If you're curious about trading cryptocurrencies like Bitcoin, Ethereum, or Dogecoin, it's essential to gather as much information as possible before choosing an exchange or trading platform. This guide explains what drives the price of digital assets and how to begin trading cryptocurrency. We'll also provide insights on where to buy and trade digital coins.
Understanding Cryptocurrency and Blockchain
What Is Cryptocurrency?
Cryptocurrencies are digital currencies created using digital cryptography to process transactions and generate new coins. They are popular because they are decentralized, meaning banks and governments do not control access to the currency. In contrast, fiat currencies are more easily influenced by governments and financial institutions.
Thousands of Bitcoin alternatives, known as altcoins, exist. Cryptocurrencies like Ethereum and Ripple have improved upon Bitcoin's original model or created variations to support niche uses.
Fiat currency is money declared legal tender by a government, while altcoin refers to non-Bitcoin cryptocurrencies.
What Is Blockchain?
Blockchain technology is what makes cryptocurrencies unique and valuable. Using Bitcoin as an example, blockchain stores all transactions in a ledger attached to each coin.
From a digital perspective, blockchain is a chain of programmatic blocks. Each block lists transaction details like dates, times, amounts, and traders involved. The chain functions as a publicly accessible, encrypted database.
Blockchain structures the Bitcoin ledger, encoding it with cryptography to protect against hackers and allowing it to be copied to any computer. This cryptography also makes it difficult to forge coins.
Pricing the Cryptocurrency Market
Cryptocurrencies are high-risk trading instruments because they are newer than fiat currencies, making their value difficult to predict. They may be suitable for traders seeking high-risk, potentially high-reward opportunities.
Crypto Market Size
The University of Cambridge's 2019 benchmarking study on cryptocurrency revealed:
- Over 139 million crypto wallets exist, but only 38% (about 52.8 million) are active.
- 52% of crypto companies operate across two or more industry sectors.
- 84% of service providers support more than one type of coin.
- The number of employees in the crypto asset industry grew by 164% from 2017 to 2018.
What Drives the Price of Cryptocurrencies?
Cryptocurrency prices are influenced by factors different from those affecting fiat currencies:
- Simultaneous Volatility: The market experiences steep rises and sudden falls, with multiple coins often moving in tandem.
- Media Attention: News coverage can lead to an influx of new traders, causing price increases followed by profit-taking and sell-offs.
- Impending Regulation: Potential regulation can make traders bearish.
- Coin Idiosyncrasies: Individual currencies are affected by specific factors, such as support from the financial sector or security issues.
Where Can I Trade Crypto?
Before trading cryptocurrency, verify its legality in your area.
Crypto Regulatory Bodies
Various regulatory bodies worldwide oversee cryptocurrency trading:
- Australia: Australian Securities and Investments Commission (ASIC)
- Canada: Canadian Securities Administrator (CSA)
- European Union: Cyprus Securities and Exchange Commission (CySEC), Markets in Financial Instruments Directive (MiFID), European Securities and Markets Authority (ESMA)
- Germany: Federal Financial Supervisory Authority (BaFiN)
- Japan: Financial Services Agency (FSA)
- New Zealand: Financial Markets Authority (FMA)
- Switzerland: Financial Markets Supervisory Authority (FINMA)
- United Kingdom: Financial Conduct Authority (FCA)
- United States: Financial Crimes Enforcement Network (FinCEN), Securities and Exchange Commission (SEC)
Crypto Trading by Country
Many countries allow cryptocurrency purchasing or trading, including:
- United States
- United Kingdom
- Canada
- Australia
- Germany
- Japan
Some countries, like China and Saudi Arabia, ban cryptocurrency trading. In the U.S., legality varies by state, with some states allowing it and others restricting it.
How to Start Trading Cryptocurrencies
Follow these steps to minimize losses and start trading responsibly:
- Do Your Research: Understand how the cryptocurrency market works, including key terminologies and supply-demand cycles.
- Choose a Platform: Select a platform based on features, fees, account types, and supported funding methods.
- Practice with Demo Money: Use demo accounts to practice trading without risk.
- Verify Your Account: Provide identification and proof-of-address documents.
- Secure Your Account: Enable two-factor authentication for added security.
- Make a Deposit: Deposit only what you can afford to lose and be aware of fees.
- Know Your Rights: Understand tax obligations and legal requirements in your country.
👉 Explore more strategies for secure trading
Cryptocurrency Exchanges
Cryptocurrency exchanges allow you to:
- Use fiat money to buy tokens
- Store cryptocurrency in a digital wallet
- Trade tokens for different cryptocurrencies
Fees Associated With Exchanges
Exchanges generate revenue through fees:
- Trade Fees: Charged for placing or taking trades, up to 1% of the transaction.
- Deposit and Withdrawal Fees: Cheaper to deposit than withdraw; credit card deposits may incur 3-4% fees.
- Exchange Fees: Applied when converting tokens between currencies.
Identity Verification
Most exchanges require ID verification to prevent illegal activity. Options for anonymity are limited due to regulatory changes.
Currency Pairs Offered
Exchanges vary in the currency pairs they support. Some focus on Bitcoin, while others offer hundreds of altcoins.
Security
Research exchanges for factors like age, history, scam prevention, and user reviews to ensure safety.
Cryptocurrency Trading Platforms
Another way to speculate on crypto is through regulated brokers offering products like forex, options, and CFDs. These brokers provide a way to trade without owning cryptocurrencies directly.
CFDs are complex instruments with a high risk of loss due to leverage. Between 74%-89% of retail investor accounts lose money trading CFDs. They are not available in the U.S. or to UK retail traders.
Choosing a Crypto Trading Broker
Select a regulated broker for security and compliance with laws protecting traders. Consider commissions, spreads, and overnight holding fees.
Try the Demo Account
Demo accounts allow you to test a broker's interface and tools without risk. Some brokers offer unlimited demo accounts or easy switching between demo and real-money accounts.
Crypto Coins Overview
With thousands of cryptocurrencies available, here's a look at some popular options:
- Bitcoin (BTC): The original cryptocurrency, used for electronic transactions and as a payment method.
- Bitcoin Cash (BCH): Created from a Bitcoin hard fork to address transaction time issues.
- Dash (DASH): Focuses on anonymity and transaction speed.
- Decred (DCR): Aims to improve scalability and democratize blockchain changes.
- Dogecoin (DOGE): Started as a joke but gained a legitimate following.
- Ethereum (ETH): A programming language running on a blockchain, acting as a decentralized computer.
- IOTA (MIOTA): Facilitates microtransactions for IoT devices using Tangle instead of blockchain.
- Litecoin (LTC): Designed to be easier to obtain than Bitcoin with faster block generation.
- Monero (XMR): Prioritizes anonymity in transactions.
- NEO (NEO): Developed in China as an improved version of Ethereum's smart contracts.
- Ripple (XRP): Acts as a bridge between cryptocurrencies and fiat currencies, supported by major banks.
- Verge (XVG): Focuses on privacy with TOR and I2P integration.
- Zcash (ZEC): Emphasizes privacy and decentralization with untraceable transactions.
Frequently Asked Questions
How much does it cost to trade cryptocurrency?
Costs vary widely. Exchanges charge trading, deposit/withdrawal, and currency exchange fees. Brokers may charge spreads or commissions.
Is crypto trading still profitable?
While it's possible to make money, the market's volatility makes it risky for casual traders. It's recommended for experienced traders only.
Can you day trade crypto on Robinhood?
Robinhood offers commission-free crypto trading in some countries but limits day trades to three in a five-day period for most accounts.
Has COVID-19 impacted coins the same as fiat currencies?
COVID-19 initially caused Bitcoin's value to plummet, but it recovered faster than the U.S. dollar. The pandemic's uncertainty makes future predictions difficult.
Do you pay tax on cryptocurrency trading?
Taxes vary by country. In the U.S., crypto is treated as property, with profits taxed as capital gains. Losses can be written off up to $3,000.
Is cryptocurrency trading 24/7?
Yes, cryptocurrencies can be traded around the clock, but brokerages and exchanges may have limited trading hours.
What was the first cryptocurrency?
Bitcoin was the first decentralized, blockchain-based currency. Earlier digital currencies like Hashcash and DigiCash influenced its development but no longer exist.
How many cryptocurrencies are there?
There are over 8,000 altcoins and tokens, but most brokerages and exchanges offer a limited selection based on demand.