How to start trading cryptocurrency in 7 simple steps
If you are reading this, you have probably heard of cryptocurrencies or more specific, the top trending cryptocurrency called Bitcoin. Another concept that has probably led you to this article is trading, whether it is stocks, the foreign exchange market or cryptocurrencies. However, this trading ultimate guide mainly focuses on cryptocurrencies and how to get started trading them.
Instead of going into all the details and lengthy discussions of the blockchain, bubbles, regulations, temporary hype etc, the fact remains that people are making money trading cryptocurrencies and you could be amongst them. It can be extremely difficult to find an accurate step by step guide on how to start trading cryptocurrencies but let’s just say you came to the right place.
Here is a 7 step guide for you to follow so that you can enter into the cryptocurrency markets and start earning today.
- Understanding cryptocurrency
- Learn to trade the cryptocurrency market
- Choose a cryptocurrency exchange
- Choose a cryptocurrency wallet
- Find a cryptocurrency to trade
- Manage your risk
- Start trading
1. Understanding cryptocurrency
Before investing or trading your hard-earned money, it is a good idea to get an understanding of the market.
Cryptocurrencies are tradeable digital assets or digital form of money. This virtual money is decentralised, meaning they are not backed or controlled by a government or a central bank of any country.
One of the most famous cryptocurrencies is Bitcoin, which was invented to create an alternative currency for anyone who wanted to opt-out of the traditional banking system during the 2008 Financial Crisis. Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world – which is why they have become so popular in recent years. Bitcoin transfers can be done with minimal processing fees – avoiding the high fees charged by traditional financial institutions.
How does cryptocurrency trading work?
Just like trading the Foreign Exchange (Forex) market, cryptocurrency trading is the buying and selling of currencies to generate a profit. In its simplest form, you’re betting on the changing price difference between two different currencies. These funds are then used to place buy and sell orders against another currency. You make profits from selling, or closing orders at a higher price than you bought.
Trading cryptocurrencies works exactly the same as the forex market trading, but instead of selling and buying fiat currencies, such as euros or US dollars, traders buy and sell cryptocurrencies, such as Bitcoin, Ethereum or Litecoin. You will usually exchange a fiat currency into a cryptocurrency and then, at a later date, back into a fiat currency, although there are traders and exchanges that allow cryptocurrency-to-cryptocurrency trading.
For example, you might speculate on the change of price between the Bitcoin and the US dollar.
If you think Bitcoin will increase in value you might enter a “Long” position. This means you buy Bitcoin as you believe that it will increase in value relative to the US dollar.
If you think Bitcoin will decrease in value you might enter a “Short” position instead. This means that you sell Bitcoin as you believe that it will decrease in value relative to the US dollar.
2. Learn how to trade the cryptocurrency market
You may or may not have some experience in trading the Stock or Forex (FX) markets, but the Cryptocurrency market is a whole different ‘game’. It is advised to study the cryptocurrency charts first before starting to trade them. Do not to assume that your skills attained by trading other markets will be sufficient and that your trading strategies will work the same in the crypto market. Traders often assume that skills and trading strategy’s developed in alternative financial markets can be applied to others, you need to take time and research each market respectively.
If you are a new trader in general, it is advised that you either start with a demo trading account and train yourself, or sign up to our FREE online trading academy which is designed to help you prepare for success in the financial markets. Not only will we teach you the technical and fundamental side of trading we will also teach you the mentally needed to trade like a pro. Simply sign up for a free account and learn how to trade today.
It is important to find a strategy for each trade you will make and apply these strategies in the cryptocurrency market. We have spent years developing ours, it may seem daunting at first but once you pick up the basics, picking up the rest of the knowledge can become a walk in the part.
What affects the price of a cryptocurrency?
Why is cryptocurrency so volatile? They are not as stable as currencies that have had centuries to develop. Bitcoin is the oldest coin on the market, and it has only been around since 2009. Nevertheless, there are a number of things that can affect cryptocurrencies:
No intrinsic value:
Most cryptocurrencies don’t sell a product, earn revenue or employ thousands of people. They generally don’t return dividends, and just a tiny amount of the total value of the currency goes into evolving it. Because of this, it is extremely difficult to value. How do we know if it is fundamentally overbought or oversold? When is it a good value or overpriced? Without any fundamentals to base this information off of, we can only rely on market sentiment, often dictated by the media that makes money on viewership.
The lack of regulation in the cryptocurrency space can play a factor in the volatility of the price. This low level of regulation allows for market manipulation. Often done by placing orders with the intent to cancel, whereas in a regulated market such as the foreign exchange placing fake orders is illegal. Creating these false orders can lead to a misrepresentation of market behaviour which can cause volatility with the false orders encouraging uncertainty.
Supply and demand:
Another reason the price of crypto is so volatile comes down to simple Economics. When the demand for an asset increases quicker than the supply, the price is likely to rise. We saw this come into play with Bitcoin during the Christmas period of 2017. The demand for Bitcoin was widespread due to the profit being made by traders throughout the year and the supply could not keep up with the massive uptake, which led to the price reaching an all-time high of around $20,000.
Lack of institutional capital:
While it is undeniable that some pretty impressive venture capital companies, hedge funds and high net-worth individuals are both fans of and investors in crypto, as a segment, most of the institutional capital is still on the sidelines. At the moment there has been little to no movement on a Bitcoin ETF or Mutual Fund, which is predicted to introduce much needed institutional volume into the cryptocurrency markets.
Just like government regulation, exposure in the media greatly affects a cryptocurrency’s price. Whenever a public figure makes a statement regarding cryptocurrencies or a major retailer starts accepting cryptocurrency as a form of payment, you will see the market respond.
Changes to technology:
When a cryptocurrency’s core technology is affected (either via an update or the finding of a flaw), the cryptocurrency’s price is also affected.
The cryptocurrency market is only roughly 10 years old and still an emerging market. The total size of the cryptocurrency market is currently $250B. Although this is a huge amount, it is a small figure when compared to the foreign exchange market which totals around $5T per day. This is why the foreign exchange market is able to keep stability even when there are massive movements in the market. The same cannot be said about the cryptocurrency market. This allows a few big traders who hold a lot of currencies (referred to as whales) have the ability to shift the market by making huge transactions.
3. Choose a cryptocurrency exchange
Selecting a cryptocurrency exchange to purchase your first cryptocurrencies can be a daunting and overwhelming process. After all, there are over 200 cryptocurrency exchanges in today’s market, with 24-hour trade volume in the billions. So, how do you make your choice?
Here are a few attributes to look at while choosing your exchange of choice:
- Geographical location and their constraints;
- Transaction fees;
- Security, anonymity, and customer support;
- Ease of use and user interface;
- Volume and liquidity of the exchange.
Note that the above list does not cover all needed attributes to consider while choosing an exchange but are a good solid basis to start off with. We will now take a closer look at each attribute named above:
Geographical location and constraints:
Two key things to consider while looking at the Constraints of Geographical locations of a crypto exchange is; Firstly, is the exchange limited to a specific geographical location or is it open to most countries, including yours. Secondly, is the exchange legal in your country. It would not help you if you were to register on an exchange which you cannot access or trade legally.
Depositing cryptocurrencies onto an exchange located in a highly politicized or anti-crypto country probably isn’t the smartest idea and could potentially cause more headache and strife in the future than its worth.
Another factor to consider is the fee’s charged by the exchange. If you plan on placing multiple trades on the exchange, this is an important factor to look out for.
Tip – The less fees you pay the exchange you more that stay in your pocket!
Security, anonymity, and customer support:
It is important to investigate the exchange’s history to find out whether the exchange has been subject to any past malicious attacks or phishing scams and also whether they engage with their community on a regular basis. While this may seem like common sense, avoid signing up for exchanges which have a known history of financial and security breaches, and who have disabled withdrawals for long periods of time.
It is advisable to look for exchanges with Two Factor Authentication (2FA) and Know-Your-Customer-Verification (KYC)
Volume and liquidity of the exchange:
An exchange with a large volume of trading is usually a good indicator of a crypto exchange’s liquidity and overall ability to fill a user’s order at any point in time. Based on the type of trading you’re looking to do, liquidity is an extremely important factor.
A highly liquid exchange with good volume will also reduce the spread and allow you to enter trades at better prices.
Ease of use and user interface:
If an exchange has a good User Interface, it is a good indication that they care about their user base and ease of buying and selling.
An easy to use trading platform will also make your life easier and make it less likely to cause you to make any mistakes. Remember that making a mistake whilst trading can result in you losing money!
A few exchanges to choose from are:
4. Choose a cryptocurrency wallet
After choosing your exchange, you need to create a crypto wallet to store and control your funds with. A cryptocurrency wallet is a place where you store encrypted passwords that represent your coins, it is the equivalent to storing money in a bank account.
There are several types of cryptocurrency wallets that provide different ways to store and access your digital currencies. To understand more about cryptocurrency wallets and how to decide which wallet is best for you, please read our guide on cryptocurrency wallets.
For beginners, we would recommend an online wallet for the ease of use and accessibility that they offer. An online wallet can be set up in a matter of minutes and function somewhat similar to online or mobile banking.
A few cryptocurrency wallets to choose from are:
It’s important to note that most exchanges have built-in wallets but it is best practice to store digital funds off exchanges as exchanges have fallen victim to hacks in the past. However, insurance companies are beginning to offer cryptocurrency insurance against theft.
5. Find a cryptocurrency to trade
After setting up your wallet, finding your exchange, and getting familiar with trading and the cryptocurrency markets you can now log onto your exchange and start trading. Before putting your money into any cryptocurrency, it is a good idea to first study the asset. Read our guide on how to evaluate different cryptocurrencies.
One of the best tools for this research is our cryptocurrency market cap page where you can find information on every coin and token available around the world. The data found there includes market capitalization, news, supply and trade volume. Listing them in chronological order of top cryptocurrency and can be used to know exactly what each coin represents and compare different cryptocurrencies with each other.
Tracking the latest cryptocurrency news daily is essential if you want to be successful in trading cryptocurrencies. Trading the news is very important when it comes to cryptocurrency trading, it’s important to use verified sources such as CoinDesk and CoinTelegraph. Learn how to start trading cryptocurrency news in our in-depth article.
Be aware of false market hype and cryptocurrency scams, such as false ICOs. It is advised to study the token or coin thoroughly to make sure that you are buying a legitimate asset which will not disappear overnight. If you are still hesitant in which coin to buy you can always start on the top cryptocurrencies listed by market cap as they are the most popular at the moment with most people trusting them.
6. Manage your risk
Much like the diversification of other investment types, risk management is possible by diversifying a cryptocurrency portfolio. Going “all in,” so to speak, on one specific currency can be an incredibly risky move. Because of cryptocurrency’s volatility, beginner traders may want to start at a slow pace and gradually build a position. This is similar to dollar-cost averaging within stock investing. Plenty of traders also solely trade with only a fraction of their available funds or holdings.
Admittedly, keeping a portion of your money out of harm’s way could limit potential gain. However, it also limits losses. This means that you can continue to trade, as well as gain some wisdom from the experience.
Here are some tips to help you manage your risk like a cryptocurrency pro:
Only invest what you can lose:
If you are investing money you can’t afford to lose, you need to take a step back and re-evaluate your current financial situation, because what you’re about to do is an act of desperation. This includes: using credit cards, taking out mortgages, applying for loans, or selling everything and traveling the world (as glamorous as that sounds).
Always pay attention to Bitcoin:
Most altcoins (every cryptocurrency except Bitcoin) are pegged closely to Bitcoin. If Bitcoin price pump drastically, altcoins price can go down as people try to exit altcoins to ride the BTC profits; inversely, if Bitcoin prices dump drastically, altcoin prices can go down, too, as people exit altcoins to exchange back into fiat.
Never put all your eggs in one basket. Diversify:
While the potential to earn more is increased with the amount of money you invest into a coin, the potential to lose more is also magnified.
Don’t be greedy:
No one ever lost money taking a profit. As a coin begins to grow, the greed inside us grows along with it. If a coin increases by 30%, why not consider taking profit? Get into the habit of taking profits and scouting for re-entry if you want to continue reaping potential profits.
Don’t invest blindly:
There are people in this world who would sell a blind person a pair of glasses if they could make money. Those same people play in the cryptocurrency markets and use every opportunity to exploit less-informed investors. They’ll tell you what to buy or claim certain coins will moon, just to increase the prices so they can exit. Also remember to do your own research!
Always learn from your mistakes:
Never accept a total loss. Always evaluate the situation and try to figure out why it happened. Take that experience as an asset for your next move, which will be better because you are know more now than you knew before. We all start off as amateurs, and we have all lost money throughout out trading experience.
7. Start trading
After you have completed all the above steps, you are ready to start trading. Here are a few tips to remember before setting off into the cryptocurrency trading universe:
You don’t have to buy a whole coin. cryptocurrencies allow traders to buy fractions of coins. This is a feature not a lot of new traders know, thus demotivating them not to start trading due to the high price of coins such as Bitcoin (BTC). You simply do not need to buy 1 whole Bitcoin (BTC) and can simply buy a fraction of a Bitcoin (BTC). This is the same across most of the tokens created in the cryptocurrency market.
Most of the top coins are expensive, so consider buying fractions of these coins to start if you don’t want to start trading with enormous amounts of money. Rather consider and predict which cryptocurrency is most likely to increase in and retain value and focus less on its current price.
If you would like to own for example 10 Litecoin (LTC), you can periodically buy additional fractions and grow your portfolio whilst still keeping your balance. This is also a good strategy to optimize the average price, known as dollar-cost averaging.
Keep in mind that the cryptocurrency market is volatile at this stage of its life! There is always the chance that the market will move rapidly in any single moment. Thus, include this into your trading strategies and adapt as the market changes.
Don’t trade with money that you cannot afford to lose! If you have been in the trading scene for a while you will hear this phrase a lot. This term must not be misinterpreted. This phrase does not mean that you must be willing to lose this money, it only means that if the worst-case scenario plays out, you will not feel the impact of losing this money and still be able to live your life as before losing this money.
If you have the mentality that you can lose this money, you have already made your first mistake. The aim is not to be comfortable with losing money, but if this happens, you still have a basis to work from and not have to start from scratch again.
Cryptocurrency trading is still in its infant stage, if you can stick out the learning curve, you will be glad you started. Always stay calm and do not attach emotions to trading, have a strategy and follow it. Stay open-minded and do not let your emotions stop you from making trades.
The hardest part of cryptocurrency trading is that all-important first step to getting started. At starttrading.com we make this step that little bit easier, you don’t have to start trading alone. Take your trading to the right level, simply sign up to our FREE online trading course so that we can give you the help you need today!