Cryptocurrencies are a highly volatile new asset class. Learn how to harness the power of crypto and build profitable cryptocurrency trading strategies.
What is Cryptocurrency and How Does it Work?
Cryptocurrency is cryptographic, digital currency that operates through a decentralized blockchain technology network. Cryptocurrency coins are secured by cryptography, making it virtually impossible to counterfeit them or double spend. What makes cryptocurrencies unique is that they are not issued by central banks or governments, and usually have a defined supply that cannot be arbitrarily extended and are (so far) relatively free from government interference and manipulation. Therefore, many believe that cryptocurrencies represent a superior store of value to fiat (government issues) currencies and are likely to rise in value in terms of fiat currencies.
Are Cryptocurrencies Legal?
The legality of cryptocurrencies is a grey area in some countries.
Countries such as the United States, United Kingdom, the European Union, Canada, and Australia have no laws preventing crypto trading and investment, although they do have regulations and some restrictions. For example, the UK has banned Forex / CFD brokers regulated there from offering trading in cryptocurrencies to their clients.
There are a few countries such El Salvador, Panama, Guatemala, and Paraguay where Bitcoin is legal tender. On the other hand, there are some countries such as Bahrain and Vietnam where crypto investment is legal, but certain uses of crypto are illegal.
A few countries have completely banned the usage, mining, trade, and investment in any cryptocurrency. China is one of them. India and Russia have also proposed similar complete bans, but these have not yet been implemented.
How Much Should I Risk Investing or Trading in Crypto?
Cryptocurrencies are an extremely risky investment. So risky that in fact, you should be prepared for the possibility that the value of ANY cryptocurrency could fall to zero within a few hours.
If you choose to invest, you can invest in more than one cryptocurrency. This diversification should reduce your overall risk.
If you choose to trade, trade such small quantities that you are effectively not leveraged or even de-leveraged.
What is My Time Horizon? Should I Invest or Trade?
You need to decide how long you are prepared to wait for potential profits, and how much of your time you are able and willing to devote to your operations. The answers to these questions will decide whether you should be a “trader” or an “investor”. If your timeframe is short, you are probably better off trading cryptocurrencies through a brokerage. If you are prepared to wait weeks, months, or even years, then you are an investor. Consider the table below before deciding which path is right for you:
INVESTING
TRADING
Available Currencies
All
8itcoin, Ethereum. Ripple
Time Frame
Long Term
Short Term
Profit Targets
Higher
Lower
Transaction Fees
Lower
Higher
Ruin Risk
Higher
Lower
Labour intensive?
No
Leverage?
None or Low
Yes
Vehicle
Exchange/Fund
Brokerage
Long/short
Long Only
Long/short
Investors can expect wild rides over the long-term so need to be emotionally prepared for that. On the plus side, investing is not time-intensive, and involves low transaction costs.
How to Buy and Sell Cryptocurrency in 5 Steps
Now let’s look at the practical steps you can take to buy and sell cryptocurrencies.
1. Choose a crypto exchange or broker
To start investing or trading in cryptocurrencies, you’ll have to register with a cryptocurrency broker or cryptocurrency exchange. Each exchange or broker charges a fee for these services. This is called a trading fee.
What is the difference between a crypto broker and a crypto exchange?
Both offer dedicated platforms for buying, selling, and trading cryptocurrencies. One fundamental difference between the two is that brokers offer several additional investment options in addition to crypto. Brokers generally offer only a limited number of cryptocurrencies. Trading fees are also different on each platform.
Should you choose a crypto exchange or a broker?
A crypto exchange will probably be a good choice if you’re only interested in cryptocurrencies. If you are interested in other assets beyond cryptocurrencies, a broker is likely to be a better choice. One major issue with using a broker is that there are typically large swaps (overnight fees) to be paid on open cryptocurrency trades, so longer-term investors should probably look to exchanges.
How to Choose the Best Crypto Exchange?
Different crypto exchanges offer different features and fees. To find the best crypto exchange for you, you should consider the following issues:
- Trading fees and incidental fees
- Range of payment methods
- Selection of cryptocurrencies available
- Ease of using the platform
2. Create and verify your account
Most crypto exchanges and brokers require users to complete a KYC (Know Your Customer) check.
You should also remember to enable 2FA authentication when creating your profile if your chosen platform has the feature.
Every crypto exchange or broker requires clients to be at least 18 years old.
3. Deposit cash to invest
Available deposit methods usually include bank transfer, wire transfer, and credit cards. Some exchanges or brokers offer instant buy features. This means you can instantly buy crypto with PayPal or Apple Pay, or a credit/debit card.
Deposit or instant buy, which one should you choose?
It’s always better to deposit and hold the money in your crypto exchange/broker account before investing. This gives you flexibility in terms of investment timing. Cryptocurrency prices can fluctuate wildly with high volatility.
It’s also important to note that instant buy often incurs higher fees. If you’re using credit cards, you might also experience additional credit card charges.
4. Buy and sell cryptocurrency
Once your account is set up and funded, placing an order is simple. Choose the cryptocurrency you want to buy, enter the amount, and choose your payment method. Your final price will include all the additional charges and trading fees of the transaction.
When you’re buying cryptocurrencies at the current available price, it’s called a market order. Most crypto broker and exchanges also offer limit and stop orders.
5. Select a storage method
When you buy a cryptocurrency, you need to safely store it in a digital crypto wallet.
Most crypto exchanges have their own built-in crypto wallets, but not all do. That’s when you’ll need to use an external crypto wallet.
There are two different types of crypto wallets.
Hot wallets are online software which stores the digital keys of your cryptocurrency using secured encryption. Hot wallets are always online, so your cryptocurrency is essentially stored on the cloud.
Cold wallets are offline hardware wallets that securely hold the digital keys of your cryptocurrency in a physical location.
Hot wallet vs cold wallet, which is better?
Cold wallets are generally more secure because they are offline.
Although hot wallets are highly encrypted, they are at higher risk of being hacked. In recent cases of successful crypto exchange hacks, almost all stolen cryptocurrencies were stored in hot wallets. However, hot wallets are more convenient and quicker to use.
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