A beginner's guide to trading cryptocurrency
A beginner's guide to trading cryptocurrency
You may have heard of Bitcoin and Ethereum, but what does it mean to trade cryptocurrency? There are many aspects of cryptocurrency which can make them attractive to investors, but like with any investment, it comes with an element of risk. Before you enter the market, or open a trading account on the first crypto exchange you find, let us guide you through all the information you need to know about trading this digital currency.
What is cryptocurrency?
Cryptocurrency, sometimes known as crypto, is a non-centralised virtual currency, which isn’t linked to an authority, government or bank. Instead, the records of ownership are held on a computerised network, through blockchain technology. These digital currencies are increasingly being used to purchase day-to-day items, but are mostly traded as a financial asset in order to profit from the investment, and the movement of their value in the market. As a newly emerged financial instrument, the crypto market can experience extreme levels of volatility.
How to trade cryptocurrency
Cryptocurrency can be traded 24/7. Traders can buy or sell crypto via an exchange or speculate on the price movements through a financial derivative, such as contracts for difference (CFDs). CFDs allow for exposure to the market, without owning the underlying currencies.
Contrasting from traditional trading, with CFDs traders can open a position on a falling market, as well as a rising one. You can also take advantage of leverage trading, meaning you can gain a greater exposure to the market, with less capital initially required. It allows you to control a much larger position, but can magnify both profits and losses.
There are several different trading strategies which lend themselves well to crypto trading. These include:
- Day trading
- This aims to make the most of the short-term price movements that the crypto market experiences, through buying and selling assets within a day. It’s worth noting that although it can lead to potential good results, it’s a risky strategy as it involves trying to time the market
- This involves both owning the currency, as well as trading CFDs, to try and mitigate the volatility of the market and offset any losses in a falling market, using a financial derivative.
- Buy and hold
- This strategy has been adapted from traditional trading, and involves holding the currency for a long period of time. This is sometimes referred to as ‘HODLing’ or ‘Holding on for Dear Life’ in crypto forums.
The factors which affect cryptocurrency
If you’re already an established investor, you’ll understand that financial markets, affected by fundamental factors, can move up and down. This is no different for cryptocurrency. However, the crypto market is one of the most volatile, and can experience dramatic fluctuations which can provide potential opportunities to profit or great risks for loss. In addition, the factors which can affect the market can be vastly different from those of other financial instruments.
The factors which can influence the value of crypto can include:
Coverage in the media
There’s always plenty of news to monitor when it comes to digital currency, as it can heavily influence the market sentiment, whether it’s positive or negative press coverage.
Technological advances and integration
Unlike any other financial market, any updates or changes to the blockchain system can alter the value of the cryptocurrency. So can any new regulations imposed on the selling process. Crypto is quickly becoming a mainstream form of payment for buying goods; the more it becomes integrated into banking and payment systems, the higher its value is likely to rise.
Cost and reward
Not only will the supply and demand of the digital currency impact its value, but also the level of cost it takes to mine the crypto, as well as the rewards granted for verifying transactions to the blockchain.
The risks involved
Before you begin trading cryptocurrency, you must be aware of the risks involved. As previously mentioned, its volatile nature means prices can fall just as fast as they rise.
You must also be conscious of the security of your digital wallet, which is the place where you store your cryptocurrencies. These are encrypted with a private password, so you should be careful as to not lose or forget this password, and consequently put your assets at risk.
To ensure extra care, you can also store your currency in other forms, known as cold wallets - which are essentially external hardware wallets to plug into your device - and store your crypto offline. These however also come with the risk of being lost or damaged, so it’s best to have both types of wallets to store your assets with extra protection.
Finally, if you do decide to invest in cryptocurrency, it would be advisable to carry out extensive research beforehand to ensure that you have a well-informed basis to take a position in this fluctuating market.
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Not investment advice. Trading cryptocurrency may not be available depending on your country of residence.