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How to Trade Cryptocurrency: A Detailed Guide for Beginners
Last Update: 2024-11-16
Cryptocurrency trading has become increasingly popular as public acceptance and understanding of this investment opportunity grows. In this article, we will look at how novice traders can get into the game in a safe manner. We will provide answers to frequent questions, such as what you need to start trading cryptocurrencies and which cryptos are the best in which to invest.
The article will take you to the very beginning of a trader’s journey, leaving no stone unturned, as we detail the process involved from research and registration to funding your first account. These helpful tips will set you on your way to one day becoming an advanced trader.
How to Trade Crypto
Before you invest in crypto, you need to decide if you will trade through a crypto broker or through a crypto exchange. Many online brokers offer crypto trading facilities along with other products, such as FOREX, stocks, indices and more. You can easily trade crypto through one of these brokers.
Alternatively, you can go directly to a crypto exchange. The advantage of going through an exchange is that it removes the middleman, the crypto broker, and you are not paying fees twice over. For the rest of this article, we will default to the trading experience you will get through a crypto exchange, as this is designed for traders who have decided to concentrate only on crypto.
There is a growing number of high-quality crypto exchanges. It is important, as a new trader, for you to assess as many potential companies as you can before deciding which one to use. A crypto exchange is nothing more than a firm that provides an online platform on which to buy and sell cryptocurrencies. Among the highest profile exchanges, Binance, Kraken and Coinbase are among the best known.
Once you have chosen your crypto exchange, you will need to open an account. To do this, you need to provide your personal identification details as part of the application process. Normally, you will not have any trouble opening the account, which happens after a day or two of vetting.
After your account is opened, you will need to fund it. Crypto is a virtual currency that is purchased by exchanging it with fiat currencies. For this, you will need to connect your fiat currency bank account to your crypto account so you can buy more crypto whenever needed.
Most crypto exchanges accept funding through conventional means, such as debit cards and wire transfers. Each method comes with its own processing period, but once your account is funded, you are ready to trade cryptocurrencies.
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How to Pick the Right Exchange
Choosing the best crypto exchange for your needs can be confusing and daunting. The number of cryptos increases every day. The choice is vast. Making the right decision for your needs will make your crypto trading journey more comfortable and enjoyable.
You should know that choosing a crypto exchange means effectively choosing its trading interface. Unlike the online brokering space, crypto trading has not yet developed a universally trusted third-party trading interface, such as the well-known MetaTrader platform. Each crypto exchange develops its own platform. You will need to conduct thorough research to find out which is the best. Here are some key things to remember as you try to select the best crypto exchange for you:
Do Your Research
Being a cautious investor is one of the first things you will learn from trading crypto. When searching for digital currency exchanges and crypto investing in general, there are many fraudulent companies that operate in this unregulated space.
Even if they are not out to swindle you, many companies are undercapitalized or inexperienced in this somewhat immature industry; this can lead to them going under. One recent example is Mt. Gox, an early digital currency exchange that collapsed after it could not detect fraudulent activity in its operations.
There is also the danger of crypto companies getting hacked. This happens reasonably often as there are still loopholes because different companies adopt different security postures. The vulnerability is usually not in the blockchain, but in the crypto wallets that companies use to store funds.
You will need to use all the tools at your disposal to figure out which company is legit. This includes general best practice like confirming physical addresses and the country of operation. If the crypto exchange is in a faraway jurisdiction that is not regulated, you can be sure you are unsafe.
Concentrate on Security
Watch out for telltale signs of weak security. From your experience with other Know-Your-Customer account-opening processes, you will be able to understand if the company you are dealing with is sticking to the right security protocols.
Remember that in an unregulated space it will always be much more difficult to get your funds back after they have been lost, as the crypto exchanges are not part of a controlling body that licenses them and oversees their operations.
After doing your research, you will learn that it is a good idea to keep your crypto instruments in an offline storage service like a “cold” wallet, which is safer because it is more difficult for hackers to access than a more convenient “hot” wallet. Just like with online brokers, crypto exchanges invest considerable sums on security measures. They should be making it their business to constantly remind you to be alert and vigilant as you trade.
Be Careful of High Fees
As an investor, you never want to pay fees that are over the top. The two most important aspects that set an exchange apart are the level of fees and the number of currency pairs they offer. Many exchanges charge some type of fee for transactions, and this is usually based on the volume of transactions. There is no universal fee standard.
It is good advice for you to understand how the fees work because this is how exchanges can differentiate themselves from each other. Not unlike online trading brokers, the companies that are able to charge lower fees are often those that have innovated and streamlined their operations, so they do not have to pass too many costs on to you.
In business, in general, you need to be suspicious of why a company would be charging too much or even too little. It is in your best interest to master the fee schedule of the exchange with which you work to understand how it will impact your portfolio, depending on your strategy.
Choose Your Investments
Bitcoin and Ethereum are two of the biggest cryptos in the world by market capitalization and it makes sense that they are the most traded. If you are attracted to smaller cryptos, known as altcoins, make sure that these do not make up the bulk of your portfolio.
The crypto market is volatile enough while trading the two biggest cryptos, so you do not need to bring on too much risk by backing altcoins alone.
Some traders use different reasoning to arrive at their crypto choices. Some are concerned about the environmental impact of crypto mining, which leads them to altcoins with a low ecological footprint. Other traders are attracted to the altruistic promises of some cryptos, like equitable wealth distribution. This is to say nothing of the emerging trend of exotic cryptos linked to cultural items like art and sports memorabilia.
As there are so many cryptocurrencies, and the number just keeps growing, you will soon realize that crypto investing is not a passive exercise. It is something you need to actively watch. Besides the inherent volatility of the asset class, there are always news events and market developments that contribute to the price swings. You will need to become skilled at reading these.
A Word on Crypto Volatility
Crypto has always been an upstart technology challenging the established global monetary system. In its short existence, it has been written off by many commentators and analysts as a passing fad or bubble.
The digital currency is only beginning to come into mainstream acceptance, with governments and financial regulators finally sitting down to work out how to regulate it. Until crypto achieves a critical mass of acceptance, it will always be volatile. Even today, the currency swings wildly on the back of world news.
It is also bedeviled by illicit activity due to its pseudo-anonymous nature. As a crypto trader, you will come to accept the volatility as part of the territory. You can make lavish profits by betting against the movements of the currency, but, at the same time, you can suffer heavy losses. It is always a good idea to work out a durable crypto trading strategy that considers these swings.
Choose a Trading Strategy
You can adopt many different strategies to trade crypto. Whichever strategy you choose, it pays to be consistent in applying it. A good crypto exchange will present you with a range of technical indicators that can help you make better decisions as you trade. Many crypto exchanges offer detailed crypto research and education facilities, so you are fully informed as you start to trade.
It is important to use a trading strategy that is going to keep you in the game for the long term. This strategy must stick to a few basics.
These include not committing too much of your portfolio into one trade and being disciplined enough to take profit when it is there, without being greedy. Another good habit is to stop your losses before they become too heavy.
If you are a trader who has been active in different asset classes, you will see that stock trading is not that different to crypto trading. The strategies you use for trading stocks can also be used for trading crypto because the fundamentals of going long or short and selling for a profit remain the same over the two instruments. Here are some strategies you could try:
Day Trading
This is a form of trading that is extremely fast and that allows people to buy and sell crypto within a day to make the most of intraday price movements. There is significant risk in this approach as there are often pronounced losses within a trading session. That said, this is countered by the fact that there are often days of pronounced gains.
Hedging
Hedging is a strategy where one investment is carefully constructed to balance out the risk of another. So, you place a trade on one crypto losing value, and place a corresponding trade on the same crypto gaining value. It can seem pointless, but if you are an experienced hedger and you understand what you are doing, you could find that this type of trading is highly lucrative and comes with manageable risk.
HODLing
The term HODL relates to holding a crypto asset regardless of its price fluctuations. It stands for “holding on for dear life,” which is a way of saying the trader sticks to the crypto they have purchased as they believe in its underlying strength and positive future. This is not for everyone. The trader would need to know something that the market does not for the trader to withstand the dips of value without selling off their asset.
Trend Trading
This type of trading requires experience to understand what is driving the trends that make crypto assets rise and fall. Crypto exchanges provide traders of all experience levels with market signals they can use to anticipate changes to capitalize on them.
Best Cryptocurrency Exchanges
Every day, many thousands of new traders start their investment journey. As the crypto industry becomes better known, some of the mystery of trading cryptos has ebbed. Modeled along the online broker industry, the crypto exchange space has some large, well-established players that are competing with hungry upstarts.
As a new trader, you are on the lookout for the company that can give you the best trading deal according to what is important to you. Here are some of the most notable features that new traders ought to look out for when starting with a crypto exchange:
Sound Financial Footing
Crypto exchanges allow you to trade on margin, which means they loan you some of their own money upfront to make your investment journey easier. You need to select a crypto exchange that is well capitalized and can run itself in a way that does not put your investments at risk.
It is not always easy to tell if a crypto exchange is financially secure, but you can go some way by doing research on key management and ownership figures. Are they well connected and experienced in this field, or do they come to crypto with no background? Also, does the crypto exchange make credible claims that it has partnerships with liquidity providers or strategic capital partners? Is the company with which you are dealing part of a larger, more formidable group? All these questions will help you understand where the crypto exchange sits in the scheme of things.
Mature Trading Platforms
When a company takes the time to invest in its platforms, it positions itself in a different light to competitors. These types of companies are to be taken seriously as they are striving to become market leaders. A quick comparison of trading platforms on the market will give you an insight into which exchange is best positioned to make your trading journey as easy as possible.
Credibility and Market Standing
Although crypto remains a maturing market, there are some established exchanges, like Coinbase, that have been in existence since the arrival of the technology. Pay careful attention to any licensing, awards and positive reviews that a crypto exchange is willing to share.
Customer Service
Crypto trading takes place 24/7, with some significant moves happening at odd hours and over weekends. The best crypto exchanges will typically offer you a range of contact options over many time zones and even on the weekend so you can make the most of the industry. That said, not every crypto exchange offers weekend trading. You will need to add this reality into your weighting system as you decide.
Approach to Risk
Everybody is out to make money from crypto, but it comes with a lot of downsides. What is your crypto exchange’s approach to risk? Ideally, you want a partner that can facilitate trade in many ways to increase your chances of success. For example, does the broker offer hedging?
Crypto exchanges that are unhedged are more exposed to large losses caused by their client base. What about margin? If your exchange offers generous margin trading, does it protect you by instituting negative balance protection?
Crypto exchanges that are unhedged are more exposed to large losses caused by their client base. What about margin? If your exchange offers generous margin trading, does it protect you by instituting negative balance protection?
Commissions and Fees
One of the defining features of cryptocurrencies is that they have all the tools to upend the old order of the financial world. In a crypto-dominated future, you would not have to pay anywhere near the amount of fees you currently pay for banking services. This is because there are fewer intermediaries with crypto. Thus, fees should be something you look at very closely when looking at your crypto exchange.
Sign-up Process
When you open an account, the sign-up process tells you a lot about the company with which you are dealing. Look out for cues that its Website works without bugs and lags. Is it asking you for something out of the ordinary, like excessive first deposits to open an account? You can also look at the security apparatus. Does the Website have a valid SSL certificate? Does the broker offer multi factor authentication? All these are key signs.
Technical Support
Technical support is like but different from customer service. Technical support teams help you with potential bugs on the operating platform or delays in transactions. Sometimes you might need technical assistance for something as mundane as being locked out of your account. A technical support team can assist far more quickly than a customer service team, who might need to log it and escalate it first.
Demo Trading
This is an important differentiator in the online trading world. By giving you the chance to run a demo account, you can practice your trades and improve your strategies at no risk to your capital. It allows you to become familiar with the crypto exchange’s tools and platforms while doing so at minimal risk.
Conclusion
Trading cryptos can be a straightforward process. If you have traded any financial instruments before, the set-up process will feel familiar. From that point, you will need to adapt to the main aspects of crypto trading, which is that its high volatility means you need to be on constant watch for the health of your portfolio.
As the crypto landscape is populated by more competitive brokers and exchanges that bring the best out of each other, you will benefit from a natural rise in quality players who are professionally managed and well-capitalized and who have your best interests as a trader at heart.
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FAQ
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