Published on August 19th, 2020
Cryptocurrencies such as Ethereum, Bitcoin, and Litecoin have rapidly grown since its electronic launch in 2009.
Its popularity has soared in recent years with this technology, which otherwise would go unnoticed has become a global phenomenon. Cryptocurrencies are characterized by rapid growth trends and volatile trading patterns and, as a result, responsible for making and breaking fortunes.
Types Of Cryptocurrency
A generalized name altcoin also refers to cryptocurrencies, and there are more than 1,000 available in today’s market. Therefore, if you are an altcoin trader, your options are broad, including the most popular cryptocurrency, Bitcoin.
If you are new to trading cryptocurrency, it is best only to consider the most popular kinds of cryptocurrencies to avoid any confusion due to the broad array of options available.
By doing this, you get to remain active in the market, compared to if you opted for the fledging or less active cryptocurrencies with limited trading opportunities, thereby harder to sell due to a limited number of buyers.
The two most popular cryptocurrencies are Bitcoin, with 38% of the market share and Ethereum with 18%. However, things might change in the near future since Ethereum, despite only being launched in 2015, has quickly become very popular in the cryptocurrency markets. There are also other cryptocurrencies available at exchanges including;
- Ripple (XRP)
- Dash (DASH)
- Monero (XMR)
- Zcash (ZEC)
- Litecoin (LTC)
Cryptocurrencies are generated through computational alchemy using specialized computers in a process referred to as mining.
The coins get their value due to their relative rarity since the production of new coins needs a substantial amount of power. Furthermore, other cryptocurrencies are in finite supply limiting the number of coins that can ever be created.
What Is Cryptocurrency Trading?
Forex trading and the trading of cryptocurrencies have a lot in common with the markets in different fiat with the currencies across the globe traded against each other. For example, you use the U.S. dollar to buy an option or a position in Swiss francs, euros, or your preferred currency in the forex trading and sell it later. You will either realize a profit or loss from this trade.
Like forex trading, traders can also buy cryptocurrency using the U.S. dollar in cryptocurrency trading. Furthermore, the cryptocurrency trader can either trade daily or weekly as they observe the upwards-and-downwards volatility or opt for the buy-and-hold strategy.
You can also employ numerous strategies such as binary options and futures contracts that help you profit even when the value of a cryptocurrency is falling.
Nevertheless, betting on the fall in the value of a cryptocurrency is not recommended if you are less experienced in cryptocurrency trading. The reason for this is the volatile nature of Bitcoin and altcoin trading.
Whereas the price of Bitcoin is at the moment seemingly looking too expensive for most investors to afford, you can buy it or any other cryptocurrency as a decimal-based fraction of the entire coin. With the total number of Bitcoins limited to 21 million coins with 17 million already circulating in the market, its total number can theoretically be split by 100 times.
However, these small trades in current exchanges are not possible in practice, with many exchanges requiring you to state the precise amount in U.S. dollars you wish to buy. Subsequently, this exchange calculates the value of Bitcoins or your preferred altcoin that can be purchased with that amount.
Other Methods Of Getting Exposure To Cryptocurrency
Another way investors are looking to own cryptocurrencies is by investing in funds that buy altcoins or Bitcoins. Unlike direct trading, these funds have a substantial premium and offer exposure to cryptocurrencies in more conventional investment accounts such as personal accounts and IRAs.
It also helps simplify the ownership of cryptocurrencies. One of the most popular cryptocurrency funds is Grayscale Bitcoin Investment, which trades as GBTC.
This company has realized tremendous success, thereby making it launch four other cryptocurrency funds, and these are; Litecoin Investment Trust, Bitcoin Cash Investment Trust, XRP Investment Trust, and Ethereum Investment Trust.
However, these funds yield lower returns compared to direct cryptocurrency trading due to the higher expenses of these funds. Despite this, these funds offer several other benefits and can be bought through most conventional investment accounts.
Cryptocurrency Exchanges And Brokers
If you wish to trade cryptocurrency directly, the best options to take are either using a Forex broker or an exchange. Through the exchange, you can buy and sell altcoins or bitcoins directly.
In contrast, if you opt for a Forex broker, you will be purchasing a Contract for Difference (CFD). Nevertheless, you do not get ownership of a digital asset; that is the cryptocurrency with CFD. For this reason, most cryptocurrency traders opt for exchanges, and it occasionally uses more than one exchange.
Selecting A Cryptocurrency Brokerage
The mechanics of cryptocurrency trading determined by the exchange or marketplace. It also happens the same as stock market broker trades where buyers and sellers post their orders at a certain quantity and price.
This also follows the mechanics of buying or selling from a market maker at a fixed price that is typically close to the market value.
For the full-feature exchanges such as GDAX, traders are offered an experience that is almost similar to what might be found if you opt for a forex broker.
This includes the posted bid and ask prices showing the quantity and price that traders are open to trade. You are not charged for canceling a limit order should you have a change of heart or if the price fails to hit the target when using a full-featured exchange. In contrast, market orders cannot be reversed.
How Do You Make A Profit On A Trade?
The cryptocurrency market investing is identical to the stock market investing with gains or losses being on paper or its digital equivalent, and this remains so until the sale or exchange happens
Discussing long-term trends when talking about cryptocurrency seems like an oxymoron, especially after factoring in the second most popular cryptocurrency is barely three years old.
Nonetheless, the general direction of the leading cryptocurrencies from their launch has been upwards, with this movement skyrocketing in some instances. Usually, most cryptocurrency traders bet huge portions of their positions on long-term profits rather than trading.
Cryptocurrencies are characterized by erratic up and down movements even for the leading ones on the market.
Therefore, fortunes can either be made or lost within a short duration, and this makes cryptocurrencies one of the most volatile investments if you observe the short-term price movement.
Many of the technical indicators used in stock day trading are the ones used in cryptocurrency trading, albeit frequency amplified.
According to Warren Buffer, cryptocurrencies, unlike stocks, do not possess an intrinsic value other than their relative rarity caused by the difficulty in mining and available in finite amounts. For example, Bitcoins is limited to 21 million coins.
Nevertheless, this also does apply to many other assets we attach value. This is because if individuals thing something is worth money, that is the case even if it is only for a short duration. One risk is government interference, as it is difficult to imagine the government will not try to squash a currency that cannot be regulated with ease or which it cannot regulate.
The SEC’s view on this matter is already known after labeling cryptocurrencies as securities and stating that trading platforms are possibly acting illegally and need to be regulated by the SEC. Whereas cryptocurrencies are the moment not yet illegal, there are instances when authorities have seized them in connection to other criminal allegations.
Cryptocurrency Failure Rate
The failure rate of cryptocurrencies is very high, despite what is shown in the headlines. This is proved with close to half of the Initial Coin Offerings (ICO) in 2017 failing and the currencies either failing after the fundraising or never getting off the ground. There is also a huge group that vanished without a glance, thereby raising the failure rate by close to 60%.
Diversification of the cryptocurrency portfolio is an excellent way of managing risks, just like with other types of investments. This is crucial because cryptocurrencies are highly volatile, and only picking one currency might be a big risk.
If you are new to cryptocurrency trading, it is best to start slowly and gradually build your position like dollar-cost averaging when investing in stocks. Moreover, most traders only use a fraction of their holdings or funds to make the trades.
Therefore, you should set aside some of your money from the risk of loss despite this limiting on the potential gains. By doing this, you will be able to carry on trading and wiser due to more experience gained. It is vital to know that CFDs are complicated instruments, and the risk of losing money quickly because of leverage is huge.
The accounts of retail investors losing money from trading CFDs is between 74% to 89%. It is thus important to first know how CFDs work and be better placed to decide whether you can handle losing money or the high risk involved.
There is no doubt that cryptocurrencies are among the market’s most thrilling new asset classes seen in a while. However, the burden lies with the investor or trader to remain safe in cryptocurrency trading.
Furthermore, a particular cryptocurrency can fall or gain in value overnight, and this offers you a chance to readily wait for the next big move if it ever does happen. All in all, cryptocurrencies will be here to stay in the near future and transformed several individuals into millionaires.