The concept of money has changed with the evolution of digital technology resulting in the development of a new form of currency known as cryptocurrency.
This article explores the fundamentals of cryptocurrencies, their security features, the technology linked to them, and the methods and strategies used to buy, sell, and trade them in the exchanges.
Trading cryptocurrency is easy for the uninitiated or the expert with user-friendly interfaces provided by the various crypto exchanges.
However, the nature of the cryptocurrency with its high volatility should be kept in mind before making an investment decision or starting trading.
This article offers valuable insights into the dynamic and fascinating world of cryptocurrencies.
What is cryptocurrency
Cryptocurrency is a digital currency secured by cryptography making it nearly impossible to counterfeit or double-spend.
The reason for the security and integrity of crypto is due to the decentralization of most cryptocurrencies using blockchain technology.
A blockchain is a distributed ledger enforced by a network of computers which renders cryptocurrencies mostly immune to government interference and other kinds of manipulation.
It is also not issued by any central authority like a government or a bank but operates through the consensus mechanism of cryptographic validation.
Cryptocurrencies ensure secure online payments without the need for third-party intermediaries thanks to encrypted algorithms and techniques to safeguard transactions.
The central technology used in cryptocurrency is blockchain technology, which allows for high integrity of transaction histories.
There are thousands of cryptocurrencies and Bitcoin was the first cryptocurrency that acts as a store of value and medium of exchange. Another popular crypto, Ethereum introduced smart contracts and decentralised applications.
The advantages of cryptocurrency are that it is cheaper and faster to transfer money thanks to the decentralized systems it has high resilience against a single point of failure.
The disadvantages are the price volatility and high energy consumption for mining and the unscrupulous actors and scammers in the cryptocurrency ecosystem.
Trading in Cryptocurrencies
Cryptocurrency is an extremely volatile asset. It is one of the charms for traders in cryptocurrency because of the adrenaline rush associated with it. In cryptocurrency trading, timing the market is of the greatest essence.
If the ability to time the market is mastered, one can earn higher returns than traditional investments. It should be noted that as a highly volatile asset, there is a higher risk of loss compared to other traditional asset streams.
The main aim of the crypto traders is to accumulate Bitcoin or Ethereum or make a profit in USD in a shorter time.
In a crypto bull market, the value of the investor portfolio can increase exponentially and the reverse may happen in a bear run.
The first step in trading crypto is to choose the right cryptocurrency exchange. There are many crypto exchanges and the features of the exchanges vary from one another.
Some only offer spot market traders while others offer trade in futures and derivatives. Binance and Coinbase are reputable exchanges where one can buy, sell, and hold cryptocurrencies.
The first step involved in trading cryptocurrency is to open an account in an exchange. After opening an account the exchange account should be funded using traditional currencies and it should be ensured that secure storage such as hardware wallets is available.
Crypto Trading Strategies
There are many trading strategies used in crypto trading, which are similar to the strategies used in stock markets, commodities exchanges, and forex trading.
One of the most followed strategies is to purchase a cryptocurrency and hold onto it with the expectation that its value will increase over time.
In most cases, the price of the investments may go well below the purchase value and at this time, the investor should not panic and sell the assets but wait for an upswing in the prices.
Another method, also known as day trading, is making multiplay trades throughout the day to benefit from short-term market movements.
Technical analysis where charts and other tools are used to analyze historical market trends and future trends helps in making an informed trading decision and reduces the risk associated with trading.
As the risks associated with crypto trading are high, a resilient risk management system and strategy are extremely important.
It is always advisable, to begin with smaller investments till the investor learns about the dynamics of the crypto market and to mitigate the risks.
Another way to minimize risks is to avoid putting all eggs in one basket, that is to diversify the investments across various cryptocurrencies, so that, even in the case of a price crash, the impact can be cushioned.
The investor should also keep abreast of the market news and trends to make an informed decision.
There are many regulations associated with crypto trading and investors should be aware of the legal framework and tax implications for cryptocurrency in one’s jurisdiction.
Along with this, it should be noted that using a secure internet connection to protect data and funds is very important.
To familiarize trading in cryptocurrencies there are many resources like demo accounts where one can practice training without risking real money.
Together with this various, educational resources are available like Binance Academy which can inform investors about cryptocurrency training and the latest news updates.
Conclusion
All investors should take cognizance of the fact that the cryptocurrency market is one of the most volatile trading markets where the price of the asset can vary exponentially in a matter of minutes or hours.
So an investor should be mentally prepared to suffer huge notional losses before embarking on trading crypto.
It is always good to keep oneself up to date about the trends and news from the crypto market and also to familiarize the regulatory framework and taxation structure.
However it is a thumbing experience to be a crypto trader and if luck has its way, one could spot a multi-bagger.
