The cryptocurrency market never sleeps. Because of the 24/7 nature of crypto, traders can dedicate endless hours and sleepless nights to their accounts. Some even quit their regular jobs to become full-time crypto traders.
Through a combination of unprecedented volatility and new developments in blockchain technology, the value of crypto can soar to staggering heights and crown new millionaires overnight. It also can fall to new depths, causing some investors to lose billions.
While the success stories are hard to ignore, crypto newcomers must first learn the basics of trading before entering the digital arena. Financial literacy is crucial to safely navigate the markets, maximize the value of crypto investments, and protect one’s overall financial future.
In this blog post, we’re going to cover the five first steps to trading in crypto. We’ll then conclude with a brief overview of the unique challenges crypto investors must continually strive to overcome.
The 5 Steps to Trading Cryptocurrency
The complexity of crypto trades varies greatly. They can range from simple, one-off transactions to using a variety of trading pairs to implement arbitrage strategies.
With traditional investing, individuals select trades depending on their unique risk tolerances, or “the degree of variability in investment returns that an investor is willing to withstand.”
With crypto, there is no barrier to entry. A new investor simply needs to open a crypto brokerage account, link their bank to it, and start trading.
While such freedom is empowering, it must be accompanied by ample preparation. Though it takes considerable time to understand, implement, and master different crypto trading strategies, it only takes a few moments to lose one’s savings.
Here are the five steps to trading cryptocurrency:
1. Open a Crypto Brokerage Account
A traditional brokerage account holds an investor’s financial assets (i.e., their “securities”).
By having such an account, investors are able to buy and sell various investments.
In legacy trading markets, the top brokerage firms include household names like Charles Schwab, Fidelity, and Merrill Lynch.
Cryptocurrencies also have a range of top brokers, though they are more commonly regarded as exchanges. Contrary to the heavily regulated legacy markets, however, some crypto exchanges are totally decentralized (i.e., no single entity oversees it).
The most popular exchanges include eToro, Gemini, and Coinbase, all of which feature streamlined, easy-to-use interfaces and a variety of altcoins from which to select. But be sure to compare and contrast the specific fees, terms, and conditions of each exchange.
To view a list of the top crypto exchanges ranked by volume, click here.
2. Fund Your Account
After you’ve signed up on your chosen exchange or trading platform, you’ll next need to link your bank account.
This free, easy step typically comes with one stipulation: the minimum and maximum initial deposit.
For example, eToro and Coinbase both have minimum deposits of $50, while eToro has a maximum deposit of $10,000 per day. Coinbase sets its maximum daily deposit limit at $25,000.
These are important distinctions dependent upon how much you intend to trade.
3. Pick Your Crypto
Now it’s time to pick your crypto.
While Bitcoin and Ethereum may be the most headline-ready cryptos, there are thousands of altcoins from which to choose.
Consider these three elements as you compare your top cryptocurrency contenders:
- The Community: Hype is one thing. Genuine interest is another. As you research various altcoins, pursue the ones that have loyal communities and enthusiastic tokenholders. This process can be as easy as reading news articles about particular cryptos, watching dedicated YouTube channels, and even perusing various crypto subreddits.
The Developers: While public interest may be a key indicator of legitimacy, your due diligence process should also include an assessment of the crypto’s team. If you can verify who they are, what their track record is (including what projects and upgrades they have on the pipeline they might’ve introduced in the past), and what they hope to achieve with their cryptocurrency, you can have more confidence in your investment.
Note that more than 2,000 cryptos have died out, being exposed as either a joke, a test, or a type of fraud.
- Technical Specs: Beyond the social and communal aspects, be sure to research the protocol stacks of each cryptocurrency network. In other words, ensure that their security enforcement, monetary policy, and overall approach to technology innovation are worth your immediate (and potentially long-term) investment.
Many financial advisors encourage investors to keep crypto holdings to under 5% of their portfolios. More conservative advisors suggest limiting such holdings to just 1%.
4. Select Your Crypto Strategy
Despite the volatility inherent in the crypto market, it’s important to develop short- and long-term investing plans. With ongoing research and adaptation, these strategies can lead to solid market performance.
Many strategies that work in the stock market can also be successful with crypto.
For example, while The Elliott Wave Theory has been applied to conventional assets for nearly a century, it has recently gained immense popularity with crypto enthusiasts.
Other strategies, like Dollar Cross Averaging (DCA) and RSI divergence, are popular methods for beginning crypto traders.
5. Pick Your Wallet
When you’re actively trading cryptocurrency, you’ll need to store your funds on the exchange.
On the other hand, if you’re choosing to apply a buy-and-hold strategy over a longer period of time, you should consider getting a cryptocurrency wallet.
Crypto wallets come in two forms: hot wallets (i.e., digitally stored, often on a mobile device) and cold wallets (i.e., offline, hardware-based wallets, often in the form of a USB drive).
While there are a range of benefits to each type, hot wallets are generally regarded for their accessibility and convenience, whereas cold wallets are notable for their high level of security.
The 3 Crypto Trading Challenges to Consider
All trading incurs risk. While such challenges are natural in any market, they are especially present in cryptocurrency, which can see unprecedented levels of volatility.
Depending on one’s perspective, goals, and risk tolerance, such volatility can be seen as both a blessing and a curse. Double-digit intraday price swings aren’t uncommon, and massive shifts can happen in seconds.
Though volatility is unavoidable, there are three primary challenges new crypto investors should watch out for:
Never bet more than you can afford to lose. Such overexposure in crypto can lead to devastating losses, as are often reported in the news.
In fact, recent studies revealed that in the UK, 14% of crypto buyers had borrowed money to continue pursuing gains.
While the thrill of trading crypto is clear — and FOMO (Fear of Missing Out) is a real phenomenon with digital currency — such emotional responses are usually deleterious in trading.
To learn how to control your emotions in the market, check out these five trading psychology tips.
While it can be tempting to “hold on for dear life” (HODL), it is vitally important to know when to close a position.
Unfortunately, crypto positions shift very quickly, and it can be difficult to stay on top of the latest movements. Such swings frequently happen in the middle of the night, causing more and more money managers to pull all-nighters for the sake of their clients.
To protect your financial health, consider establishing “stop-losses” on your exchange.
A stop-loss order is a highly effective risk management safeguard that automatically closes crypto positions when prices reach a predetermined level.
While there are proponents and detractors of stop-loss orders, they are certainly worth researching to add that knowledge to your investing arsenal.
A tool best reserved for experienced investors, leverage trading can often be a trap for beginners.
Leverage trading refers to investors who essentially borrow money to get a much higher potential ROI (return on investment). While the rewards of leverage trading can be stratospheric, they can also cause people to lose more money than they have available to invest.
For example, your cryptocurrency can be leveraged as collateral for crypto loans with enticing features like low interest rates, same-day funding, and no credit checks. The downside is you could lose your collateral through forced liquidations. As a result, you wouldn’t even have the option to hold anymore: it is gone permanently.
In July 2021, Binance and FTX both announced the lowering of their leverage trading limits. For Binance, their new limit is 20 times leverage, down from 100 times.
The Value of Education
Risk management is crucially important with crypto trading, especially for beginners. Patience, financial literacy, and careful portfolio management are equally enduring values in a market easily influenced by hype, FOMO, and celebrity speculation.
Trading cryptocurrency takes time to understand, so start slow and only invest a small percentage of your portfolio.
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