A Beginner’s Guide to Cryptocurrency Trading: Bitcoin, Ether, Litecoin etc.
A Beginner’s Guide to Cryptocurrency Trading: Bitcoin, Ether, Litecoin etc.
A lot of objections have been raised about cryptocurrencies and how they won’t be around for long. However, these same statements were said about a number of new technologies—the internet included, and everyone can see how that worked out. Therefore, before we go on, I implore you to keep an open mind. If you do, who knows, you may learn some new things about an emerging market that holds a lot of promise.
Another common objection as far as cryptocurrency trading is concerned is: “the prices are unpredictable and very volatile.” While this is true, it is important to note that the cryptocurrency trading market is relatively young and as a result, it is yet to gain a strong foothold. In spite of these flaws, though, cryptocurrencies provide a unique trading opportunity for those who know how to maneuver the markets. Of course, risks exist in the market, but what type of profitable trading is risk-free?
In this post, the goal is to show you what makes cryptocurrencies attractive to trade and how to operate favorably in the market.
What are Cryptocurrencies?
Cryptocurrencies (also referred to as crypto or coins) are digital currencies that serve as a medium of exchange, using blockchain technology to send and receive secure transactions, verify the transfer of assets, and create additional crypto tokens. With cryptocurrencies, you can send money to anyone in the world within minutes, without the bureaucratic hassle of traditional banks, and at a low cost. To make things better, the receiving party only needs an internet-enabled device and a cryptocurrency wallet.
As mentioned above, this is made possible by the blockchain, an open, distributed ledger that records, tracks and updates its records as transactions are made. The records are tamper-proof, cannot be changed, and exist in perpetuity.
According to Wikipedia, banking started in 2000 BC when merchants and farmers came together to create the barter system. This system has since evolved and the current system has been in place since the 14th century. In all those years, banks picked up a number of traits that are not consumer-friendly, opening the sector up to disruption. Here is where cryptocurrencies come in.
Below are several advantages that cryptocurrencies have over the traditional banking system:
- With cryptocurrencies, there is no need for intermediaries (e.g. bankers, brokers, or financial institutions) before transactions are resolved. This makes transactions faster, cheaper and less vulnerable to human error.
- Blockchain technology is decentralized, meaning government organizations cannot meddle & manipulate the way traditional banks do. Transactions are free from scrutiny and user accounts cannot be frozen.
- Cryptocurrencies are global. Unlike with fiat currency, it is not necessary that a physical office exists in an area before transactions can be made. Furthermore, payments can be sent out and received at any time of the day and on any day of the week.
Cryptocurrencies definitely have some shortcomings but bear in mind that they have only been in existence for ~10 years. The traditional banking system, on the other hand, has been around for centuries, yet, it is fraught with failings.
How to Buy/Store Cryptocurrencies
Cryptocurrencies are stored in virtual wallets and the wallets come with user-unique addresses that are used to facilitate payments between users. Since cryptocurrency transactions are almost untraceable and irreversible, it is important to keep wallet details secure from the public eye. If hackers access a user’s wallet, they can send out coins and given the nature of cryptocurrencies, there would be no way to identify the perpetrator or retrieve the money.
There are many secure software wallets out there e.g. Mycelium, Blockchain.info, Electrum, and CoPay to mention a few. Traders that hold a considerable amount of cryptocurrency may, however, opt for a hardware wallet. These devices are a bit pricey but they offer a higher level of security compared to the software wallets. Examples include the Ledger Nano, Ledger Blue, Trezor, KeepKey, etc.
Cryptocurrencies can be bought and sold at online exchanges. Users may pay with their credit cards or through their bank accounts. Buying the more popular cryptocurrencies—Bitcoin, Ether, Litecoin—should be easy enough. To buy some of the less popular altcoins; however, users may need to first purchase BTC or ETH and then exchange them for the altcoin they want. Since exchanges provide users with in-platform wallets, new traders often make the mistake of leaving their coins on exchanges. This is not very smart and there have been many instances of people losing their coins. Once you exchange fiat for crypto, send the coins from the exchange wallet to your personal wallet.
There are also other exchanges, like CredoEx, that offer users the opportunity to trade new but highly-promising cryptocurrencies.
There are 2 ways to trade in cryptocurrencies. Option one is long-term trading: you buy the coins when the price is low, secure it in your wallet for a few weeks (or months), then sell it at a higher price. A lot of cryptocurrency traders prefer this method because it doesn’t require too much effort and the gains are often substantial. During the crypto boom of 2017, traders that bought Bitcoin on, for example, January 2, 2017 (at ~$1,025) and sold it on December 17, 2017 (at ~19,000) made a ~1,087% gain (Figures extracted from CoinMarketCap). That is an 18X return on trading. Profit margins like these are highly unlikely in the traditional markets.
The second option is to trade cryptocurrency pairs actively and in the short-term e.g. BTC/ETH, ETH/LTC, BTC/XRP, etc. or trade cryptos against fiat currencies e.g. BTC/USD, BTC/EUR, ETH/USD. More effort is needed for this and it requires a technical understanding of how the market works. However, it promises even bigger profit margins than the former. While passive traders saw an 18X ROI in 2017, thousands of active traders made millions from the cryptocurrency markets.
Of course, you may decide to take advantage of both opportunities; earning passively and at the same time trading actively.
To trade actively, you need a strategy, and to devise a strategy, you need some technical know-how. Here are some technical tools to help you along:
Relative Strength Index (RSI):
The RSI determines whether a cryptocurrency is oversold or overbought by running a comparison between current price and past performance. The index ranges from 0—100 and a score above 70 indicates that a coin is overbought and prices may trend downward imminently. A score of 30, however, indicates that it is oversold and price may trend upwards soon.
To improve the accuracy of its predictions, it is important to combine the RSI with other trading tools.
The Moving Average (Convergence/Divergence) Indicator (MACD)
The Moving Average Indicator consists of 2 exponential moving lines and they predict price action by comparing short-term and long-term price movements. This indicator works in tandem with the chart of the cryptocurrency and when the moving average lies crossover (above) the currency’s signal line, it indicates an imminent upward price movement. If the moving averages cross under the signal line, a downward trend may be on the horizon.
Bollinger bands are just moving averages combined with standard deviations and they show market volatility. During periods of high volatility, the bands widen and move away from the average. When price is less volatile, the reverse happens.
When price moves to the upper region of the Bollinger band, this is an indication that the coin is overbought and may soon trend downward. When price hovers near the lower region of the band, it indicates that the coin is oversold and may soon trend upwards.
The best strategies are those that combine 2 or 3 indicators simultaneously. Conversely, it is important to keep your strategy as simple as possible.
Other Cryptocurrency Trading Secrets
- Cryptocurrencies trend upward when they get listed on popular exchanges.
- Price appreciates when new updates are rolled out.
- Platforms like Ethereum that deploy other cryptocurrency projects & tokens often see an increase in price if the deployed project is performing well in the market.
- News and rumors affect the cryptocurrency markets significantly. Tweets from popular celebrities generate hype and hype moves market. Keep your ears peeled for activities that may affect price positively or negatively.
- The biggest threat to cryptocurrency prices is news of government crackdown. However, more governments are warming to the idea of cryptocurrencies and harmful regulations have reduced significantly.
- When trading short-term, remember to act quickly and without fear. In a market as fast as crypto’s, hesitation is punished swiftly.
Whether you choose to trade on a short-term basis or you prefer to make your profits over long periods, one thing is important, stay informed of developments in the market. Do your own research and if the cryptocurrency project doesn’t add up or feel right, avoid it; do not get influenced by FOMO (the fear of missing out). Many have made fortunes by trading this market, however, quite a number of people have also lost huge sums of money to it. The difference between both parties is, among many others, their understanding of the markets. Therefore, before you trade, make sure you have a firm grasp of how the market works. Good luck!