The Beginner's Guide to Cryptocurrency Trading
Bitcoin has once again been one of the best performing asset classes of the year, outperforming stocks, bonds, and gold by a substantial margin. In 2017, bitcoin generated a return on investment of over 1,250% while the American stock market index S&P 500 rose by 18.5%, US 10-Year Treasuries gained 2.5%, and gold rallied by 12%.
Clearly, bitcoin and, cryptocurrencies in general, offer a much high earnings potential than established financial assets, which is why so many investors are now diversifying into this new digital asset class.
If you are new to cryptocurrencies and want to get involved in this market, then this guide is for you. In this beginner’s guide to cryptocurrency trading, you will learn how to get started, what investment options you have and what to look out for when investing in crypto assets.
How To Get Started
Firstly, you need to decide how much of your investable capital you want to invest in cryptocurrencies. Given the riskiness of this new asset class, it is recommended that you only invest a small amount of your overall net worth into cryptocurrencies. Union Square Ventures CEO Fred Wilson, for example, believes that experienced investors should only invest five percent of their total net worth in bitcoin.
How much of your capital you invest in digital assets is, of course, up to you but the most important thing when deciding how much to invest in crypto assets is never to invest more than you can afford to lose.
Next, you need to sign up to a cryptocurrency exchange such as Bittrex, Poloniex or Binance. To ensure you can deposit and withdraw fiat currency as well as cryptocurrency, it is highly recommended to go through the full verification process once you sign up.
Once you are registered and verified on the exchange that best serves your geographic location and currency pairs, you can get started by depositing money into your trading account and placing your first trade.
Buying and selling cryptocurrencies on designated exchanges works in the same way as buying stocks or trading forex on any online broker. You deposit funds, decide what asset you want to buy, place an order that includes the volume you want to buy and price you want to trade at and then wait for the order to be executed. If you are not too concerned about the exact price level and simply want your order to be executed as quickly as possible at the best price, you can place amarket order and your trade will be completed within a few seconds.
Finally, once you have purchased digital currencies, it is best to then transfer your holdings to your personal cryptocurrency wallets. Each cryptocurrency usually has its own wallet that you can transfer your holding to. Ideally, you want to keep large holdings offline in hardware or paper wallets so that they cannot be accessed by hackers.
Keeping your funds on exchanges is very risky as cryptocurrency exchanges are regular targets of cybercriminals, which can lead to a loss of user funds as we have witnessed in several instances over the last few years. Hence, storing your crypto assets securely in your own personal wallets is absolutely key when investing in crypto assets.
How To Invest in Cryptocurrencies
When it comes to investing in crypto assets, there are several different approaches you can take. Each option has its pros and cons and it is up to you to choose the one that suits you the most.
Buy and Hold
Buy and hold is widely considered the most popular investment strategy when it comes to cryptocurrencies. That is because this asset class is still in its naissance, which means it has the potential to multiply in value over the course of the next five to ten years as has been the case with bitcoin.
Hence, most investors simply buy the coins that they believe in the most and hold onto them for several years. This strategy is commonly referred to as “HODLing” in the bitcoin community, named after a bitcoin user’s spelling mistake in a famous Bitcoin Talk forum post in 2013.
The polar opposite of the buy and hold strategy would be day trading. Day trading involves following market news closely and trading in and out of digital currency pairs on an intra-day basis. This strategy is more something for those who already have experience in trading stocks or forex and for those who have the time to closely follow the markets throughout the day. Hence, for anyone with a day job, this strategy is very difficult to execute and not recommended. Also, the more you trade, the more trading fees you incur, which eat into your investment returns over time.
Another popular way of trading is through the use of crypto trading bots. The success rates of these type of trading bots, however, have been very mixed, ranging from regular profits to fraudulent software that simply does not work at all. Hence, the use of trading bots is very risky and not really recommended. However, new trading bots hit the market on a regular basis and if you can find one that does the trick for you you can always try it out with a small amount of capital that you are not afraid to lose.
Alternatively, you can also invest in crypto funds. Currently, there are several digital currency investment platforms focused on retail investors such as TaaS, which enable investors to buy into a fund that tracks a basket of the most promising cryptocurrencies in the market. While these funds do incur an annual management fee, they are an excellent way to receive broad exposure to the cryptocurrency market without having to individuals buy and store each cryptocurrency you would like exposure to.
What To Look Out For
Now that you know how to get started and what investment style you can adopt, is important to be aware of certain key aspects of the cryptocurrency markets.
Cryptocurrencies are much more volatile than stocks, bonds, commodities and fiat currencies. Hence, it is important to keep your cool when it comes to your crypto asset holdings.
Your portfolio can easily drop by 20% in a day and by up again 30% on the next. It is important not to panic sell when all the numbers on the screen are red as digital assets are very volatile and these price fluctuations are normal. Bitcoin, for example, dropped by 30% percent in a day six times in 2017 and still recovered to reach new highs thereafter. However, it does not mean this will happen everytime.
“Blue Chips” vs “Small Caps”
There are over 1,000 cryptocurrencies you can invest in, which makes the choice of which coins to pick a lot harder. Having said that, there is a big difference in terms of returns potential and risk when it comes to established top 20 “blue chip” coins versus illiquid “small cap” coins.
The largest cryptocurrencies are those who have emerged as having the most potential. This is reflected in both their prices and their market capitalizations. These coins include litecoin (LTC), Dash (DASH), ether (ETH), monero (XMR), for example, and are considered less risky than newly issued ICO tokens or smaller coins that only trade on a few second-tier exchanges.
As a beginner, it is best to build a portfolio of “blue chip” coins as opposed to trying to pick “the next bitcoin” among smaller coins that have so far received little traction in the wider bitcoin community.
The bulk of your portfolio should be composed of bitcoin as well as leading cryptocurrencies with the highest market capitalizations. Only a small percentage should be dedicated to ICO tokens or small cap coins.
Believing the Hype
Unfortunately, the cryptocurrency market is plagued by pump and dump schemes and misinformation that can drive prices to brief highs before plunging again. Hence, it is important not to believe the hype you read online around smaller coins as you can easily find yourself on the losing end up a pump and dump scheme when you are new to this market.
Aside from pump and dump schemes, there are also several scams in the cryptocurrency space. Due to the semi-anonymous nature of most cryptocurrencies, scammers have infiltrated this area to prey on unknowing victims.
The most common ones in the cryptocurrency investment space are high yield investment schemes (HYIPs), which promise high daily or weekly returns but are nothing more than Ponzi schemes and fraudulent initial coin offerings, where the perpetrators raise funds for a fictitious blockchain project and then disappear with the money as it was the case with Confido.
Hence, before making any investment or making use of an investment platform, always conduct thorough due diligence and ensure that the people behind the project or company are legitimate business people with a stellar track record in this space.
One of the most important aspects of investing in cryptocurrencies is securely storing your holdings. Cybersecurity is an increasingly important issue for both companies and individuals around the world. That also includes cryptocurrency investors. In fact, losing money due to hacks or operational issues on exchanges is a much more common occurrence for crypto investors than people may think.
Hence, it is important to store your holdings in personal wallets for which you own the private keys and have created backups for. Ideally, you want to store your holdings offline in a hardware or paper wallet and keep those safe.
Cryptocurrencies are an exciting new asset class with an immense earnings potential. However, high returns also come with high risks. Hence, it is important to tread carefully when starting out as a beginner.