There is no 100% of success for any of them. What you can do is read about a few of the list and decide which one is worth your attention. You can read about the associated companies and fundamental data – any information you find can help.
What are the most common trading mistakes?
The main risk associated with crypto trading is volatility risk. The price of cryptocurrency fluctuates like almost in no other instrument. And there is no guarantee that your cryptocurrency doesn’t lose in price. However, the most common mistake people make is selling on emotions when the price suddenly declines.
Another potential risk is susceptibility to hacking. There are cybersecurity issues taking place in the market that may lead to the loss of crypto funds. Thus, if you decide to go into a trade, make sure you follow the best practices to protect your investment. They include choosing a reliable exchange and creating a safe wallet.
There are many pitfalls in cryptocurrency trading. Without a basic understanding of this market, starting trading cryptocurrency is risky and may lead to money loss at each step of the way: buying, storing and selling. This is why trading and investing in crypto requires a great deal of vigilance. The best practices for investing in cryptocurrency include careful selection of exchange platforms and the use of efficient storage methods.