How to start cryptocurrency trading
With investors around the world watching cryptocurrencies with interest, we show you how to take the plunge and start trading
There can’t be many people that haven’t heard of Bitcoin. The original cryptocurrency that took the world by storm back in 2009 has recently celebrated its tenth birthday – something that many thought it would never see.
Each crypto coin is essentially a computer file that is stored in a digital wallet. Every time a transaction is carried out, it is recorded in a public ledger known as the blockchain. As this is protected by strong cryptography it’s incredibly secure and it’s impossible to spend coins twice, or clone them.
But while supporters argue that cryptocurrencies are safe and transparent, others, including ex UK Prime Minister Theresa May, have voiced concerns that digital currencies could be exploited by criminals to anonymously transfer funds.
Bitcoin transactions are processed by “mining” – computers must solve a complex mathematical problem and for each problem solved, a block of Bitcoin is processed. In the early days, anyone could offer their home computer to join the network, become a “miner” and be rewarded with a Bitcoin for their trouble.
However, in the same way precious metals such as gold can’t be mined from the ground infinitely, Bitcoins won’t be mined digitally forever.
In line with the Bitcoin Protocol, only 21m Bitcoins can ever be created by miners. As there are over 18 million Bitcoins already in existence, we know we have reached almost 86 per cent of the total number that can ever exist. It is this scarcity that many believe is the fundamental reason Bitcoin will maintain its monetary value in the future.
What is an altcoin?
Of course, Bitcoin has since been joined by a number of different coins known as Altcoins (alternative to Bitcoin). Some of these work in a similar way to Bitcoin, while others have been developed from scratch. If you’re wondering how to start cryptocurrency trading, investigating the different coins is a good place to start.
How to start cryptocurrency trading
If you’ve decided you wish to learn all about cryptocurrency trading, you’ll need a method of obtaining your chosen coins, which are typically bought and sold via exchanges.
Exchanges offer probably the cheapest way to trade your fiat money for crypto coins, although depending on where you live in the world you may find you are limited in which exchanges you can use. You may also find certain exchanges can’t legally sell you certain coins, so check where they are based.
Of course it is vital to find a reputable exchange that is properly regulated. While no exchange will be perfect, consistent chat on forums about bad experiences with certain companies should set off warning bells. Customer care in particular can vary widely, so it’s worth researching what help is offered should traders experience problems.
Due diligence in cryptocurrency
One concern we often hear in relation to trading cryptocurrencies is how traders can be completely anonymous, thus making them attractive to criminal elements for money laundering.
However, stricter regulations imposed by numerous governments means that many cryptocurrency exchanges must now complete a Know Your Customer (KYC) process, asking traders for proof of residence, photo ID and possibly even proof of income (depending on how much you wish to trade). While this can be time-consuming and irritating, it can serve to reassure us about a company’s credibility.
Another important aspect that can differ widely is the fee structure.
Fees on cryptocurrency exchanges
There are three fees that are typically charged by cryptocurrency exchanges:
1. Deposit fees
2. Transaction fees
3. Withdrawal fees
As always, costs will eat into your profit so be clear about what you will be charged before signing up. Fees are typically lower for those wishing to do bank transfers, and higher for those using credit cards or PayPal. Compare different exchanges side by side to ensure you are getting the best value service for your needs.
If the fees seem surprisingly low, it’s worth analysing the exchange rates offered; poorer rates can mean this is a way the exchange is clawing back money.
Buying limits with crypto trading
Some exchanges will impose buying limits on what can be purchased, which are largely influenced by your identity verification level and payment method. However, this is unlikely to be a problem unless you are planning to buy a large amount.
How safe is cryptocurrency trading?
In July 2019, Tokyo based cryptocurrency exchange Remixpoint had $32m (£25m) in various cryptocurrencies stolen in an apparent hack on a hot wallet. What’s more, this is hardly a unique case, with thousands of coins having been stolen by numerous cryptocurrency exchange hackers over the years.
How to store cryptocurrency
It’s important to understand coins stored at exchanges are owned by the exchange, not the individuals that bought them. Should the company get hacked or become insolvent, you could lose everything.
So, withdraw your coins as soon as your transaction is complete. Choose a hot or cold wallet in which to keep them, bearing in mind that hot wallets are always connected to the internet, whilst cold wallets are typically hardware that must be plugged into a computer to be accessed and thus far safer.
Start crypto trading
There are clearly many factors that will influence your opinion on cryptocurrencies and whether you believe they are worth investing in. With volatility to spare you certainly can’t accuse them of being dull.
But if you feel the time is right to start crypto trading, put in all the safety measures you would for any other trade. Only risk what you can afford to lose (some say no more than five per cent of your portfolio), make a trading plan and stick to your strategy.
FURTHER READING: 3 Best Cryptocurrencies to invest in right now
FURTHER READING: How to invest in cryptocurrency