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How to trade cryptocurrency

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The concept of cryptocurrency has grown wildly popular in the last few years. Bitcoin – the headline act in cryptoverse – seems to be on everyone’s lips these days, especially with stories flying around of people getting rich overnight.

Cryptocurrency trading has had an even bigger pull on the masses, given that there isn’t much of a learning curve involved in trading crypto and that it’s possible to start reaping the benefits as soon as you begin trading.

While jumping on the bandwagon at this point in time may feel like a missed opportunity with the likes of Bitcoin surging through the roof, there has honestly never been a better time than this to start trading cryptocurrency. The industry is more stable today and the uncertainty previously associated with cryptocurrency trading has all but waned.

Plus, there’s a whole range of crypto coins on offer that promise great value on investment (Bitcoin included), so the way from here can only be up!

But what exactly does cryptocurrency trading entail, and how do you go about it?

We’ve gone ahead and put together a cryptocurrency trading guide for beginners to you through the basics of all you need to know about this relatively nascent technology. Let’s start with the different types of trading available.

Which Path to Go Down?

If you’re wondering how to start trading cryptocurrency, it’s a good idea to know the options available to you. Like in forex, stock, and commodity trading, there are two options to choose from when you want to trade cryptocurrency: trading cryptocurrency CFDs and direct trading on an exchange (spot trading).

Trading Crypto CFDs

Short for contracts for differences, CFDs are basically a contract between you and the brokerage that allows you to speculate on the price movement without actually owning the coin in question.

This contract allows you to make a profit by predicting whether your chosen crypto will rise or fall in value. If you think the price will go up, you go “long” (buy). If you think the value of the cryptocurrency will fall, you can go “short” (sell).

CFD trading allows you to leverage your crypto trades, which means you only put up a small deposit (known as margin) and then the broker advances you additional funds. x2 leverage means if you put up $100, the broker will advance you double that sum; x5 will give you five times the money you’re staking (which will total $500 in this case), x10 will be $100 x 10, and so on.

If the value of the coin goes up, you pocket the profit two times (x2), five times (x5) or 10 times (x10) over, and you give the “borrowed” funds back to the brokerage, including the commission. If the value of the coin drops, you suffer a x2, x5, or x10 loss (depending on your leverage) and still return the borrowed funds to the broker.

Benefits of trading crypto CFDs

People that trade crypto CFDs do it for bigger profits and to be able to trade with more money than they actually have at hand.

Another advantage that comes with trading crypto CFDs has to do with volatility. Volatility is a good thing as it means the cryptocurrency is highly liquid, a characteristic of the top cryptocurrencies like Bitcoin and Ethereum.

But this volatility can be a bit much to handle sometimes. CFDs are helpful here in the sense that they give you more wiggle room to get in and out of a trade – you see a nice profit, scoop that up; scared the price might dip too much, use a stop-loss order to get out fast.

The flexibility also gives you an edge as you can develop hedging strategies to limit excessive market risk.

The liquidity of CFDs is also much better compared to direct cryptocurrency trading, particularly when dealing with some altcoins that lack a direct cash-out system. Altcoins are alternative cryptos other than Bitcoin.

The process of withdrawing some altcoins through an exchange or offline ATM can be a bit protracted and cost a lot in fees. When you trade cryptocurrency through CFDs, this is not a headache you have to deal with – you don’t need a wallet to perform multiple conversions that could eat into your profits.

Another advantage of trading crypto CFDs is the security that comes with it. CFD brokerages are licensed by local financial regulators. So, should something happen on the broker’s platform that is not of your doing, the law requires the broker to compensate you.

Downsides of trading crypto CFDs

While there is a stop-loss order to limit the amount of risk, once the loss in crypto CFD trading is realized, there is no recovering the money lost. By contrast, spot trading directly on the exchange gives you the option to ride out the bear run. If the crypto price rebounds, you can crawl back the loss easily without actually losing your money.

Margin trading also doesn’t allow for long-term trading. Not only does this carry an element of risk as there’s always a possibility crypto prices will sink, but platforms also have a maximum window during which you can keep a leveraged position open.

There’s the option to extend the deadline of course, but there is a fee for this. This fee can be high on some platforms that could eat into your profits over time.

Spot trading

Another approach we’d like to highlight in this cryptocurrency trading guide is known as spot trading.

This involves trading crypto directly on the exchange. Participants buy and sell crypto assets on the spot. This is the most common form of cryptocurrency trading and is the default trading mode on most exchanges.

Spot trading requires you to have your own capital to trade with. That means if you have $1000 you plan to channel towards cryptocurrency trading, you’ll only have $1000 to play with initially – a figure that could rise or fall depending on your profit and loss respectively.

That can be both an advantage and a disadvantage. An advantage in that it helps you better manage risk as there is only so much money you could lose in spot trading. If a cryptocurrency depreciates $10 in value, your loss will be $10, platform commissions notwithstanding.

On the other hand, spot trading limits your profits in that there is only so much profit you can make. If, for example, a crypto coin appreciates by $10, your maximum profit will be $10, without factoring in the fees. By comparison, if you were CFD-trading and decided to leverage that trade by a factor of x5, you profit would otherwise have been $50 ($10 * x5).

In short, spot trading is a safer form of investing in crypto compared to trading CFDs, increasing your chances of staying in the market for longer. That makes it the ideal form of cryptocurrency trading for beginners and anyone else with a lower appetite for risk.

The fact that spot trading allows you to invest and walk away means it also requires less micromanaging on your part, unlike CFD trading which requires you to be constantly monitoring your trades. You can literally buy coins and forget about in the same way you would buy gold as an asset to hold in the long-term.

Set up Your Account

Now that you’re familiar with how to trade crypto, it’s time to set up an account and dip your toes in the market.

To the unversed, setting up a crypto account may seem like a big deal but there’s nothing much to it really. All you need to do is find a good brokerage that allows for cryptocurrency trading and sign up with them.

Now, there is no shortage of brokerage options out there offering crypto trading, but it’s important to keep in mind that all crypto brokers are not equal. Usually, they will differ in terms of account minimum deposit, ease of use, trading features available, fees and commissions etc.

Equally, all crypto traders are not equal. Depending on what you’re looking for in a platform or what your objective is when venturing into crypto trading (for example, do you plan to be actively involved or more of a passive trader?) some platforms might prove a better fit for you than others.

A cryptocurrency trading guide would not be complete without name dropping some platforms to get you started:

  • Interactive Brokers – ideal for low-cost trading

  • Coinbase – intuitive interface and ideal for beginners

  • Gemini – ease of use

  • eToro – unique features such as social trading (ability to copy other traders or investors)

  • WeBull – low barrier for entry (minimum account deposit of $1) and good all-in-one platform (if you want a platform to trade other vehicles like stocks)

Next, you’ll need a cryptocurrency wallet

Cryptocurrency wallets come in two forms: hardware wallets and software wallets. Both are used to store the private keys for the crypto you hold.

Hardware wallets

Hardware wallets are also known as cold storage. They’re actual devices that are different from online exchange platforms and are usually connected to your computer if you want to access your holdings. Hardware wallets are secure, and only the person with the wallet and PIN has access to the private key.

Software wallets

Software wallets, for their part, are computer programs as the name suggests, which you can download to your computer to store your private keys. While they are convenient, many opt for hardware wallets as there isn’t as much risk of getting it infected with malware.

Choose what crypto to trade

Now that your account is set up and funded, the next step in your cryptocurrency trading journey is the most exciting one: trading time!

When it comes down to it, you might want to start with the more established names before trying out the less popular coins. For most people, Bitcoin is the preferred choice, and it’s understandable really. Not only did it pioneer the crypto revolution, but Bitcoin is also the leading cryptocurrency available, commanding nearly half of the total crypto market cap (43% of total crypto market cap) at the time of publishing. But in addition to Bitcoin, the most popular coins by virtue of market capitalization that you should consider include:

  • Ethereum (ETH) – The second-most popular coin after Bitcoin, Ethereum is a nice choice to start with. Boasting more function and versatility than Bitcoin, Ethereum’s returns have even eclipsed its bigger sibling over the last several years.  

  • Binance Coin (BNB) – Binance Coin was only launched as recently as 2017 but has become one of the top 5 cryptocurrencies by market cap. It is issued by Binance, one of the biggest crypto exchanges in the world.

  • Cardano (ADA) – Often found hovering around at or near two dollars per unit, Cardano is a good and stable coin to invest in. It claims to be a more balanced and sustainable coin compared to other cryptocurrencies, so if sustainability is big on your agenda, there’s a plus.

  • Litecoin (LTC) – With a hard cap four times that of Bitcoin, Litecoin is one of the oldest coins around that should be on your watchlist.

  • Dogecoin (DOGE) – DOGE was originally created as a joke following the run-up in Bitcoin, but it has managed to hold its own to date and a good coin to consider today. It can be used to send money or make payments and while DOGE gets the name from an Internet meme featuring a Shiba Inu dog, it is a different coin to Shiba Inu (see below).

  • XRP (XRP) – If you’ve been seeing XRP a lot lately, that’s because it’s a versatile coin that has found common use when making cross-border transactions as it pays in a variety of real-world currencies. This was the coin originally known as Ripple and was launched in 2012.

In addition to the established names, some of the emerging names in the crypto world that you should watch for include the following:

  • Solana (SOL) – SOL was launched just at the start of the COVID-19 pandemic (in March 2020) and has become one of the top cryptocurrencies by market cap.

  • Binance Coin (BNB) – Binance Coin was only launched as recently as 2017 but has become one of the top 5 cryptocurrencies by market cap. It is issued by Binance, one of the biggest crypto exchanges in the world.

  • Tether (USDT) – Tether is a unique coin in the sense that it’s tethered at $1 per coin (hence the name). These types of coins are known as stablecoins and are usually tied to the value of a specific asset; in this case, the US dollar.

  • Polkadot (DOT) – DOT was also launched in 2020 by one of Ethereum’s co-founders. It’s a great coin to trade in, and some industry watchers project it will be dethroning Ethereum at some point in future.

  • Shiba Inu – Shiba has become one of the most prominent names in cryptoverse despite only being launched in August 2020. The dog-based meme token is widely deemed as an alternative to its close cousin, Dogecoin.

There are other upcoming coins we would like to highlight in this cryptocurrency trading guide. Just to mention them briefly, these include:

  • Terra (LUNA

  • Celsius (CEL)

  • Chiliz (CHZ)

  • Avalanche (AVAX)

  • Chainlink (CHAIN)

  • Waves (WAVES)

  • Filecoin (FIL)

  • Flow (FLOW)

Your Cryptocurrency Journey Awaits

It is our hope that this cryptocurrency trading guide will go some way towards demystifying the world of cryptocurrencies which most ordinary people consider to be a bit technical.

Once you get acquainted with the basics and brush up your knowledge with individual coins, you’re well on the road to successfully trading crypto.

If you need more advice, guidance, or additional information on trading crypto, join thousands of others on the Blitz Broker’s program. It’s a program that also offers you a unique opportunity to profit more from cryptocurrency trading by building your own certified crypto brokerage business!