When I first started taking an interest in cryptocurrency I thought I was so lost in this huge sea of unknowns. Where do I start? What are the useful keywords to look up and keep in mind? What are the available helpful resources? This cryptocurrency investing guide is written so that in just minutes, you would have a sense of what to expect of your upcoming crypto journey, and how to best go about starting it. Enjoy it, it might just be the most exhilarating ride of your life.
What is a CryptoCurrency?
Let’s start at the beginning. You may have heard many things about what a cryptocurrency is, but you may still be searching for an understandable definition. The easiest way to think about cryptocurrencies:
A cryptocurrency is basically money on software platforms.
The goal of cryptocurrencies is usually to improve on some type of existing software system or network.
The Characteristics of a Currency to be Aware of
Although cryptocurrencies are all based on blockchain technology, they are not all created equal. Here are some differences that you need to understand to make informed trading decisions:
- Transaction processing speed
- Total supply currently available
- Will there ultimately be a limit on the total number of currency available?
- Will there be an unlimited supply of currency?
- Is there a real-world need for this software/currency?
- Real world adoption of the technology
- Any big investors in the project?
- Does the use of the software make sense?
- Do the founders have a reputable background?
These are just a few of the characteristics that you should look at. But once you start digging into these details, you will begin to see which projects could work for their intended purpose and which ones are probably scams.
This understanding will also allow you to assess the long-term viability of these different currencies and which ones will be more desirable in the future.
How to pick a trading platform
There are multiple exchanges available in India for you to kick-start your cryptocurrency trading. All of them have differentiating features, which you should check before registering. Some of the main differences you’ll find include:
Cryptocurrencies available: Bitcoin (BTC) will be largely available on all the platforms for sure. However, there are more than 200 other crypto currencies available in the world, and you need to see how many of these are available on a particular exchange. Not all the currencies are available on all the exchanges.
Trading features: Every exchange will have a video or a separate section on features and basic ‘to dos’ for new investors. This is to simplify your overall experience and also to teach you key sections of the exchange. Hedging, stop loss features and other options can give you more control over your trading. Experienced traders might be able to benefit from these, while first-timers might prefer to keep it simple.
Leverage available: Leverage lets you trade beyond your initial deposit and multiply your gains, suiting those who prefer higher risks and higher rewards. You can often find leverage up to 20:1 with cryptocurrency, depending on your chosen platform and currency pair.
Minimum investment: This is a tricky one. While you should decide your investment amount before trading, exchanges also have their limits of the minimum and maximum amount you can invest.
How cryptocurrency trading works
Unlike in the equities market where you need to have a broker or in the mutual funds market where you need to have a fund manager, the cryptocurrency exchange is all about you. You will yourself register your account (along with the required KYC) on an exchange, you will yourself deposit the money on to your wallet and you will yourself buy / sell crypto currencies. Yes you can get tips from industry leaders online, but it is always better to do your own research and then start trading.
Basic steps for trading:
Step 1: Sign up for and exchange to create a digital currency wallet where you can securely store digital currency.
Step 2: Update your KYC documents to connect your bank account, debit card, or credit card so that you can exchange digital currency into and out of your local currency.
Step 3: Buy crypto currencies from the balance available in your wallet.
Step 4: Sell crypto currencies at a profit which automatically reflects in your wallet.
Step 5: Transfer the money from your wallet back to your bank account.
The advantages of trading crypto currencies
• Open 24/7: Unlike stocks and commodities, the cryptocurrency exchanges are open for trade 24/7. Since all of them are a peer-to-peer exchange platform, you can place and execute a trade beyond the ‘normal business hours’ in which other asset markets work.
• Fast trades: You can place multiple buy/sell orders on an exchange. The moment the market price of the cryptocurrency hits your order; the trade gets executed. It’s that simple.
Cheap fees: For each trade, the exchange platform you’re using will take a small percentage as commission for the service they’re providing. This is inevitable. The advantage here is that the fees for transferring crypto currencies (typically via wallet payments) are cheaper than credit card and bank transfer fees; market-trading fees are cheaper than forex-trading fees.
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 Can Affect the Price of a Cryptocurrency?
There are many things that can affect the price of a cryptocurrency…sometimes very quickly. Some of them are as follows:
Be aware of current trends in government regulation and steer clear of currencies that could get red flagged by government agencies.
Check out coinmarketcap for the tabulation of various coins’ market cap and price. Check out cryptowat for the prices of popular coins across different exchanges. Check out the respective coins’ subreddits for available news and market sentiments.
That’s about all I have, for now, invest smart and most importantly, don’t invest more than what you can afford to loose!