How to Invest and Trade in Cryptocurrencies

Digital currency has gained a lot of attention in recent years – as an alternative to fiat currency, the extended hype around Bitcoin price and government backing and regulatory controls around this asset class. This has prompted many investors to jump on to the cryptocurrency bandwagon in hope of better returns compared to traditional forms of investing. However, before investing in cryptos, it may be necessary to take a look at some of the jargon and processes involved so as to facilitate a seamless trading and investing experience in your favorite digital assets.

1. Trading Method Selection

There are two major ways to trade cryptocurrencies as follows: –

• Trading cryptos using CFDs: CFDs refer to Contract for Differences and investors use CFDs to exchange the difference in the price of a cryptocurrency from when the position is first opened to when it is closed. Here the investor is speculating on the price of the market by taking long/short positions and the profit/loss would depend on the direction of price movement.
• Buying cryptos via an exchange: Investors may decide to buy a cryptocurrency, thus taking ownership of a portion of the digital currency. Safe crypto storage and asset price appreciation would be some of the investor’s long term/short term investment objectives.

2. What is required before Investing and Trading?

The investor needs to select/set up the following prior to commencing cryptocurrency trading: –

• Crypto Exchange/ Trading Platform: A crypto exchange is analogous to the stock market with digital currency being the traded asset. These exchanges have trading platforms which are used to buy and sell preferred cryptocurrencies. Selecting the right crypto exchange/trading platform is necessary for a smooth trading experience going forward. Some well-known crypto brokerages are Coinbase, Gemini and eToro.
• Trading Account: A trading account is required to be opened on behalf of the investor at the selected crypto exchange. Details around selected services, planned investment amount and trading options would be required while registering the account. Personal information like Social Security Number (SSN), photo identity proof, date of birth etc. may be required to verify investor details.
• Digital Wallet: Since security is one of the major concerns regarding cryptocurrencies, it is good practice to invest in a secure crypto wallet. Crypto wallets can be available as hot wallets (e.g., Ledger) and cold wallets. Both provide security, however since cold wallets store digital currency on a physical device and is not connected to the internet, it is less susceptible to being compromised by malicious entities.

3. Funding of Account and Buying Cryptocurrency

Once the crypto-trading account is opened, money needs to be transferred to the account to purchase cryptocurrencies. This can be accomplished by linking a bank account with the crypto-trading account and transferring funds online accordingly. There may be a waiting period prior to purchasing digital coins.

The investor is responsible for deciding which digital coins he should invest in. Some of the popular cryptocurrencies for investing and trading are Bitcoin, Ethereum, Dogecoin etc.

4. Initial Coin Offerings (ICOs)

Cryptocurrency traders can look to invest in Initial Coin Offerings (ICOs). Similar to IPOs in the equities market, ICOs are launchpads of new cryptocurrencies on crypto exchanges and provide opportunities to infuse capital into a potential “next Bitcoin”. While ICOs do provide opportunities to invest in a cryptocurrency right at the start, lack of government regulation and ease of developing digital assets means that ICOs are susceptible to scams. Thorough research into the ICO’s history and product creators may be helpful in averting a potentially disastrous investment in a brand-new cryptocurrency.

5. Crypto Volatility and Trading Strategy

It is well-known that the cryptocurrency market displays high levels of volatility. This volatility is an attractive feature for those looking to “time the market” and thus make a large profit in directional trading, however it is extremely difficult to predict whether this will lead to a profit or loss. Hence a well-defined trading strategy, including risk management tools, outline of goals and methodology for entering and exiting trades is necessary to manage volatility better.

Analysis of the crypto market can be accomplished by technical and fundamental analysis. Technical analysis focuses on the price movement of a crypto and its historical patterns, while fundamental analysis looks at the external factors and macroeconomic data that impact the digital asset. It is also important to remain up-to-date with any news impacting the market as cryptocurrencies are sensitive to market sentiments.

Closing Remarks

Investing and trading in cryptocurrencies is an exciting pursuit with potentially large gains. However, it is important to understand the nuts and bolts of the crypto trading process so that investing can be performed more logically. Also, the pitfalls on the road to large profits need to be studied and avoided; after all, there are no free lunches and cryptocurrency investing and trading requires a lot of hard work and skill to make it worth one’s while!