How to Trade Cryptocurrency: A Guide for (Future) Millionaires
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What Is Cryptocurrency Trading?
Cryptocurrency trading is, to put it simply, the trading of cryptocurrencies. This is usually done via trading platforms.
It works in a similar way to trading forex or stocks. The main difference between conventional trading and cryptocurrencies is that they aren’t as strictly regulated or monitored.
Understanding Cryptocurrencies and Blockchain
What Is Cryptocurrency?
Cryptocurrency is a digital currency that is almost impossible to counterfeit or overspend. The word ‘cryptocurrency’ is derived from the encryption techniques used to secure the networks on which cryptocurrencies are stored.
What Is Blockchain?
There are many different types of cryptocurrency available, but they all operate similarly, using blockchain technology.
Blockchain is essentially a type of database or network, in the sense that it stores data. However, unlike a database, the information isn’t stored in tables.
As the name would suggest, blockchain stores information within blocks. Each block has a limit as to how much data it can store and as the blocks fill, more are added in chronological order.
The main advantage of blockchain is that it is decentralized. Control of trading and cryptocurrencies isn’t held by one individual group or organization.
The primary advantage of this is that each individual within a network ultimately has access to the same data. There is no need to trust someone else to make decisions regarding your investments.
Why Do People Trade Cryptocurrency?
Cryptocurrency is growing in popularity for individuals looking to trade for the first time.
Advantages of Cryptocurrency
Faster transactions – There are no agents or brokers when it comes to trading cryptocurrencies. Therefore, the process is often much faster than traditional trading.
Secure dealings with increased confidentiality – All transactions are encrypted. This leads to increased security as you are the only person able to view your transaction history.
Financial freedom – There are approximately 7 billion adults around the world with no form of bank account. This could be for a variety of reasons, but cryptocurrency offers them the opportunity to trade and store money without the need for a bank account.
International trade – With cryptocurrency, international trade is quick and easy. Transactions are performed online, so they take seconds to complete.
Growing opportunities – There are more than 5,000 different types of cryptocurrencies to choose from, operating across 20,000 markets. The market is likely to continue growing in the future, offering even more investment opportunities.
Cheaper transactions – Because there is no middle person to deal with, trades and transactions are cheaper than with traditional trading.
Higher potential returns – Traditional trading generally offers returns over a long period. In comparison, cryptocurrencies offer the opportunity for higher returns in a shorter period.
It is worth noting, however, that cryptocurrency isn’t without risks and individuals looking to trade for the first time should make sure that they do their research before investing money.
What Are the Risks of Trading Cryptocurrency?
Potential for scams – Because cryptocurrency markets are unregulated, there is increased potential for scam activity.
Volatile markets – Unlike traditional trading, the value of cryptocurrencies can increase and decrease by huge amounts each day. It’s not uncommon to see a price change by as much as 10%. While this is good news for people looking for short-term investments, it can also be risky.
Illegal activity – Because of the anonymous nature of cryptocurrency trading, it is a popular choice for those wanting to conduct illegal activities such as money laundering and tax evasion.
Not ideal for long-term investments – Because of the volatile nature of the markets, cryptocurrency is generally not advised for long-term investments. Instead, it is popular with those looking for a fast turnaround.
How to Trade Cryptocurrency
If you are considering trading in cryptocurrency for the first time, there are a few things to consider.
Choose the Right Broker
If you don’t already have cryptocurrency, you will need to set up an account with a brokerage. There are many to choose from, such as eToro and Coinbase. It is important to research them and find the one that will best suit your needs.
Remember to consider factors such as the minimum investment required and trading fees.
Set Up and Fund Your Account
Once you have chosen your preferred platform, the next step is to set up your account. This is usually relatively straightforward.
You will normally be required to provide some form of identification and personal information such as your date of birth and social security number. It can sometimes take a few days to process this information before your account becomes active.
Once your account is set up, you need to fund it. This can be done by connecting your bank account, although some brokers will also allow funds to be transferred via wire transfer or credit card.
Know What You Want to Buy
If you have never traded cryptocurrency before, the number of options available can be overwhelming.
Beginner traders will often find that Bitcoin is a popular choice due to its more predictable nature. However, the currencies you choose are dependent on your personal preference and willingness to tolerate risk.
Plan Your Strategy
Several strategies can be used when it comes to trading. Understanding your risks and intentions will help you to build your trading strategy and implement it.
If you are completely new to cryptocurrency and trading, it is a good idea to do a trading course which will teach you the basics of different strategies and how to recognize trading indicators (calculations that can help traders to identify trends and signals).
Manage Your Risks
No form of trading is without risks. It is important to understand what those risks are and have a plan in place to manage them.
Get a Crypto Wallet
If you are actively trading, you will be required to keep your currency on the trading platform.
If, however, you are holding your currency for potential long-term returns, it is a good idea to store your cryptocurrencies away from your chosen trading platform. A crypto wallet is a secure way of storing your cryptocurrency offline.
The markets are constantly changing. It is important to stay aware of market trends as this will help to guide your buying and selling decisions and reduce risks. Make sure that you choose reputable sources for your information.
Top Tips for Successful Crypto Trading
Try a demo account – Many trading platforms will let beginners create demo accounts. This helps individuals to understand the trading process and practice a variety of strategies without risking real money.
Plan before you trade – Make sure you have a plan for each trade. Decide on the lowest amount that you would be willing to trade at as well as the highest point.
Use stop losses – Stop losses are a good way of helping to mitigate risks. Applying stop losses will ensure that you don’t trade currencies unless the value is above what you bought it for. It isn’t a random action and will need to be set up by you.
Choose your trades wisely – It can be tempting to act impulsively, but it is important to consider your trades before committing to them. Avoid being influenced by others; choose trades that are truly best for you.
Diversify your portfolio – The saying ‘don’t put all your eggs in one basket’ is good advice. This is particularly important when it comes to any kind of trading. By creating a diverse portfolio, if one particular form of cryptocurrency suffers significant losses, you will only lose money related to that particular investment. Other investments will remain unaffected.
For a variety of reasons, cryptocurrencies are growing in popularity for beginner traders and those looking to invest in something new. Setting up an account is a straightforward process and there are many trading courses and demo platforms which will offer you the opportunity to learn how platforms work before you invest any of your own money.
Although the potential returns from cryptocurrency trading are large, it is important to remember that no form of trading is without risks. When things go well, they can go very well. But with volatile markets, things can change quickly. It is important to never invest more than you can afford to lose.
WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.