How to Trade Cryptocurrency (In 6 Easy Steps)
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In April 2020, the total market cap for all cryptocurrencies was just under $200 billion according to TradingView. But just two years later, the total number of assets invested in crypto has ballooned to over $2 trillion. The cryptocurrency market has exploded – and that's putting it mildly.
Over the past two years, I’ve had several friends ask me "Should I invest in Dogecoin?" or "Should I buy Shiba Inu?" Interestingly, most of them had never asked me any questions about stock market investing. Gradually, it became clear to me that crypto trading and investing isn’t just hot within an insular community…it’s gone mainstream.
But unlike investors in other "mainstream" asset classes, like stocks and bonds, many of the newcomers to the cryptocurrency industry aren’t just looking to invest for copy trading crypto review the long haul. They’re looking to trade cryptocurrency — perhaps holding onto coins for who to copy trade on etoro only a few days, hours, or minutes.
Without the day trading rules that keep many novice stock traders away, virtually anyone can trade cryptocurrency. But is it a good idea? And how do you get started? Below, we break down how to trade cryptocurrency in six steps.
1. Gain a Basic Understanding of How Cryptocurrency Works.
If you’ve already moved to the point of wanting to learn how to trade cryptocurrency, it’s likely that you already understand the basics. But if you don’t, we highly recommend that you do further research on Investor Junkie and other reputable sites (such as cryptocurrency exchanges) before beginning to trade coins. In the meantime, here's a quick overview.
Cryptocurrencies are digital currencies that are built on decentralized networks of peer-to-peer computers. Bitcoin was the first, and is still by far the most popular, cryptocurrency. However, there are hundreds of "altcoins" (any coin other than Bitcoin). And, as of writing, over 90 coins have market caps in excess of $1 billion according to CoinMarketCap.
Unlike currencies that are issued and controlled by governments, cryptocurrencies don’t require middle-men (such as banks or payment processors). This means your coins can be transferred directly to another party quickly and securely.
A cryptocurrency’s blockchain is its record of transactions, akin to a financial institution’s ledger . Again, this ledger is split amongst many computers, so there’s no central server to hack. This makes blockchains incredibly difficult (many would say nearly impossible) to hack.
To receive cryptocurrency, you need both a public and private key . The public key is the address where the sender will direct the funds. However, you won’t be able to authenticate that you own them without your private key.
Importantly, this means that if someone gets access to your private keys, they could withdraw or transfer all of your cryptocurrency assets. This makes their security paramount.
Private keys can be stored in either hot (connected to the internet) or cold (not connected to the internet) wallets . Cold wallets are more secure, but they can be more cumbersome for traders as keys must be transferred to an exchange before they can be sold or traded.
2. Decide if You Want to be a Crypto Trader or Investor.
There are two major camps within the cryptocurrency world. Some are all in on trying to buy and sell assets for quick gains. Others are resolved to hold on to their coins over the long haul no matter how far the market moves up or down in the short-term.
"…When markets dip and traders say "Sell!" crypto investors say "HODL!"
Those who belong to the second category often refer to themselves as HODLers. The term HODL originates back to 2013 when someone accidentally spelled HODL instead of "hold." Since then, many have used HODL as an acronym for "hold on for dear life." So when markets dip and traders say "Sell!" crypto investors say "HODL!"
While stocks are often used for both investing and kraken copy trading
, cryptocurrency tends to lend itself better to the latter. As a whole, the crypto market is far more volatile than the stock market. That’s generally considered a negative for investors, but can actually be a positive for traders. There are also no pattern day trading regulations for cryptocurrencies like there are for stocks.
There are advantages to taking a buy-and-hold approach to cryptocurrency investing, however. First, it helps you avoid panic selling during periods of high volatility (which, again, is just about every day in the crypto world). Plus, HODLers may be able to take advantage of loaning out their crypto to earn interest. Many platforms now offer crypto interest accounts that pay far more than the typical high-yield savings account.
If you decide that trading is right for you, any cryptocurrency with high liquidity becomes fair game. However, if you’re looking to actually invest in crypto, you may want to stick with more established coins that already have practical use cases like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC). If you think crypto investing is more your style, check out this guide for more tips and best practices.
3. Focus on Cryptocurrencies That Have High Liquidity.
If you’re specifically looking to trade cryptocurrency rather than invest, you’ll want to zero in the coins that are traded most often. While billions of dollars of Bitcoin may change hands in a 24-hour period, other less popular altcoins may have a daily volume of less than $1 million.
Trading illiquid coins can lead to two major problems:
You may not be able to immediately close a position when you want to. This could cause you to miss out on locking in profits or, worse, suffer steeper losses. Trying to trade illiquid coins can also lead to "slippage," which results in you receiving a lower price for your assets than expected.
CoinMarketCap is a great place to start if you’re wanting to find coins that offer high liquidity. It allows traders to compare currencies by market capitalization, 24-hour trading volume, circulating supply, and more.
It should also be noted that even if you’re trading a liquid coin, you might struggle with fast trade execution if you’re trying to buy or sell it on a low-volume exchange. Again, CoinMarketCap can be helpful in this regard as it makes it easy to rank each exchange by 24-hour trading volume, average liquidity, weekly visits, and more.
4. Choose a Cryptocurrency Exchange.
Exchanges are to cryptocurrency trading what brokerages are to stock trading. And just like with brokers, exchanges can vary widely in their features and costs.
At the end of this article, we list five of our favorite cryptocurrency exchanges for trading. But for now, here are a few factors that you’ll want to consider as you compare platforms.
Long-term investors may not be as worried about the fees that they pay for trades. But if you’ll be trading frequently, trade costs become a bigger deal that can make a big difference in how much you make (or lose).
To find the lowest fees, you’ll generally want to look for exchanges that utilize a maker/taker pricing structure. With Coinbase , this means you’ll want to sign up for a Coinbase Pro account which targets active traders as its standard accounts come with a more complicated and higher cost fee structure.
"Maker" orders are trades that don’t receive an immediate match, which means that they are providing liquidity to the market. "Taker" orders, meanwhile, are those that are matched immediately and thus take away liquidity. Typically, exchanges charge lower fees for maker orders.