Cryptocurrencies have drawn great interest from people across the world. The oldest digital currency Bitcoin has given tremendous returns over the last few years. A study suggested that only 8 percent of American households had invested in cryptocurrencies but the number was set to increase over the coming years. Cryptocurrency investing is simple but one needs to exercise utmost caution.
Basics of cryptocurrency trading
Cryptocurrencies are digital money and their price is dependent on its supply and demand at any given time. If more investors are bidding for digital currencies then their prices increase. Opening an account with a cryptocurrency exchange is the first step for any crypto investor. A digital currency exchange is similar to an equity exchange where one can trade crypto instead of securities.
A user can register at any online cryptocurrency exchange. The exchange will create different wallets for every cryptocurrency in his account. He can add fiat currency to the account and then start investing in cryptocurrencies. A cryptocurrency exchange is a place that matches orders of different traders. It matches orders at same prices and executes them.
Trading cryptocurrencies
Most cryptocurrency exchanges offer two trading options. One is fiat to crypto and the second is crypto to crypto. Fiat to crypto trading takes place when the investor uses fiat currency to buy digital currencies. While a fiat to fiat trade occurs when the investor uses one cryptocurrency to acquire another cryptocurrency. Cryptocurrency traders use a crypto to crypto trading strategy when price of Bitcoin and Ethereum rises significantly but other cryptocurrencies have not rallied. They receive more number of the exchanged digital currency.
Crypto trading is not only restricted to only digital currencies. It also extends to digital tokens. These tokens are issued by companies who are developing dapps. These smart contracts will either be built on the Ethereum mainchain or migrate to a native network later. Companies raise money from investors through an ICO and issue them tokens. Tokens built and developed on Ethereum mainchain adhere to a set of ERC standard. This helps in differentiating tokens as each token has a specific purpose.
Tokens acquired in an ICO are available at discounted rates. Hence investors can reap huge profits on their investments when the token is listed for trading.
Trading vs Hodling
Cryptocurrency investors who buy cryptocurrencies with a long term horizon expecting prices to eventually rise are termed as hodlers. On the other hand, investors who use technical analysis to trade cryptocurrencies are termed as day traders. It is important to have a clarity on what kind of investor one would like to become.
Important notes to remember before beginning
Before investing in cryptocurrencies, investors must study local regulations. Every nation has a different set of rules and regulations for cryptocurrency trading. Some countries have taken extreme steps to abolish cryptocurrency trading but most countries allow trading in digital currencies.
Cryptocurrency exchanges typically charge commission for every trade executed on the platform. They also charge a processing fee when you withdraw your investment and returns in fiat currency. Hence investors must lookup about trading and other fees before signing up at any cryptocurrency exchange.
Also investors need to consult a tax professional in order to analyze the tax rates for profits from cryptocurrency investments. There is a lack of clarity on how these profits are to be taxed. Some countries consider profits generated from cryptocurrency investments as capital gains. Hence they are taxed according to capital gains laws.
Safeguarding digital holdings
Safety of digital currency holdings is of utmost importance. Previous events such as Mt. Gox hack and the most recent Coincheck and Bancor hack have exposed security concerns. Hence investors must take caution with security of their digital tokens. It is advised to move all cryptocurrencies to a cold wallet when not being used. The offline wallet is a preferred way of safely storing digital currencies.
There are three main types of wallets. Online wallets, desktop wallets and cold storage or offline wallets. Online wallets are easiest to use and can be accessed from any device. Desktop wallets can be accessed from a specific computer on which it is installed. Both these wallets are online wallets and could be hacked. Hence offline wallets are a better option to safeguard digital currency holdings.
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