What is cryptocurrency trading?
Cryptocurrencies are constantly in the news, but should you make them a spicy part of your portfolio? Here’s a closer look at crypto trading.
When the first cryptocurrency, Bitcoin (BTC) was first launched back in 2009, most people didn’t know quite what to make of it. Despite being shown pictures of large gold coins in newspapers, we learned a bitcoin was a decentralized, unregulated virtual currency that had to be held in wallets that are operated by secret key codes. Oh, and that it would cost 10,000 Bitcoins to buy two pizzas. Baffling.
However, things soon changed. Huge price fluctuations for Bitcoin ensued, both exciting and terrifying traders and governments alike, resulting in dire predictions from economists and some countries going so far as to issue outright bans on cryptocurrencies.
But it seems some people may be coming around to digital currencies.
Changing attitudes to cryptocurrencies
The Bank of England governor, Mark Carney, who had said that Bitcoin had “failed” as a currency back in 2018, challenged the dollar’s position as the world’s reserve currency in July 2019, arguing that it could be replaced by a global digital alternative.
China, too, while having issued a ban on cryptocurrencies in 2017, has had a change of heart. President Xi Jinping recently called for China to accelerate the development of blockchain, prompting the country’s regional governments to pledge development funds of $5.7bn (£4.4bn) for blockchain projects. China is also expected to be the first country to create a sovereign digital currency.
Indeed, President Xi’s endorsement of cryptocurrencies seemed to have an effect on crypto trading as October saw Bitcoin’s price rise 40 per cent; from $7,307 on 23 October, to $10,300 on 25 October. Bullish commentators declared it could eclipse Bitcoin’s highest figure of $12,920.
So how can we make the most of this digital currency phenomenon?
What is cryptocurrency trading?
Well, if you’re now wondering “what is cryptocurrency trading and how can I make money from it?” rest assured you can take the plunge relatively easily. But first, you’ll need to know which cryptocurrency you wish to concentrate on.
Bitcoin has since been joined by altcoins: Ethereum, Ripple, Litecoin, Zcash, Dash, Monero, Bitcoin Cash, NEO, Cardano, EOS… the list goes on and on and as there are now over a thousand available, that’s a lot to choose from.
Once chosen, you’ll need to trade your fiat money for the currency you’re interested in via a cryptocurrency exchange. Ensure you check the exchange operates in your country and that it can legally sell you the coin you’re interested in.
Once bought, remove your coins immediately to a cold wallet. Not only does this take your coins out of the exchange (which could be attacked), but a cold wallet, being offline, ensures hackers can’t steal them from you, either.
Selling your coins
Once you’re ready, you can sell your coins in a number of ways.
Firstly, the easiest method is to deposit your coins back at the cryptocurrency exchange and place a “sell order” to sell at the current market rate. If the market is fluctuating you can set the price you’re happy with and place a “limit” order; the sale will only occur then when it hits your specific price.
Once sold, it should be a straightforward process for your fiat money to be transferred back to your bank account. Alternatively, cryptocurrencies can be sold through brokers, or exchange platforms. Whichever method you choose, ensure you fully understand what fees you will be charged as they can vary widely.
No need to trade in whole coins
Depending on the cryptocurrency you’re interested in, you’ll find the price per coin varies dramatically. The price of a single Bitcoin, for example, is currently a whopping $9,180 (£7,160). If you don’t quite fancy risking that much, each coin will divide down to eight decimal places, making the smallest amount that can be handled in a transaction 0.00000001 BTC.
It’s worth pointing out that cryptocurrency trading isn’t recommended for novice investors as there are a number of pitfalls to be aware of. And with extreme volatility, it isn’t for the faint hearted.
Even experienced investors should think carefully before crypto trading, with experts recommending we dedicate no more than 5 per cent of our portfolios to such volatile stocks. But by trading what we can afford to lose and diversifying the rest of our investments we can minimise risk; we may even make some money.
Real world use
Interestingly, 10 years after Bitcoin was launched we can now observe crypto coins creeping into the real world, with increasing numbers of retailers, restaurants and even some accountancy firms accepting them as payment.
Even the UN children’s agency, UNICEF, has pledged to accept donations through Bitcoin and Ether. Indeed, cryptocurrencies’ appeal for aid organisations lies largely in the fact that they can be easily moved globally; however, they also make tracking donations easier and could potentially even allow donors to see how their money has been spent.
It certainly seems that regardless of whether we choose to start crypto trading, we will all be exposed to cryptocurrencies in some way or another in the future.
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