crypto trading

Investing in Cryptocurrencies can be intimidating at first, especially if you do not really understand what is cryptocurrency and how does it work. There is frequent news about scams and people losing money. While this is true, and many scams have happened and continue to happen, it has never been so simple to invest in cryptocurrency and safely trade as it is today.

This cryptocurrency investing guide gives you a variety of approaches to get started via safer, simpler, more effective ways to lower your risk and increase your returns, either as a conservative cryptocurrency trader or as a more passive longer-term investor seeking exposure to assets that have a diversified product portfolio, including exposure to the cryptocurrency market.

What is Cryptocurrency?

Instead of getting too technical, here’s the easiest way to think about cryptocurrencies. Cryptocurrencies are basically the money on software platforms.

It’s important to keep in mind that the companies that are behind these cryptocurrencies are not only creating a new form of currency but a new software platform.

Examining how these platforms work (the so-called “fundamentals”) will help you understand cryptocurrencies.

On each of the platforms like Windows or Dropbox, a type of money is used, in exchange for using the platform. Each of these systems also has a database connected to it. Cryptocurrencies essentially replace the US Dollars (or your local fiat currency) that you use to purchase these software services. The “database” that cryptocurrencies give you access to is based on blockchain technology.

But wait, what are the software services that you are getting? Isn’t a cryptocurrency like Bitcoin just a currency, like US Dollars?

Not quite.

The goal of cryptocurrencies is usually to improve on some type of existing software system or network. Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world. Other cryptocurrencies like Ether, Litecoin, and Ripple solve other problems.

As you’ll learn more about the cryptocurrency market and you’ll actually start trading Bitcoin and other digital currencies, you’ll find that there are tremendous opportunities. With some cryptocurrencies, it’s potentially like being able to get pre-IPO shares of Apple or Google.

Cryptocurrency market – higher volatility and less liquidity

The cryptocurrency market may be more volatile than one might think. There are numerous instances when the price of Bitcoin, relative to the U.S. dollar has turned erratic for a number of reasons.

Volatility is not something new to the investing world and any type of market has undergone extreme volatility. One of the fundamental reasons why shares, commodities or currencies turns volatile is because when some news or information is released which is not discounted by the markets already.

The volatility that follows later, which can result in either a sharp appreciation or depreciation of the security’s price in question is simply a result of price adjusting to the new piece of information. In the Bitcoin world, volatility is for the same reasons, but also additional factors such as regulatory warnings from agencies, a hack into an exchange, and so on.

The limited liquidity and availability of Bitcoins mean that just a few transactions can quickly and significantly impact the price of Bitcoin. Proponents of Bitcoin claim that volatility will settle as the technology matures and Bitcoin becomes more widely accepted. If one looks close enough, you can see that the volatility in Bitcoin has been steadily falling over the past couple of years, while liquidity is increasing fast.

What moves the Crypto market?

Cryptocurrency markets move according to supply and demand. However, as they are decentralised, they tend to remain free from many of the economic and political concerns that affect traditional currencies. While there is still a lot of uncertainty surrounding cryptocurrencies, the following factors can have a significant impact on their prices:

  • Supply: the total number of coins and the rate at which they are released, destroyed, or lost
  • Market capitalization: the value of all the coins in existence and how users perceive this to be developing
  • Press: the way the cryptocurrency is portrayed in the media and how much coverage it is getting
  • Integration: the extent to which the cryptocurrency easily integrates into existing infrastructure such as e-commerce payment systems
  • Key events: major events such as regulatory updates, security breaches, and economic setbacks

How to Invest in Cryptocurrency Market?

Only those with specialized, high-powered machinery are able to profitably extract bitcoins nowadays. While mining is still technically possible for anyone, those with underpowered setups will find more money is spent on electricity that is generated through mining. In other words, mining won’t be profitable on a small scale unless you have access to free or really cheap electricity.

Instead of time-consuming, high costs mining unsuited for most people, there are alternative ways to invest in cryptocurrencies that don’t require dedicated hardware or virtual wallet, nor investing in bitcoin hyips or bitcoin cloud mining.

Cryptocurrency CFD trading

The most popular way to invest in cryptocurrencies – CFD trading – enables you to speculate on the rising or falling prices of the fast-moving global cryptocurrency market (or instruments) such as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, or Ripple.

Contracts for difference (CFDs) let you go long or short on cryptocurrencies, without needing large amounts of money to get started.

Cryptocurrency trading with CFDs have 2 major advantages:

  • The potential for better risk/adjusted returns

CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade-in order to open a position. This is called ‘trading on margin’ (or margin requirement). The availability of leverage in cryptocurrency trading magnifies gains and losses, creates the unmatched profit potential for those with limited trading capital IF they learn how to control the downside risk. For example, with 5:1 leverage in cryptocurrency trading, a 20% price fluctuation means 100% profit. It also means a 100% loss.

>> The best crypto CFD Brokers

  • As easy to profit in bear markets as in bull markets

In Cryptocurrency CFD trading it’s as easy to profit from falling prices as from rising ones. You can also use CFD trades either to speculate on movements in financial markets or to hedge existing positions or your existing crypto portfolio.

Example: selling short CFDs on Bitcoin with the scope of offsetting exposure to price fluctuations in the opposite direction with a previous Bitcoin purchase or holding. The hedging method can also be used when a Cryptocurrency has reached your profit target and you want to lock in gains without actually selling them.

Buying and selling cryptocurrencies via an exchange

When you buy cryptocurrencies via an exchange, you purchase the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position and store the cryptocurrency tokens in your own wallet until you’re ready to sell.

Exchanges bring their own steep learning curve as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limits on how much you can deposit, while accounts can be very expensive to maintain.

The drawdown of investing in cryptocurrencies through exchanges is the lack of regulation. Right now the exchange’s trading in these crypto-assets does not have a regulatory framework as there’s no market regulator around the crypto exchanges. And thus there’s really no protection against fraud or manipulation (SEC Chair Gary Gensler‘s first statements on cryptocurrency regulation).

>> The best Crypto Exchanges

Investing in Securities with cryptocurrency exposure

Blockchain is touted as the next game-changer in the tech sector. The underlying technology behind bitcoin mining and trading has rapidly gained traction over the last few years, driven by accelerated multi-industrial adoption and mainstream adoption.

Before taking a closer look at Cryptocurrency investing steps, is mandatory to mention that there is also a substantial portion of the market seeking exposure to bitcoin and other cryptocurrencies without having to buy and store the underlying asset. These companies offer the opportunity not just to pick up an exposure to cryptocurrencies, but to also pick up a shorter-term exposure to a company that is growing on an influx of speculative volume-based purely on its connection to bitcoin and blockchain.

IBM Corporation (#IBM), Microsoft Corporation (#MSFT), Amazon (#AMZN), DocuSign (#DOCU), or Mastercard (#MA) are currently the dominant player in the blockchain market.

Other options are cryptocurrency exchange-traded funds (ETFs) that work, in theory, like any other ETF. While most ETFs track an index or a basket of assets, a cryptocurrency ETF would track one or more digital tokens. The largest Blockchain ETF is the Amplify Transformational Data Sharing ETF BLOK.

>> The best Stock Brokers

How do you value a cryptocurrency?

Very simple is just about how much SUPPLY there is and the nature of the DEMAND. To measure supply and demand for a given instrument one needs to look at the charts. That’s because a chart is a shortcut of looking at all the available news and data since the price chart factors in all the fundamentals and quickly shows you who’s winning the battle between the buyers and the sellers.

This is especially important in Cryptocurrencies because there is so much news and technologies from so many different sources and it’s impossible to keep track of all of it.

And there are some amazing benefits of learning how to read the charts to really help boost your profits and decrease market risk via the use of Technical Analysis and its concepts.

Technical Analysis is the study of the behavior of the market and market participants. We try and identify the direction of the primary trend and invest accordingly. As Technicians, we can apply our price-focused approach to any market, whether it’s stockscommoditiesETFs, or even Bitcoin. If it is liquid and driven by the supply and demand dynamics in that particular market, then applying our methods of price analysis makes perfect sense and it works very well.

Traders and investors really enjoy it, whether they are actively trading it or just interested in the product.

Steps to Invest in Cryptocurrencies

Take a look at the 5 steps to invest in cryptocurrency.

Step 1: Make a cryptocurrency account

Unless you already own cryptocurrency, you’ll need to make an account with a crypto brokerage. Binance, Coinbase, and eToro are among the best crypto brokerages on the market. All 3 of these options offer a simple user interface and a variety of altcoins to choose from. Admiral Markets is the best option for investing in the crypto market through stocks and ETFs, offering access to thousands of markets via CFDs or traditional share dealing.

To make an account, you’ll need to provide your crypto brokerage with personal identification information, similarly to opening a forex account or a stock account with a stockbroker. Some common information you need to provide when setting up your account includes your Social Security number, address, date of birth, and email address.

Step 2: Fund your account

Once you’ve signed up with a crypto brokerage, you’ll need to connect your bank account. Most crypto brokerages offer bank funding through debit cards and wire transfers. Wire transfer is typically your cheapest option to fund your account –– it’s free on most crypto exchanges.

Step 3: Pick cryptocurrencies to invest in

Most active cryptocurrency traders allocate most of their capital to Bitcoin and Ethereum. These cryptos move more predictably than smaller altcoins, so trading with technical indicators can be easier.

Many crypto traders allocate a portion of their capital to smaller altcoins. Although small mid-market cap cryptos are riskier than large-market cap cryptos, they offer higher upside potential. Many small altcoins have risen over 1,000% in a matter of months, making them attractive investments for risk-tolerant investors.

Read the next section to decide what cryptos to trade and how.

Step 4: Choose a strategy

There are a plethora of trading indicators to choose from, and most traders take multiple factors into consideration when buying and selling cryptocurrency. If you’re new to investing, you may want to consider purchasing a trading course.

If you’re an experienced trader, you may already have a strategy you use to trade forexForex trading strategies are also commonly used for cryptocurrencies.

Another popular trading strategy is arbitrage, the process of taking advantage of inefficiencies in markets. In the case of cryptocurrencies, this can occur as the price of assets fluctuates over time. If there is a difference between the price of an asset across exchanges (or even potentially within the same exchange), it may be possible to buy and sell the same asset in a way that will result in a net profit.  

>> Learn more about Crypto arbitrage

Step 5: Store your cryptocurrency

If you’re actively trading your cryptocurrency, you’ll have to store your funds on the exchange to have access to them. If you’re buying your cryptocurrency to hold for the mid to long term, then you should get a cryptocurrency wallet.

Cryptocurrency wallets come as software wallets or hardware wallets. Both are secure, but hardware wallets offer the best security, as they store your crypto on a physical device, offline. Ledger is a great hardware wallet brand many investors trust to store their crypto assets on. If you’re looking for a software wallet, there are several options on iOS, Google Chrome, and Android that is free to use.

How does cryptocurrency trading work?

Crypto Trading is the simultaneous buying of one digital currency and selling another for capital gains.

Like with Gold trading, there is no steady income like a dividend in stock trading or a swap in forex trading. Crypto Trading includes all speculative trades, or profiting on floating price by either:

  • Buying low and selling high a cryptocurrency anticipating that the price will appreciate against the quoted currency (usually USD);
  • Selling high and buying low a cryptocurrency anticipating that the price will depreciate against the quoted currency.

In either case, the crypto trader could earn an amount of money on the difference between the opening and closing price of the trade.

Cryptocurrency trading needn’t be any riskier than other markets

Cryptocurrency trading has a gotten a reputation for being excessively risky due to a combination of:

  1. High failure rates due to beginner traders who failed to do their homework and understand the risks associated with the high volatility and leverage commonly used in most cryptocurrency trading.
  2. CFD Brokers who failed to provide sufficient training to deal with the risks of using leverage in volatile markets.
  3. Crypto exchanges failed to meet their financial obligations due to poor regulations and client protection.

However, you can reduce and manage the risks. There are:

  1. Highly regulated brokers, like Admiral Markets, offer the highest level of security protection and allow you to adjust your exposure down to what you can handle, and provide guidance on the appropriate level.
  2. Alternative ways to benefit from cryptocurrency, which are no riskier than stock trading.
  3. A variety of techniques to reduce risk in trading and new instruments for simpler, safer cryptocurrency trading: social trading or automated trading.

The basics of Cryptocurrency trading

Spread in cryptocurrency trading

The spread is the difference between the buy and sell prices quoted for a cryptocurrency. Like many financial markets, when you open a position on a cryptocurrency market, you’ll be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.

Lot in cryptocurrency trading

Cryptocurrencies are often traded in lots – batches of cryptocurrency tokens used to standardize the size of trades. As cryptocurrencies are very volatile, lots tend to be very small: most are just one unit of the base cryptocurrency. However, some cryptocurrencies are traded in bigger lots.

Leverage in cryptocurrency trading

Leverage is the means of gaining exposure to large amounts of cryptocurrency without having to pay the full value of your trade upfront. Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.

While leverage will magnify your profits, it also brings the risk of amplified losses – including losses that can exceed your margin on an individual trade. Leveraged trading, therefore, makes it extremely important to learn how to manage your risk.

Margin in cryptocurrency trading

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading cryptocurrencies on margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.

Margin is usually expressed as a percentage of the full position. A trade on bitcoin (BTC), for instance, might require 20% of the total value of the position to be paid for it to be opened. So instead of depositing $5000, you’d only need to deposit $1000.

Pip in cryptocurrency trading

Pips are the units used to measure movement in the price of a cryptocurrency and refer to a one-digit movement in the price at a specific level. Generally, valuable cryptocurrencies are traded at the ‘dollar´ level, so a move from a price of $190.00 to $191.00, for example, would mean that the cryptocurrency has moved a single pip. However, some lower-value cryptocurrencies are traded at different scales, where a pip can be a cent or even a fraction of a cent.

It’s important to read the details on your chosen trading platform (with MT4 and MT5 among the most popular ones) to ensure you understand the level at which price movements will be measured before you place a trade.

The Most Popular Cryptocurrencies

Cryptocurrency Prices by Market Cap
source: coinmarketcap.com

#1. The King of Cryptos: Bitcoin

Bitcoin has turned into the go to cryptocurrency for traders. But for investors, who can hold through the volatility, they see advantages to bitcoin as well. Once 21 million bitcoins have been mined, no new coins will be created ever. 

Looking at it from a supply/demand stand point, long-term investors stand to gain. Plus, Bitcoin is the base currency that you need to purchase if you want to end up getting some of the other currencies on this list. You can’t simply buy many of these others with USD – you need BTC.

Bitcoin is one of the easiest cryptocurrencies to invest in. 

>> Learn more about Bitcoin trading

#2. The king of DeFi: Ethereum

Ethereum was initially seen as the cryptocurrency that could shove bitcoin off of its thrown as the dominant currency. It didn’t work out that way but Ethereum holds a solid #2 by market cap.

Ethereum did provide a few enhancements over bitcoin. Namely smart contracts and 5X higher transactions per second (TPS) than bitcoin.

>> Learn more about Ethereum trading

#3. Ripple: new payment ecosystem

Ripple is more than just an exchange of value. It helps make cross border financial transactions more efficient. By working with financial institutions, Ripple lowers currency exchange rates and provides for real-time exchange rates.

Before Ripple, banks often had to use intermediaries for cross border transactions. These were expensive and could takes days to complete. Ripple has greatly improved efficiencies in how cross border transactions operate.

For an investor, this shows that Ripple is providing real value in the world beyond the basic store or exchange of value premise.

>> Learn more about Ripple trading

#4. Litecoin: fast and affordable

Litecoin has similarities in its infrastructure to bitcoin. Litecoin’s transaction fees are far less, at around $0.35 per transaction. Just like Ethereum, Litecoin also has higher TPS than bitcoin.

Litecoin has an $81 million cap on coins that can be mined. This means Litecoin could potentially see steady increases in price, depending on future demand. Litecoin is currently ranked at #5 by marketcap so it isn’t a slouch by any means.

>> Learn more about Litecoin trading 

#5. Bitcoin Cash (BCH): the little brother

Bitcoin Cash will forever hold a special place in the history of cryptocurrency. It is one of the earliest hard forks from Bitcoin. And thus far, it’s the most successful one.

Because cryptos are decentralized by nature, when there is debate about possible issues to one’s underlying code, no changes can be made without a consensus. If miners and developers can’t come to an agreement, the digital currency can be split – or forked.

In this case, there was a heated debate about Bitcoin’s scalability. Bitcoin remained the same. And Bitcoin Cash was created with updates to its code. This code change increased the size of blocks from one megabyte to eight. This allowed for much faster transaction times.

Although it still has some catching up to do with some of its competitors, Bitcoin Cash’s scalability could allow it to accrue value even faster than much of the competition. 

>> Learn more about Bitcoin Cash trading

Cryptocurrency Vocabulary

Like many other financial markets, the cryptocurrency market has evolved its own jargon. Some of the key terms used by market operators are defined below. To better understand what is cryptocurrency you need to get used with the crypto jargon.

  • Block: A collection of transactions permanently recorded on a digital ledger that occur regularly in every time period on a blockchain.  
  • Blockchain: A constantly growing list of blocks in a peer-to-peer network that records transactions.
  • Cryptocurrency exchanges: Also called digital currency exchanges, these generally consist of online businesses that allow customers to exchange cryptocurrencies for fiat currencies or other cryptocurrencies.  
  • Cryptocurrency wallet: A secure digital account used to send, receive and store digital currencies. Crypto wallets can either be cold wallets that are used for storing cryptos in an offline environment or hosted wallets that are hosted by 3rd parties. Hosted wallets store your private keys and provide security for your digital currency balances. 
  • Distributed ledger: A network of decentralized nodes or computers that connect to a network where transaction data is stored. Distributed ledgers do not have to involve cryptocurrencies and can be either private or permissioned.
  • ForkAlso known as a “chain split,” a fork is a split that creates an alternate version of a blockchain that then leaves 2 blockchains running simultaneously. For example, Bitcoin and Bitcoin Cash came about due to a fork in the original Bitcoin blockchain. Another type of fork is known as a “project” or “software fork.” This occurs when cryptocurrency developers take the source code of an existing altcoin project and create a new project. For example, Litecoin is a project fork of Bitcoin.
  • ICO: An initial coin offering (ICO) occurs when a new digital currency or token is sold, typically at a discount, to its first set of investors. An ICO lets issuing cryptocurrency companies raise funds from the public to support their coin’s development and maintenance.
  • Mining: A computationally-intensive process performed within a cryptocurrency network where blocks are added to the blockchain by verifying transactions on its distributed ledger. Miners are rewarded with digital coins as compensation for their successful computational efforts. 

Best Cryptocurrency Brokers

Many people believe that cryptocurrencies are the future of finance. When you’re ready to leap into crypto, choosing a broker to invest in cryptocurrencies is one of the most important steps to your success in the crypto market. 

Get started now with Investing Magnates’s picks for the best cryptocurrency brokers and choose the right one for you.

Since different brokers have different strengths, you need to figure out what kind of broker best suits your cryptocurrency interests. Some brokers provide a social trading platform where you copy other cryptocurrency traders’ trades in your own account. Others can offer the ability to make transactions in a broader selection of altcoins. 

Choosing the best crypto broker depends largely on addressing your needs as an investor or trader. The following list of crypto brokers been selected for different reasons to meet the needs of differing cryptocurrency trading and investing styles. 

  • Best for Social Trading: eToro
  • Best for Ease-of-Use: Gemini
  • Best for New Investors: Coinbase
  • Best for High Volume Forex Traders: CryptoRocket
  • Best for DeFi Exchange: Crypto.com
  • Best for Crypto Futures: Kraken

In sum, should you invest in Cryptocurrencies?

We prefer to be cautious as far as crypto trading is concerned despite its massive growth prospects. Instead, we recommend investing in stocks that have a diversified product portfolio, including exposure to cryptocurrencies. Although at first view this strategy will not generate as many returns as bitcoins, in reality, it offers a lot of other benefits.

FAQs

Is crypto trading profitable?

Even if cryptocurrency trading has been an irreversible trend, it’s still not easy to make money. Though some people have earned some money by good luck before 2 years, nowadays most of the winners will take profits by their deep analysis, great skills, and rich experience.

Can you get rich trading Cryptocurrency?

Buy and hold” is a popular method of earning cash from cryptocurrencies. Most investors make money by buying crypto resources like Bitcoin, Ethereum, Litecoin, Ripple, and many others for holding until their value appreciates. When their market price increases, investors then cash in on them at a profit.

How much money do you need to start trading Cryptocurrency?

$1000 will be enough to start crypto trading. One of the main advantages of the crypto market is that you don’t need a lot of start-up capital to get started. A beginner trader will only need a thousand dollars to purchase some digital money, transfer it to the exchange or brokerage, and start speculating using the chosen strategy.

Is trading Cryptocurrency safe?

Investments are always risky, but some experts say cryptocurrency is one of the riskier investment choices out there, according to Consumer Reports. However, digital currencies are also some of the hottest commodities. … If you’re planning to invest in cryptocurrencies, these tips can help you make educated choices.

Sources:

1. Top cryptocurrency prices and charts, listed by market capitalization – https://coinmarketcap.com/

2. Initial Coin Offerings and Crypto-Assets – https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf

3. The Truth About Blockchain – https://hbr.org/2017/01/the-truth-about-blockchain

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