The Ultimate Guide to Trading Cryptocurrencies
News reports telling about new record prices of bitcoin couldn’t pass unnoticed in 2017. We can say for sure that the previous year was the year of cryptocurrencies. With this new asset class in spotlight, many traders are wondering how to start trading or investing in cryptocurrencies.
This article is for them, and it’ll show that trading cryptocurrencies is easier than many of you think. We’ll cover everything you need to know to start trading right away, from exchanges and wallets to the risks of trading cryptocurrencies.
So, make sure to carefully read through this entire guide.
What are Cryptocurrencies
Cryptocurrencies are virtual currencies used to pay or get paid over the internet. One of the main differences to traditional currencies are that cryptocurrencies aren’t backed by any central bank in the world, and all transactions are completely anonymous. A growing number of well-known companies around the world are starting to accept cryptocurrencies as a mean of payment, including WordPress, Microsoft, Virgin, Dell and more.
The underlying technology behind cryptocurrencies is called blockchain, which records and verifies all transactions. While bitcoin is still the most popular cryptocurrency with the highest market capitalization (number of bitcoins x price), there are hundreds of other cryptocurrencies which we refer to as “altcoins”.
Beside bitcoin, other popular cryptocurrencies include Ethereum, Litecoin and Bitcoin Cash. In order to trade on cryptocurrencies, you buy them directly on the many crypto exchanges on the internet, invest through the stock market via the Bitcoin Investment Trust (GBTC), or open a trading account with an online broker to trade on CFDs (contracts for difference) which mirror the price of the underlying asset.
Exchanges and Wallets
The usual way to trade on cryptocurrencies is through the use of crypto exchanges. Crypto exchanges are pretty much the same as stock exchanges, only that they’re used solely for cryptocurrencies. Some of the most popular crypto exchanges in the world are Coinbase, GDAX and Gemini, out of the dozens of other exchanges. Each exchange has its own pros and cons, and they differ by their trading fees, available currencies and other features.
In addition, some exchanges allow you to deposit fiat currency (such as USD and EUR) in order to buy cryptocurrencies, while other exchanges accept only cryptocurrencies (usually bitcoin), which is then used to buy other the other altcoins.
Whichever exchange you choose, the registration process is similar across all of them. After you sign up, you’ll probably have to verify your account by providing your ID card or picture. The verification process can take a few days, and once it’s finished you can start to buy and sell cryptocurrencies on the exchange.
To store your cryptocurrencies, you need a digital wallet that can be opened at your exchange. You will receive your wallet address afterwards, which is used to send and receive bitcoins and other cryptocurrencies. Pay attention that your wallet address is correct when you make transactions across different wallets, because the transaction can’t be reversed once you hit the send button!
Know the Main Types of Orders
By now you’ve learned what cryptocurrencies are and what exchanges and wallets are for. You’re very close to open your first trade on cryptocurrencies, but first let’s take a look at the different types of orders that can be used on most of the exchanges.
A market order is used to buy or sell a cryptocurrency at the current price. Your order is matched with the best available bid/ask price in the exchange’s order book, but it can still be filled at a different price than the price you were looking at during times of high volatility.
Limit orders are used to buy or sell a specific cryptocurrency, at a predetermined price level. For example, if you think the price of Ethereum will rally once it breaks $1,500, you can use a buy limit order that automatically buys the cryptocurrency once the price level is reached.
And finally, stop-loss orders are used to reduce the risk of high losses by closing an open position once the price reaches a certain level. However, just like with market orders, be aware that during certain market conditions your stop-loss order may not be filled at the predetermined price, leaving you potentially with a higher loss than expected.
Analyze the Coins
To make profitable trading decisions, you need to analyze the cryptocurrencies. The two main ways of analyzing cryptocurrencies are fundamental and technical analysis. Fundamental analysis of cryptocurrencies includes following the related news and knowing the mission behind the currency. Many cryptocurrencies have their own websites, where you can check the team behind the cryptocurrency, and what they try to achieve with it.
Also, remember to take a look at the market capitalization of the cryptocurrency. The market cap is simply the number of total outstanding coins multiplied by their price, and gives a good indication of the market share the currency has relative to other cryptocurrencies. The site www.coinmarketcap.com shows the current market capitalization for dozens of the most popular cryptocurrencies out there.
In addition, you should also be able to find white papers of cryptocurrencies on their website, which are a useful resource in analyzing the potential behind the currencies. If you think the cryptocurrency has a future and the team is dedicated to make it a success, you’re halfway there to make a good trading decision. One of the best places to watch for cryptocurrency news is www.coindesk.com.
Initial Coin Offerings (ICOs)
New cryptocurrencies are coming the market almost daily, through a process called ICO (Initial Coin Offering). ICOs are very similar to IPOs of companies, and they offer the opportunity to buy the coin even before it hits the crypto exchanges. ICOs will usually require bitcoins or other popular cryptocurrencies for their payment, and the team will then use your funds to grow their business.
The good thing about ICOs is that once the coins become available on crypto exchanges, there is a fair possibility that their price will skyrocket in a short period of time. However, as there are many ICOs available nowadays, you need to do your research, because not all of them are going to be a success story. You can find a list of upcoming ICOs on www.ico-list.com, shown on the following screenshot.
Analyze the Charts
The other type of analysis you need to know to increase your chances of profitable trading is technical analysis. Technical analysis is based on price-chart analysis, and follows the premise that markets have a tendency to trend, and that past price patterns have a tendency to repeat themselves in the future. The cryptocurrency market, showing signs of a herd mentality in investing, is excellent to perform technical analysis.
One of the best free sites to perform technical analysis on cryptocurrencies is www.smarttrader.com.
The following chart shows a snapshot of bitcoin/USD on smarttrader.com. Notice how the price makes lower highs (LH) and lower lows (LL) during downtrends, and how the support price became resistance once it was broken. These are clues to watch for when performing technical analysis on cryptocurrencies.
A support zone is a previous price level where the price had difficulties to break below, as shown on the chart. Once a support price breaks, it becomes a resistance where the price will probably struggle to break above.
Risks of Trading Cryptocurrencies
As with any market, there are risks associated with cryptocurrency trading. One of the biggest risk factors for unexperienced traders is the extremely high price volatility of cryptocurrencies. It’s not unusual for bitcoin to rise or fall thousands of dollars in a single day. However, traders live on volatility and it also produces many trading opportunities.
Make sure to do your analysis before trading, and always use stop-loss orders to protect your capital from unexpected price changes. Also, only trade with a sum of money that you can afford to lose. Don’t invest all your life savings in cryptocurrencies!
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