Beginner’s Guide To Trading Cryptocurrency
Everything You Need to Know to Start Trading Cryptocurrency
You’re a complete beginner and you’re asking the glorious Internet; ‘ What the heck is cryptocurrencyhow the heck do I trade cryptocurrency?
Well, you’ve come to the right place.
Trading Education are experts on cryptocurrency and trading and know exactly how to explain cryptocurrency trading in a way any novice can understand it.
In this article, we’re going to get down into the nitty-gritty of what cryptocurrency is, how it is
Sit tight and get ready to learn!
Beginner’s Guide To Trading Cryptocurrency
Cryptocurrency Defined
The first thing any beginner’s guide to trading cryptocurrency should explain is what cryptocurrency means.
The word cryptocurrency is a marriage of two words - ‘ cryptocryptographycurrency
The cryptography part is because cryptocurrency is encrypted
Different banks, governments and institutions have all named cryptocurrency in different ways, such as digital currency, cyber currency and virtual money.
These names largely are based on how cryptocurrency works on online and doesn’t physically exist
Other terms people use to refer to cryptocurrency include ‘crypto’, ‘token’, and ‘coin’.
You can find a list of other cryptocurrency-related termshere
How Did Cryptocurrency Start?
The first cryptocurrency that ever came into existence was Bitcoin in 2009, around the time of the last major recession.
Bitcoin was created by a mysterious figure (or figures) who called themselves Satoshi Nakamoto .
To this day, no one knows who they were, vanishing at some point in December 2010, Nakamoto never spoke about themselves.
It is assumed that Nakamoto had some background in the cypherpunk movement, an online community that believed in using cryptography to incite political change.
Many people have come forward claiming to be Satoshi Nakamoto
Since the advent of Bitcoin over 2,000 different cryptocurrencies have been created
These other cryptocurrencies that are not Bitcoin, are called ‘altcoins’
One of the first altcoins was Litecoin which came to life in 2011.
Many of the first altcoins were created by performing what is called a ‘ hard fork
The creation of Bitcoin Cash from the Bitcoin blockchain is one of the most well-known hard forks.
Some have commented that such a dramatic event can compromise the security of a blockchain , though it is usually done in an attempt to improve scalability and speed.
There is also a phenomenon called a soft fork
Why Where Cryptocurrencies Invented?
A key thing to learn about cryptocurrency is the philosophy behind it.
Cryptocurrencies were largely created to become an alternative not just to currency, but also to the banking system we have in place.
They aim to get rid of the middlemen
A lot of beginners don’t realise how complicated it is for banks to facilitate these transactions.
Let’s say you wanted to pay a friend you owe money to with a bank transfer. To make it more complicated, your friend has an account with a different bank than you.
Your money doesn’t go directly to your friend.
First, it is taken from your account to your bank. It then goes in their bank account that belongs to the bank of your friend and then, finally, it is sent to your friend’s account.
International transfers can make things even more complicated and may involve even more banks.
This is why bank transfers can take a long time.
Cryptocurrencies aim to remove this problem by being direct and cutting out all the middlemen. By using cryptocurrency, a transaction can go straight from you to your friend.
Cryptocurrencies, in most cases, do not have a central authority like a central bank
Many cryptocurrencies are created by developers through a non-profit foundation or company. They can issue or in some cases destroy cryptocurrency.
The reason cryptocurrency may be destroyed is to regulate the price. This is often referred to as a ‘token burning’.
How Do Cryptocurrencies Work?
Almost all cryptocurrencies use what is called ‘ blockchain ’.
Blockchain was another concept created by Nakamoto, and in some senses is exceeding cryptocurrency in mass adoption. All beginners should know the basics of blockchain.
It can be used by a wide range of industries from logistics to finance and law to hospital records. And that’s just the tip of the iceberg.
Blockchain is quite simple to understand. In short, information is put into a block and encrypted.
This information within the block then needs to be decrypted by someone and only then will the block will join it to a chain of other blocks.
In the case of cryptocurrency, this ‘information’ would be transactions.
Most cryptocurrencies that use blockchain technology also have a publicly distributed ledger
But not all cryptocurrencies work in the same way. One of the biggest differences is between proof of work (PoW)proof of stake (PoS)
What Is Proof of Work And Proof of Stake?
Proof of work and proof of stake are the primary two algorithms used to validate transactions on a blockchain.
We’ll summarise them briefly in this article, but you can learn more about themhere
Proof of Work
Proof of work was the first algorithm used for cryptocurrency and works on the Bitcoin blockchain. Proof of work is often cited as the most secure algorithm.
The most significant component of proof of work is that blocks need to be ‘mined’.
Mining
Miningis the process of validating blocks by completing complicated mathematical equations
Simply put, the first computer (node), that can complete it gets a reward
On top of that, miners receive a fee from validating transactions
Transactors can raise their fee to increase the likeliness of miners validating their transaction.
Mining does have problems though. The primary being the amount of energy it uses to validate blocks.
Some believe that Bitcoin mining uses the same amount of power as the nation of Columbia
Not only does this making mining very expensive, but it is also very harmful to the environment.
Another issue with mining is that although it was designed to be decentralised, it has become very centralised with mining pools controlling most of the power and influence on the blockchain.
Some claim that Bitcoin is very centralised and is largely controlled by four mining pools which are mostly based in China.
Some cryptocurrencies have a maximum supply of coins
As Bitcoin gets closer to reaching that point, mining difficulty increases, which means it becomes harder and harder to mine blocks and the reward decreases in size.
When this point is reached, there will be no block reward for validating blocks. Miners will only collect fees for validating transactions.
Some critics believe that this may result in the end of Bitcoin and other cryptocurrencies that have the same limitations as miners will move to cryptocurrencies with greater rewards.
Proof of Stake
Proof of stake came along after proof of work and is the second most used cryptocurrency algorithm.
The primary thing that differentiates proof of stake from proof of work is that it doesn’t use mining
Instead, proof of stake is based on the stake that a validator has
Proof of stake is often considered to be more effective than proof of work.
Other Algorithms
Proof of work and proof of stake are not the only algorithms used in cryptocurrency.
Over time, developers have become all too aware of the limitations of the two and devised new ways to overcome their flaws.
An interesting variation of proof of stake is delegated proof of stake (DPoS)
Many of these new algorithms are still being developed and are in the early stages
Different Types of Cryptocurrencies
Not all cryptocurrencies are trying to do the same thing
But some cryptocurrencies are trying to do much more complicated things on top of that.
Ethereum was the first cryptocurrency to bring more to the game. One of the most innovative things they included was smart contracts
Smart contracts are essentially contracts written in code on the blockchain
Since then, many other cryptocurrencies are also competing in this space, which has the potential to change many industries.
Along with smart contracts, Ethereum also brought along decentralised applications (dApps)
Utility Tokens
These are cryptocurrencies that offer something in return for their use.
A great example of a utility token is Binance Coin , a cryptocurrency that gives users a discount when they make a transaction on the Binance exchange.
Utility tokens are perhaps the best use case example of using cryptocurrency in today’s world
Typically, such cryptocurrencies do not offer advanced features such as smart contracts or dApps.
Stablecoins
A stablecoin is a cryptocurrency that is designed to be as stable as possible in an attempt to mitigate the volatility usually associated with cryptocurrency.
Volatility is often cited as one of the main reasons why people shouldn’t get involved with cryptocurrency
They look at the huge peaks and falls of Bitcoin and don’t see it as something safe to invest in.
At the time of writing, one of the most well-known stablecoins isTether
Tether is not the only cryptocurrency tied to the USD though, several others are too.
Privacy Coins
A privacy coin is a cryptocurrency that is designed to be as anonymous as possible
There is some scepticism towards privacy coins as many people believe that people would only use such coins to perform illicit transactions.
This isn’t completely true though. Many prefer the idea of privacy coins because they don’t want all their transactions to be made public on a distributed ledger
Such information can be used by those with bad intentions.
Further to that, privacy coin users may also argue that such coins are closer to using physical cash, which isn’t necessarily traceable.
Three of the most well-known privacy coins include Dash , Zcash and Monero .
Of the three, Monero is perhaps the safest and most anonymous and does not have a public ledger
Privacy coins, unfortunately, have a bit of an image problem they need to solve before becoming accepted by governments and the general public.
Most Popular Cryptocurrencies
According to CoinMarketCap , the most highly valued cryptocurrencies to trade are the following:
- Bitcoin
- Ethereum
- Ripple
- Bitcoin Cash
- Tether
- Litecoin
- EOS
- Binance Coin
- Bitcoin SV
- Stellar
Every beginner should know these top ten, though they do change a lot.
You can check out the top 100 cryptocurrencies on CoinMarketCapherewhere we have explained them all in one quick sentence
Where Do People Buy Cryptocurrency?
In most cases, you will get your hands on cryptocurrency by buying it from a cryptocurrency exchange.
You can alsotrade cryptocurrency as a CFD
For many, CFD trading is preferred because they never own the underlying asset and cuts out having to store cryptocurrency
Though, by using a CFD broker, you will not be able to use the cryptocurrency for any kind of transactions. You will only be able to buy and sell.
Cryptocurrency faucets are places where people can get cryptocurrency for free. These were very popular at the beginning, especially for Bitcoin.
They were created to try to get people to use cryptocurrency.
Storing your Cryptocurrency
Once you have your hands on cryptocurrency, you need to find a safe place to store itprivate keys
The safest way to store your private keys is with a virtual walletdo not leave your cryptocurrency in a cryptocurrency exchange
Doing so leaves you at risk of getting hacked and your cryptocurrency stolen
One of the most famous hacks took place was that of Mt. Gox
At Mt. Gox, over a couple of years, hackers were slowly and carefully able to steal approximately 850,000 Bitcoins, worth almost $8 billion today
Mt. Gox still has not been able to pay back all that was lost. Many people left their cryptocurrency in the exchange not realising how unsafe it was.
Many different types of virtual wallets have been created.
The primary type of wallet used is an online wallet or mobile wallet (hot wallet)store cryptocurrency offline (cold storage)
These include hardware walletspaper wallets
An ideal way to keep your cryptocurrency safe is to store a small useable amount in a hot wallet for everyday use and the rest in cold storage
You can find out more about cryptocurrency walletsherewhere we have written about them extensively
ICOs
An ICO is something you will come across a lot in the world of cryptocurrency. It stands for ‘ Initial Coin Offering
This is where some coins of a new cryptocurrency are offered at a pre-sale.
Usually, ICOs are undertaken as a form of fundraising
Another form of ICOs are IEOs. An IEO stands for ‘ Initial Exchange Offering
ICOs have faced a lot of legal pressure of the last few years and today many ICOs are only held in private to large scale investors.
InChina, ICOs are completely banned
Many cryptocurrency traders like to get involved in ICOs because they know that typically after one the price of a cryptocurrency will shoot up in price.
They don’t necessarily have to believe in what the cryptocurrency is trying to achieve.
Making a Transaction With Cryptocurrency
To make a transaction to someone else with cryptocurrency, typically you need to send to their public address
Whatever you do, do not share your private address
A key thing to remember about making transactions with cryptocurrency is that in most cases, transactions are irreversible
Once they are made, they cannot be undone
Bitcoin and many other cryptocurrencies are broken down into Satoshis
This can allow for microtransactions
How Legal Are Cryptocurrencies?
The legality of cryptocurrencies varies hugely around the world and beginners should be aware of their legal status in the country they are based in.
In some parts of the world, it is completely illegal. Such is the case in much of Northern Africa and parts of South America
However, in most countries, cryptocurrency regulation is yet to catch up with how much it has progressed over the decade.
Many central banks advise that trading cryptocurrency is risky
Their concern is also usually tied to mitigating money laundering and combatting financing terrorism
Europe and North America are the most cryptocurrency-friendly continents on the planet
In some parts of Switzerland, government agencies allow people to pay for services and fees in cryptocurrency, which is a big step forward.
However, in general, cryptocurrencies are still not an accepted form of payment in many places
In Asia, the picture is more mixed with cryptocurrency operating in a grey area that is neither accepted nor rejected.
Beginnerscan check out our article here that covers how every country in the world regulates cryptocurrency
Taxes
Taxes are a big issue many cryptocurrency beginners need to get right. Depending on what country you are based in, they can be drastically different
They usually depend on how cryptocurrencies are defined. In some countries, they are taxes as commodities or other financial instruments
ICOs can also be classified in a variety of different ways which can then affect how they are taxed.
Cryptocurrency And Illegal Activity
Unfortunately, there are plenty of people that use cryptocurrency for illegal purposes.
It is estimated that as many as 25% of Bitcoin users are in some way related to criminal activity, and up to 44% of transactions are associated with illegal activity.
It is often believed that one of the biggest cases that brought Bitcoin to the public’s attention was that ofSilk Road
Silk Road was a hidden website on the dark web where people could use Bitcoin largely to buy illegal drugs.
Eventually, Silk Road was brought down and the supposed leader arrested, however, it had the effect of forever linking Bitcoin will illegal activity.
Cryptocurrency has also been used for murder for hire services and even child pornography.
Though it is worth mentioning that fiat money is used more for such purposesless traceable than most cryptocurrencies
Beginners should not be frightened off by the illegal side of cryptocurrency as it is probably much smaller than people think.
Are Cryptocurrencies A Safe Investment?
There has never been a hack on a cryptocurrency
What has happened in most cases is that people’s cryptocurrency was stolen in an attack on a cryptocurrency exchange, as we have explained above.
The riskiest part of investing in cryptocurrencies is that they are very volatile
As we will repeat in this article, without any volatility, there will not be opportunities to buy at low prices and sell at higher prices.
However, beginners shouldn’t just believe that buying low and selling high are all you need to know about trading.
What makes a trader is knowing how to buy into a trend. It is not enough to buy at a low price. What beginners want to do is buy at a low price knowing for sure that the price will rise.
Cryptocurrency Scams
Unfortunately, there are still plenty of scams beginners need to be aware of. As mentioned above, cryptocurrency is not properly regulated in many parts of the world.
Even in some of the most technologically developed nations, cryptocurrency regulation is still lagging behind the pace at which it is advancing.
This means that there are still plenty of scams out therescamcoins
These scamcoins usually operate a pump and dump scheme.
A pump and dump scheme
They ‘ pump
When investors buy up what’s left, the price rises and the creators of the cryptocurrency sell their large share for a huge profit and usually disappear.
This part of the scam is called the ‘ dump
What happens next is the people who invested in the pump and dump scheme are left with a useless coin that has plummeted in value.
One of the biggest scams that ever took place wasOneCoin
They made promises of creating a cryptocurrency, but they never did. Eventually, one of the founders was arrested in the USA.
51% attacks
Perhaps the most dangerous thing cryptocurrency beginners need to be aware of is 51% attacks
A 51% attack is where an entity controls 51% of the processing power on a blockchain
One of the most well-known would be a double-spend
51% attackers are also able to potentially censor other individuals on the blockchain as well by preventing their transactions from being validated.
A 51% attack is very severe and could lead to a loss of trust in a cryptocurrency and eventually its demise
How Much Money Can I Make Trading Cryptocurrency?
If you do it well, a lot.
There are plenty of traders and investors who have made their fortunes by jumping on the cryptocurrency bandwagon.
While cryptocurrency gets a lot of hype these days, it is mostly because it is so volatile. In reality, the cryptocurrency market is smaller than the forex and stocks markets.
That said, the cryptocurrency market has an advantage over forex and stocks market in that they are always open
Further to that, volatility is what traders want
In some senses trading cryptocurrency is quite similar to trading forex in that you are trading something that can be used as a currency.
Many forex trading strategies can also be applied to cryptocurrency as well. However, cryptocurrencies also sharesome similarities with stocks tradingtoo
Mostly in the sense that they are like products that develop over time which is similar to how companies change and make promises.
Will Cryptocurrencies Succeed?
This is still very debatable.
While some believe with absolute certainty that cryptocurrencies will succeed, they have faced waves upon waves of opposition.
Some believe that cryptocurrencies are growing, others claim they are merely an investor’s toy and it doesn’t have much use case in the modern world.
Others who trade cryptocurrencies may not believe that they will succeed, but are simply trading them now because there is a lot of money to made in the meantime.
Bitcoin investors, theWinklevoss twins, believe that Bitcoin is undervalued until it reaches the same valuation as gold which is $7 trillion
Those that oppose this argument believe that Bitcoin and perhaps the wider cryptocurrency world is in aspeculative bubble
Bitcoin has gone through a fair few dramatic peaks and falls in price, however, 10 years later, it is still around.
However, the argument that there may be a wider cryptocurrency bubble may have some grounds. Today, there are over 2,000 different cryptocurrencies.
Many are trying to compete in the same area: smart contracts; dApps; price stability; privacy; on-chain governance; etc.
Some have even compared the cryptocurrency boom to Tulip ManiaRailway Mania
Trading Cryptocurrency
While this all may sound exciting, we haven’t yet spoken about the actual trading process.
Those with knowledge of trading will have a unique advantage over those that don’t. However experienced you are, you need to create a strategy.
And before you can pick a strategy, you need to identify which trading style suits you more swing trading or day trading.
- Swing trading
- Day trading
As you are abeginner, it may be better for you to start with swing trading
Day trading with a full-time job would be very difficult as it requires a lot of attention
However, day traders can compound their earnings much faster
But then again, many traders claim that the ‘real money’ in trading is made swing trading. It is a good idea to try out both methods of trading to see which one suits you more.
You can check out this articlehereon the differences between swing trading and day trading for forex traders
Analysing the cryptocurrency market
Beginners then need to decide what kind of analysis you will rely on - technical analysisfundamental analysis
Technical analysis is the process of using indicators and charts that inform you when to buy and sell.
Fundamental analysis utilises news and other events to predict market movements.
Indicators
There are many different types of indicators that signify and measure a variety of things.
Whatever you do, do not use too many indicators
By using at least two, traders can find ‘ confluence
If two indicators are telling you to buy or sell, you will feel more confident
‘ Naked trading
Trading cryptocurrency as a CFD
Make sure your broker is regulated
Though, be careful when researching as some people may have lost money and blamed their broker when in actuality it was because of their poor knowledge of trading.
Another benefit of trading with a traditional CFD broker is that you will likely have the option to trade other market instruments on top of cryptocurrencies
This is useful because it allows you to diversify your portfolio and mitigate risk.
There will be times when the entire cryptocurrency market is down and you will have a difficult time trading.
Trading with a cryptocurrency exchange can be a little riskier as there isn’t much in the way of regulation yet
Disregard incentives to trade with a CFD broker. If they need to incentivise you to trade with them, they probably are not that good.
A good broker should impress you with their quality of service, not free money.
Trading Platforms
MT4 is the most popular trading platform for all instruments, though some brokers may offer their trading platform.
The most important thing to look for in a trading platform is a reliable service
That said, a trading platform should also have useful tools for analysis, and as a bonus offer automated trading.
Account Types
These can vary in several ways usually in the size of the orders you can make and the kind of market access they offer.
Managed accounts
Copy trading and mirror trading
Beginners can copy the trades of others, sometimes automatically, however, this, of course, comes with risk.
Don’t follow a trader because they have made one big gain, follow a consistently successful trader
Demo Accounts
Demo accounts not advised because they give traders unrealistic expectations.
Trades are fulfilled to quickly with little or no slippage. In real life, you will likely not be able to fulfil orders as perfectly as you enter them
Further to that, they will likely give you more money to play around with than you have. Some brokers even offer demo accounts of $1 million.
This is not useful because when you have so much fake money to play around with, there is no risk if you lose any of it.
When beginners start trading cryptocurrency they need this risk as it helps them think more about the trades they are making.
Robots
Beginners should be very careful with trading robots (bots).
People use them to trade when they can’t trade all the time and they automatically make trades for them.
The problem with bots is that letting them run unmonitored can be extremely risky
They can make massive losses because they are unable to get information from the outside
For example, if Donald Trump has just tweeted something about Bitcoin regulation and traders start selling, the bot won't be able to pick up on this.
Further to that, trading bots are usually designed just to work in certain environments, which is why developers can claim such high results.
As abeginner, it is highly advised that you stay away from trading bots
Leave them to the professionals who understand how they work and how to fine-tune them to mitigate loss.
Devising A Cryptocurrency Trading Strategy
Coming up with a strategy can take a lot of time. Beginners need to try many different ones to see what works for them.
To do this effectively, you have a trading journal
A key thing your cryptocurrency trading strategy needs to take into consideration is that there are different types of market.
- Uptrend (bullish)
- Downtrend (bearish)
- Ranging (sideways)
Beginners need to learn how to trade with the trend
Typically the market moves in cycles
It should be mentioned though, that these cycles can last weeks, months or even years
Your trading cryptocurrency trading strategy should do two things: look for confluencebe consistent
Consistency is important because you will not make your fortune on one trade alone, in reality, you will make it on a series of trades
Beginners need to learn to be strict on themselves and stick to your trading plan. However, it will take a long time to develop a trading plan which will need to be refined over time.
Key Points
If you remember anything from this article, make it these key points.
- Cryptocurrency is decentralised virtual money that works without the need of central banks
- There are many different types of cryptocurrency
- Cryptocurrency still operates in a legally grey area
- Those interested in cryptocurrency trading should have a good knowledge of trading
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