The world was introduced to cryptocurrencies in 2009 with the launch of Bitcoin. At that time, Bitcoin was an unknown experiment. Today, the crypto industry has seen increased growth and mainstream recognition. At their peak, cryptocurrencies were worth over $800 billion, more than companies like IBM, Mastercard, Cisco, and Oracle. This increase in value has made more and more people interested in trading cryptocurrencies for profit. If this appeals to you but you don’t know where to start, this article will help you understand what you need to know.
Learn How Blockchain Works
The first step is to learn how blockchain technology works. Also referred to as a distributed ledger, blockchain is the foundation of cryptocurrency. If this is new to you, you’ll likely come across terms such as mining, Dapp, hash, token, and consensus algorithm among others. You’ll also discover the different types of cryptocurrencies like altcoins and stablecoins. Learning all this will help you make informed choices as a trader by giving you a solid understanding of crypto’s underlying technology.
Learn the top cryptocurrencies
At the time of writing, there are more than 2000 cryptocurrencies. This is because the barriers to entry for creating a cryptocurrency are relatively low. Since you can’t realistically track or understand all these currencies, you should instead focus on the biggest and most liquid ones. Examples of these are Bitcoin, ETH, XRP, LTC, and Bitcoin Cash, which have a market cap of more than $152 billion, $27 billion, $16 billion, $8.2 billion, and $7.3 billion respectively. The benefit of focusing on these large currencies is that they are relatively more stable, are more liquid, and are found in many exchanges.
Understand the Risks
Like all investments, there are many risks of investing in the cryptocurrencies, and it’s important for you to understand these risks. Unlike traditional companies, cryptocurrencies don’t have any assets and revenues. They also don’t pay dividends. Therefore, you can only benefit when the price moves up.
There are different types of risks when investing in the currencies. The market risk refers to the overall downward and upward movement of the currencies. The economic risk refers to the overall status of the economy. Other risks are security and liquidity risks. The more you study the risks, the more you’ll see that trading cryptocurrencies is riskier than other types of assets.
Read Crypto News Every Day
Having knowledge is important when investing in cryptocurrencies. This is because the news can drive the price movement of cryptos. This is particularly important because there are no economic data that relates to cryptocurrencies. There are also no earnings and corporate news that could move the prices. Therefore, reading the news coming from the industry will help you become a better trader. Examples of crypto news sources are CCN, Business Insider and Reddit.
Open a Trading Account
After learning all you can about cryptocurrencies, you need to open a trading account. There are two main routes you can take. First, you can open an account with a cryptocurrency exchange. With this account, you buy and sell the currencies at the market rate. The challenge of doing this is that some cryptocurrency exchanges have suffered hacks. This year, more than $8 million worth of cryptocurrencies was stolen from Binance, one of the leading exchanges. In 2018, cryptocurrency worth more than $1 billion was stolen. With exchanges, communication and transaction times can be extremely long during peak periods. Plus, they are not regulated by government bodies. These are the keys risk you face if you open an account with a cryptocurrency exchange.
Alternatively, you can open an account with a forex broker that offers cryptocurrency trading via CFDs (contracts for difference). Easymarkets is one example of a broker that offers CFDs on Bitcoin and other cryptos. With this method, you don’t need to own the underlying asset, which means there is no security risk of your asset being stolen. With a forex broker, you get access to popular charting software like MT4 and MT5 to initiate and analyze the trades.
Also, when you trade cryptocurrency via a CFD, you can speculate whether the price will go up or down, which lets you profit from any direction of movement. Lastly, when you use a forex broker, try to choose a provider that is regulated by a well-regarded national body such as CySec (Cyprus) or ASIC (Australia), which gives you more peace of mind due to their stringent license requirements.
Trading cryptocurrencies is an intriguing idea for many people, and it can be more exciting and potentially profitable than trading traditional currencies. But the long term future of crypto is still a topic of debate. On one hand, there are enthusiasts who strongly believe that cryptocurrencies will be adopted widely in future, and on the other hand there are the pessimists like Warren Buffet who think the opposite. Whatever happens, being a crypto trader is a good middle ground that gives you the chance to profit from increases as well as decreases in value.