How to trade cryptocurrencies
Learn how to get started with trading the exciting cryptocurreny markets
Trading cryptos for beginners
Keeping an eye on new opportunities in the markets is crucial for traders who want to take advantage of them while still at an early stage. Sometimes, these opportunities come in the form of new markets altogether. Cryptocurrencies have been around even before 2009 when Bitcoin was created.
However, it wasn’t until this popular digital currency started hitting record after record, going as high as $10,000 in November 2017, that traders started to notice the extensive potential behind the rise of these fast-paced markets. While an increasing number of people are getting involved, the markets are still young, highly volatile and full of opportunities for the trader willing to understand them.
Getting started with cryptocurrencies begins with an understanding of the different options available. Whether you believe in the long-term value of cryptocurrencies or want to capitalize on daily double digits moves, below are the three most popular ways to get involved.
1. Buy and hold
Since Bitcoin was launched, early investors in the digital currency saw gains in the ranges of millions. An investment of $100 in Bitcoin back in 2010 would have been worth over 5 million in late 2017. Combine that with the innovative technology used by cryptocurrencies and this explains why some investors see cryptocurrencies as a long-term opportunity.
However, buying and keeping Bitcoin and other cryptocurrencies requires a deeper understanding of the technology involved. To buy cryptocurrencies, you first need an account with an online exchange. Since there are no banks involved though, storing and keeping cryptocurrencies safe becomes your responsibility.
Following the bankruptcy of Mt. Gox, the world’s first exchange that made Bitcoin available to the mainstream investor, clients lost access to hundreds of millions of dollars and traders lost faith in unregulated exchanges. That is why private digital wallets are often recommended, so that the owner is in full charge of the security of their cryptocurrencies.
2. Trade on an exchange
Another way to get involved in cryptocurrency trading is to speculate on the price of Bitcoin, Ethereum, Ripple, Litecoin and other cryptocurrencies through an exchange. The meteoric rise of the Bitcoin price has caused an equally meteoric increase in the number of cryptocurrency exchanges.
The most important task for any trader before getting started is to evaluate the security offered by the exchange. Due to the lack of regulation in the cryptocurrency markets, these exchanges are not regulated in the way financial institutions are and therefore full due diligence is recommended before opening an account and transferring money.
In addition to the security issue, traders who are serious about trading cryptocurrencies on an exchange should evaluate the leverage levels and the payment methods available. Those who wish to control larger positions than their starting capital, should first verify if the exchange offers margined trading, also known as leverage.
Although some exchanges do offer the option, the levels of leverage available can differ substantially. An in-depth analysis of the available payment methods is also a must, as it is not currently possible to make deposits simply by using your card on all exchanges. In some cases where cards are accepted, fees are so high that traders are better off with a slower but more cost-effective bank transfer.
3. Trade with a broker
For those interested in capitalising on the price swings of cryptocurrencies without having to deal with the hassle of a digital wallet or worrying about the security of their funds, trading cryptos with a regulated broker is the most popular choice.
When it comes to security, funds with any UK regulated broker are protected up to £50,000 for the unfortunate event of an insolvency. It is worth noting that some brokers offer higher protection than that at no extra cost.
The second benefit of trading with a broker is leverage. With an increasing number of cryptocurrencies offered through traditional brokers, traders can now get access to exceptional leverage on a wide range of cryptocurrencies. This is an excellent way to boost your winnings irrespective of how low or high your starting capital is. However, do note that leverage is a double-edged sword that should be used with caution in order to limit potential losses.
Trading cryptocurrencies with a broker is similar to trading forex. Cryptocurrencies are quoted against the US Dollar or the Euro and traders can use spread betting or CFDs to capitalize on the price fluctuations. With most reputable brokers offering reliable trading apps to keep you on top of the crypto markets while on the go, it is not surprising that an increasing number of traders are dipping their toe in these exciting markets.
4. Trading examples
Let’s take a look at a couple of examples to find out how trading Bitcoin and other cryptos works in practice.
Example of buying Bitcoin
Your research in the cryptocurrency markets suggests that the price of Bitcoin will go higher. You open a long position (buy) of 1 Lot on Bitcoin (BTC/USD) at $8,041. This corresponds to one Bitcoin and your profit or loss is calculated as the difference between the opening and closing price.
In a few days the price reaches new highs. Bitcoin is trading at $18,683 and you decide to close your position and lock in your profits. Well done! You made $642.
Example of selling Ethereum
Let’s suppose that you observe Ethereum trading picking up and hitting a new high. Your technical analysis suggests that it is time for a correction and you want to take advantage of the opportunity. ETH/USD is trading at $363.90 when you open a short position of 1 Lot, which equals to one Ethereum.
For Ethereum your profit and loss is also the difference between the opening and closing price. Your analysis proves to be right and the market moves lower to $221.90, when you decide to close the position. You profit on this trade is $142.
Now that you know how to get involved in cryptocurrencies, it's time to
- Start trading
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Losses can exceed deposits.