First steps, or how to trade cryptocurrencies?

Initially, cryptocurrencies were treated mainly as means of payment in the darknet. However, gradually they were widespread accepted by the community, becoming an important investment asset and object of trade. Currently, there are over 6,000 e-coins, and due to the growing demand, there are more and more of them. Can you benefit from it? Of course, provided you know how to trade cryptocurrencies.

Cryptocurrency trading –– characteristics of operation

When starting to trade virtual currency, it is good to know the difference between “coins” and “tokens”, i.e. the basic type of cryptocurrency. The difference is that coins have their own blockchain and tokens do not. Most of the popular cryptocurrencies, such as Bitcoin, Ethereum and Ripple, are coins, and the tokens include the less known ones, i.e. TRON and Dash. Scott McGovern in his article on the differences between coins and tokens wrote that the first ones are used as currency, while the latter represent access to a product or “stock”. Since coins have their own blockchains, their primary function is to be exchanged on-line as means of payment. The value of tokens is a bit more complicated to estimate as they are usually issued in an ICO. This means that they give the investor access to tokenised services and products, or represent shares in a cryptocurrency company. This is where tokens can show some advantage over coins as they are subject to different rules depending on what they represent.

Although each investment is based on a fundamental principle –– buy cheap and sell expensive, there is a question whether it is better to invest in coins or tokens? There is no definite answer to this. Coins are the more popular currencies, but tokens are considered to be more stable. So everything depends on your approach and investment strategy.

However, regardless of the division into tokens and coins, almost all cryptocurrencies can be purchased in many different ways. Most often, investors decide to buy them in an on-line cryptocurrency exchange office. This form of purchase usually involves a fixed rate, smaller spread and the ability to trade cryptocurrency without registration.

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Future-proof assets, or how to choose the right cryptocurrencies?

There are several aspects that can help you get a better understanding of the crypto market. To start with, check the various coin rankings available on the web. On the popular website CoinMarketCap, you can find cryptocurrency classifications broken down by various factors. It is also recommended to pay attention to the currency price and its trading volume. The low price of a cryptocurrency unit is not necessarily a positive sign as it can be caused by insufficient community trust or poor project management. Note, however, that this does not apply to all existing e-coins, so it is always advisable to research the market carefully.

Next, consider what sets a coin apart from others. For example, stablecoins, or coins known for their stable exchange rate, are backed by real assets, whether these are noble metals or money. Therefore, they are unique in the face of the volatility of the crypto market. Typically, stablecoin coins fall into three categories:

  • backed by fiat currency,
  • backed by cryptocurrency,
  • backed by noble metal.

Further exploring the potential of a cryptocurrency can also be useful for understanding its market value. Before investing in cryptocurrencies, ask yourself the following questions:

  • Does the coin have a use or purpose?
  • Does it have an active community behind it?
  • How liquid is the coin, or how good is its ability to be converted to cash or other coins?
  • What are the coin laws in different countries?

In this way, it is possible to capture promising e-coins and to discard those that are most likely to be quickly forgotten. You should also learn the specifics of short- and long-term trading in order to develop an appropriate investment strategy.

 

 Short-term trading

The main idea behind short-term trading is to look for opportunities to make a quick profit. There are many different methods of short-term cryptocurrency trading that traders use, but the two most popular are based on either speculation or chart analysis. Speculation is a form of considering whether an asset’s price will rise or fall due to a specific event. Chart analysis allows you to examine the price run of a given e-coin and try to guess whether the cryptocurrency will gain or lose value in a given situation.

There is a difference between short-term cryptocurrency trading and trading other assets, which is volatility. It occurs when the price of an asset goes up or down very quickly, which could be either the investor’s success or failure. When trading stocks, it is unlikely that their prices will change much in 24 hours. This is because stocks tend to be issued by trusted companies that have been around for a long time. Of course, prices continue to rise or fall, but compared to cryptocurrencies, these are slight fluctuations.

Cryptocurrency prices are very volatile, so their value can go up or down by 10–50% even in a single day. For example, in February 2018, a cryptocurrency called E-Coin increased in value by over 4,000% in just 24 hours before falling back to its starting price. Anyone who bought it at the beginning of the day would make a lot of money, however people who bought it at the highest price would lose most of their investment.

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Long-term trading

Considering the type of trading you should remember that short-term trading is not your only option. When the investor has neither the time nor the patience, they may choose to invest in the long term.

Long-term trading means activities spread over time that do not require tracking the situation of assets and constant analysis of their value. This makes it the form of speculation preferred by most investors.

 

First things first… how to start trading cryptocurrencies?

The first thing an investor needs to do in order to start trading a cryptocurrency is to find a good cryptocurrency exchange office that will allow them to buy and sell e-coins 24 hours a day. If the investor wants to trade full time, it makes sense to choose an exchange office with multiple pairs of e-currency. For example, if they believe the price of Ethereum will rise in relation to the price of Bitcoin, they need to find the BTC / ETH pair.

Having opened your account in the exchange office, it’s time to transfer some funds. You need to consider how much money you would like to invest. Cryptocurrency markets are very volatile, so there is always a chance to lose your entire investment. It’s good to start with smaller amounts and diversify your funds.

 

Learn the main rules of how to trade cryptocurrencies

There are some general rules to follow when trading cryptocurrencies, regardless of your chosen investment strategy.

  1. Be prepared for losses as this is part of trading activities. Even the best traders lose money because it is not always possible to make the right decision. So you must never “pursue your own losses”. This is the act where the investor experiences a large loss and tries to make up for it by taking a really high risk. This is one of the main reasons most traders fail.
  2. Practice makes perfect. Before depositing funds into a new trading account, it is really important to practice first. Some exchanges offer demo accounts, and various simulators are also a good place to start.
  3. Using stop loss. Another important aspect of cryptocurrency trading is the stop loss tool. A stop-loss occurs when a trader sets a price at which they want to automatically leave the transaction. For example, if you purchased Ethereum at $ 700, you could set your stop loss to 10%. This means that if the Ethereum price had dropped to $ 630, the system would automatically sell the investment. This protects against a sudden drop in price. You can also use a “limit sell order”option which means that the trade can be automatically closed when the coin reaches a certain higher price. Using the Ethereum example above, you can set a 10% sell limit, which would mean that if the price reaches $ 770, the system will automatically close the trade.

As with any other investment, it is not advisable to start cryptocurrency trading without prior preparation. It is important to define a good strategy, choose the right e-coin, place to trade, e.g. an on-line cryptocurrency exchange office, and define a plan and purpose of actions. Without this, every investor will be exposed to constant losses.

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