A Detailed Guide to Cryptocurrency Trading in April 2020
If you’re wondering what cryptocurrencies are and how cryptocurrency trading works, you’ve come to the right place.
Before we get started, though, you must understand that trading cryptocurrencies can be a risky proposition. Like any other type of financial trading, you can increase your odds of success through time and effort. The first step is to educate yourself.
Luckily, we’ve created this cryptocurrency trading guide, where you can learn everything you need to know about cryptocurrencies and how to trade them. Some of the concepts we cover include:
- Understanding how cryptocurrency trading works
- The most popular cryptocurrencies to trade with
- How to get started with trading and which broker to choose
- The secret to trading cryptocurrencies successfully
What Is a Cryptocurrency?
A cryptocurrency is a digital form of money that you can exchange online for services and goods. Unlike traditional currencies, like the U.S. dollar or the euro, cryptocurrencies aren’t controlled by a specific government. They don’t have central issuing authorities or regulatory bodies.
Instead, cryptocurrencies rely on peer-to-peer networks and cryptography to perform those same functions. These include validating transactions to avoid double spending, securing transactions to prevent fraud, and deciding when and how many units of currency to issue.
One of the most popular cryptocurrencies is Bitcoin, which was also the first cryptocurrency to be formally established in 2009. It was created by an anonymous entity calling themselves Satoshi Nakamoto.
Every bitcoin transaction is registered on a massive global ledger called the blockchain, which is decentralized. It is stored on multiple computers and servers across the world with lots of people keeping track of the transactions to ensure their accuracy.
This makes it very difficult to commit fraud because it would require changing the entries in all the “copies” of the ledger on all these servers.
Is Trading in Bitcoin Safe?
Cryptocurrency transactions are secure because they use cryptography for validation. Every cryptocurrency account, also known as a wallet, has two keys attached to it, a private key and a public one. Keys are strings of data that mathematically guarantee the validity of the “message.”
Sending someone some bitcoin requires you to inform the network with a message. Your private key, which only you have access to and can’t be replicated, signs the message.
It is then sent out to the network and the public key is used to ensure that the signature is valid. This tells everyone keeping track of the network that the transaction should be added to their copy of the blockchain.
The problem is that due to various issues, such as network delays, people will often receive transaction requests in a different order. To ensure that all versions of the blockchain are identical, the people monitoring the network have to solve special math problems created by a cryptographic hash function.
Whoever solves the problem first can add the block of transactions to the blockchain. Then, a new math problem is generated.
To ensure people have a reason to maintain the blockchain, they are rewarded with a specific amount in bitcoin whenever they solve the math problem first. This process is called mining and is how new bitcoin currency is created.
How Do Cryptocurrency Markets Work?
The cryptocurrency market is similar to the forex market in that you can make a profit by speculating on the price movements of a cryptocurrency. In both cases, price is driven, at least in part, by supply and demand.
There are important differences, though. The forex market is much larger than the cryptocurrency market. It has greater liquidity and depth but is also more stable.
Conversely, the cryptocurrency market is much smaller. According to CoinMarketCap, at the time of writing, Bitcoin is worth $8,288.79 and has a market cap of $148.9 billion. The daily trading volume exceeds $14 billion per day.
By comparison, the Swiss Franc, which is the least popular major currency in terms of trading activity, has a daily turnover in excess of $243 billion. The entire forex market has a turnover of $6.6 trillion.
Crypto-coins are also limited, unlike fiat currencies. Bitcoin, for example, is capped at a maximum of 21 million units, which is expected to be achieved in 2140. The limited supply increases demand, which increases value.
The protocols that control the creation of new coins also make manipulation of the value almost impossible.
Cryptocurrency markets are decentralized and not subject to a government or country, which means that they aren’t affected by the same factors. Some of these include:
- The number of units currently available and the rate at which they are created
- The value of all the coins available and user perception in terms of the evolution of said value
- The media’s take on cryptocurrencies at the time
- How easily a specific crypto-coin can be integrated into e-payment systems and other infrastructure
- Important events directly tied to the crypto-coin
In some ways, this makes the price of cryptocurrencies a little more predictable, especially since manipulation isn’t a concern.
Investing in Cryptocurrency vs Cryptocurrency Trading
Cryptocurrency trading differs from investing in the sense that your goal is to make a profit quickly from price fluctuations. You can make money if the price drops just as easily as you can make a profit when it rises.
When investing in cryptocurrencies, though, you buy the coins and hold on to them for a longer period of time with the intent of gradually growing your wealth over time. With cryptocurrency investment, therefore, you want the price to rise and you will hold on to them for maybe even years.
With cryptocurrency CFDs (contracts for difference), you don’t own the crypto-coin. You only “own” the difference in price. You predict what direction the price will go in and choose the associated type of CFD.
If you were right, the difference in price will be your profit. If not, it will be your loss. The amount you make or lose is equal to the difference in price multiplied by the quantity.
What Are the Top Cryptocurrencies to Trade?
Until 2011, Bitcoin was the only cryptocurrency on the market, until some people decided they could do better. The field has exploded and, as of August 2018, there are more than 1,600 cryptocurrencies available on the market, with more being created regularly.
The market will continue to grow, especially seeing as institutional investors have joined the fray. This means a larger volume of transactions and increased liquidity.
With so many cryptocurrencies, it might seem daunting to choose which one to trade. We’ve made things easy for you, though, by compiling a list of the most popular cryptocurrencies.
The original and most popular cryptocurrency with the highest market capitalization and the greatest daily trading volume by far.
Bitcoin Cash (BTC)
Created in 2017 from a fork of Bitcoin, this cryptocurrency has larger blocks, so more transactions can be processed. It was created to resolve the scalability issue Bitcoin experienced due to the large number of transactions.
Ethereum is a decentralized, blockchain-based software platform that allows the building and running of SmartContracts and Distributed Applications. The associated cryptocurrency is called ether and is traded as a cryptocurrency but is also used to run apps inside Ethereum.
Litecoin functions almost the same as Bitcoin except that transactions are much quicker and cheaper. Many traders consider that Litecoin behaves more rationally in terms of pricing than Bitcoin. The supply limit is 84 million.
Ripple is both an electronic payment network as well as a cryptocurrency. It was launched in 2012 by Chris Larsen and Jed McCaleb. Instead of blockchain mining, Ripple relies on a consensus mechanism to validate transactions.
Launched in December 2013, Dogecoin was meant to be a fun, user-friendly cryptocurrency. It’s based on another cryptocurrency named Luckcoin, which in turn is based on Litecoin. Dogecoin, like Litecoin, uses Scrypt technology for mining and can therefore only be mined using computers and not ASIC hardware. Therefore, it requires less energy to mine.
Cardano is a platform that supports the ADA cryptocurrency. It’s the first blockchain to be developed by a global team of engineers and academics. The goal is to create a stable ecosystem for cryptocurrencies that meets both users and regulator needs.
Which Are the Best Platforms for Cryptocurrency Trading?
A cryptocurrency trading platform is a software application that allows you to trade cryptocurrencies. It lets you open and close trades, but also provides you with a host of tools so you can more effectively analyze the market, such as charting software, a variety of indicators, and even economic news.
There are a lot of trading platforms on the market. An increasing number of forex brokers are offering cryptocurrency trading, and they usually require you to use their platform to trade with.
As not all platforms are created equal, we’ve done the work and found the best platforms for cryptocurrency trading. We’ve also made sure that the brokers we recommend use these platforms because they are highly efficient.
MetaTrader 4 (MT4)
MetaTrader 4 is the most popular trading platform on the market. It features powerful charting software with a wide range of analytical tools. It also allows for custom indicators and expert advisors.
MetaTrader 5 (MT5)
MetaTrader 5 offers advanced trading functions and analytical tools. It also allows you to trade stocks, futures and CFDs, unlike MT4, which is designed specifically for forex trading.
WebTrader is a browser-based cryptocurrency trading platform that you can use on any device with internet access. It features a variety of analytical tools and everything a professional trader might need. It is also very flexible and can be personalized for a better trading experience.
How to Start Trading Cryptocurrency
If you’re wondering how to start trading cryptocurrency, the good news is that it’s relatively simple if you work with one of our trusted brokers. Here’s a step-by-step guide to getting started with cryptocurrency trading:
Learn as Much as You Can
Like with any form of trading, you need a solid foundation to start trading cryptocurrencies. The more you know, the better your chances of making a profit.
Understand What You Can Trade
Most brokers allow you to trade either US dollars against cryptocurrencies or cryptocurrencies against other cryptocurrencies. In other words, you can trade USD/BTC or BTC/LTC, for example.
Choose a Cryptocurrency to Trade
Take the time to research what cryptocurrencies are available, but it’s a good idea to start with the most prominent cryptocurrencies available, like Bitcoin or Litecoin. Remember, though, that cryptocurrency markets can be very volatile, so stick to a coin that aligns with your risk appetite.
You should also choose a single cryptocurrency to focus on, at least at first. This way, you can learn its quirks and will be better able to predict how price could move.
Before you even consider opening a trade, make sure that you know the coin inside out. Learn what factors affect it and how, delve into its long-term performance, and understand all the challenges associated with it.
Pick the Right Cryptocurrency Broker
When choosing a forex broker, you first need to make sure they are legitimate, regulated, and reputable before you open an account. Also, they must offer cryptocurrency trading.
Choosing a cryptocurrency broker is easy with our list of recommended companies. Our team of forex brokers has conducted in-depth evaluations of all the brokers on our site. We use an extensive list of criteria and only recommend the best and most reliable brokers to ensure that you can trade safely on secure platforms without being scammed.
Some of the factors we check include whether or not they are regulated and by whom, the trading tools they offer, the quality of their educational materials, the quality of their customer service, and much more.
Open a Trading Account
Opening a live trading account will require a little time as most brokers will pose a series of questions to determine your level of trading knowledge. You’ll also have to submit some documents to verify your identity. You can then fund your account and start trading.
When opening a demo account, though, you usually only need to submit your email and a password. It’s quick and easy.
Starting with a demo account is the best option if you have never done cryptocurrency trading before. You’ll be able to practice your trading and determine what risk strategies work best for you.
Once you’ve done your market research and analysis and chosen the cryptocurrency broker you wish to trade with, you can decide on whether to open a Buy or Sell position. Cryptocurrency trading carries risk due to the volatility of the market, which means protecting yourself is essential.
Use effective risk management strategies, and trade within your budget. Also, never trade with money you can’t afford to lose. If you are prepared to lose it, you are less likely to make problematic decisions based on emotions. Your account should also have enough money in it to cover all your open positions.
Monitor Your Position
Though cryptocurrencies aren’t as sensitive to manipulation as fiat currencies, they are still very sensitive. The markets are very volatile, which is why you should always keep a close eye on any events that could affect your trades.
Keep a close eye on any news related to the cryptocurrency you are trading. If you feel uncomfortable attempting to predict how the crypto will react, you are better off getting out of any trades until the volatility dies down.
The top cryptocurrency brokers will provide you with all the educational resources and information you need to develop an effective trading strategy.
Now that you know how to trade cryptocurrencies, you can choose to sign up with one of our top partners so you can start cryptocurrency trading.
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