Cryptocurrencies have only become mainstream in the last decade or so, so many of us don’t have the same understanding that we have with traditional currencies. When you want to trade with these digital currencies, it helps to know what you are doing. You can lose money if you don’t, so read on for our little beginner’s guide to digital currency trading.
We cover what cryptocurrencies are, how they work, how their value is decided, how you buy and sell them, and then finish with the risks involved in trading. Digital currencies are traded by brokers and exchanges, click here to see one in action.
Explain digital currencies
First, let’s make sure we all understand what digital currencies are and how they work. They are better known as cryptocurrencies and they are digital representations of value, which can then be stored or traded electronically. They are cryptographically secure, which simply means that data is protected from third parties, which adds much-needed security to currencies as they are traded.
They are also not centralized and instead rely on peer-to-peer interactions. Transactions are transparent on the blockchain, a secure and immutable data storage system open to the public, while the individual details of each merchant are anonymized for the protection of all.
Digital currency value
Since these are digital assets, there is usually no actual asset that they are based on. This means that value is determined by pure supply and demand, worth only what the trading public agrees they are worth across transactions. For this reason, they are unpredictable and difficult to assess correctly. The cryptocurrency market is more volatile than others, which presents more risk but also the possibility of sky-high gains if you hold the right assets.
While cryptocurrencies can be valuable, they are not legal tender in many countries. This means that you may have to pay taxes on transactions involving them. Some of the most popular, like Bitcoin, are accepted by some private companies in exchange for goods and services.
Bitcoin is the largest digital currency in existence, worth five digits per coin (in USD value). There are thousands more, ranging from a few fractions of a cent to four digits. The top five digital currencies account for around 80% of the market. This means that most cryptocurrencies are worth small amounts of money. However, there is still money to be made, as some buy these cryptocurrencies and hope that they will grow by one decimal place over time, thus multiplying their investment.
Digital currency trading
While many modern technologies are used to create and transfer cryptocurrencies, trading them has become easy for the average person. Many stock trading apps have started offering crypto trading, like eToro, so that seasoned retail traders can join the cryptocurrency action. Most of the other platforms are dedicated to cryptocurrencies, like Binance, Coinbase, and Coinswitch.
You buy cryptocurrency by creating an account on the platform of your choice, putting money into it, and then using that money to buy the cryptocurrency. You may need to use digital currencies to buy others, some of the more obscure ones. You can store the currency in your account or you can get a digital wallet to store them long term.
Selling is as easy as putting the cryptocurrency back into your exchange account and then clicking sell, hopefully when the value has gone up and you’ve made a profit! Transactions are facilitated by your broker or stock exchange.
The risks of digital currency
Trading digital currencies carries additional risk. Many compare the current cryptocurrency market to the Wild West due to its lack of regulation, and it is more difficult to regulate due to the nature of blockchain and the international exchanges that take place there.
They’re not only risky due to volatility, which can be a good thing if you’re on the safe side, but they’re also prone to scams. Since they are traded anonymously, it is possible to do something called a stack draw. This is where the team behind a cryptocurrency disappears, turns off the ability to sell the currency, or acts dishonestly until no one wants to buy the assets you hold.
When choosing a cryptocurrency, you first need to educate yourself about what it is and what it wants to do. Many have underlying technologies and goals in mind, which are detailed in their white papers. Read them and make sure there is an active user community behind the asset with a communicative development team. You should then take a look at its price movements to determine if it will get better or worse.