Please note I am Australian, and we spell words differently to other English speaking countries. We often substitute the ‘z’ for ‘s’ for words, eg. in the United States they would spell decentralised as decentralized.
Please also consider this a beginners guide to understanding cryptocurrencies and ways to invest, buy and sell. This article will discuss topics such as Cryptocurrencies, Blockchain, Decentralisation, CTIs, ETFs, Indices, Trackers, Assets, Passive Incomes and Investing.
Cryptocurrency Trading
As a newcomer to Cryptocurrency trading, it can seem quite overwhelming at first. There are hundreds, if not thousands of different investment choices, so where should you start? Ideally you should first realise that there is a huge potential risk of losing money. Investing in Cryptocurrencies is highly volatile and there are many extenuating factors that contributes to the value and devaluing of those Cryptocurrencies. With so many factors at play, you need to understand that investing is generally a long term strategy in earning a passive income, rather than becoming rich overnight. There are a few points to keep in mind:
1. You need to determine what you are willing to invest and how you will manage any losses.
Yes, you will and can lose money by investing in Cryptocurrencies, you just don’t hear about it as often because only the ‘overnight Millionaires’ discuss their fortunes. The world of cryptocurrencies is booming and there are still ways to make a profit.
2. Your goal is to not only increase the value of the currencies you hold, but also to increases the volume of those currencies.
Let’s say you have USD1000 that you want to invest, and you’ve decided to invest in Bitcoin (BTC) when 1BTC equalled US$6,000, that means you own a total of 0.1667BTC. You will keep an eye on the value by visiting various exchanges (sites where you can swap, buy and sell cryptocurrency). The price or value, is determined by the demand and availability of that cryptocurrency, which I will discuss a little later. You’ll be hoping for the value of BTC to increase, and generally over time it has been increasing, hence why it’s valued so highly at the moment. You wake up one day to find out that BTC is now valued at US$6500, that means the value of your US$1000 you originally invested is now worth US$1083. The choice you need to make is whether you wait and hold that new value, or sell it to make a profit (minus trading fees). If you decide to sell you need to keep in mind that BTC is now more expensive, if you want to buy more, you should wait until it lowers in value again, otherwise you will get less BTC in exchange for the US$1000 you originally invested. As mentioned earlier, your goal is to increase the value and increase the volume of the currency you hold.
3. Increase the volume of the currency you hold.
You will either either invest more money, or sell and then buy more when the price goes down again. You want to continually have more BTC than you held previously. For example, let’s go back to the last investment you made, you spent US$1000 and got 0.1667BTC. If you sold it when it increased in value, you’d have an extra US$83 to buy more BTC the next time it drops, and if it does drop, there’s no guarantee and as I’ve mentioned, it is so volatile and you need to keep a close eye on the values. You now have US$1075 to spend (yes you lost US$8 in trading fees), and you notice that BTC has dropped to US$6000 again, but you now have $75 more to invest. This time you would receive 0.1791BTC.
4. Using exchanges - Limit Orders, Market Orders, and Stop Orders.
To simplify this process of buying when prices are low and selling or exchanging when values are higher, there are many cryptocurrency exchanges that offer automated platforms to buy and sell on your behalf when the cryptocurrency is at the value you want to buy/sell. Keep in mind, there's no guarantees that the price you want to buy/sell at will eventuate. You need to keep an eye on the markets and adjust these values to suit your needs.
Market Orders
"A market order is the most basic type of trade order. It’s an order to buy or sell at the best available current price." (1)
Limit Orders
"A limit order is an order to buy or sell at a specified price or better. A buy limit order (a limit order to buy) is executed at the specified limit price or lower (i.e., better). Conversely, a sell limit order (a limit order to sell) is executed at the specified limit price or higher (again, better)." (2)
Stop Orders
"A stop order to buy or sell becomes active only after a specified price level (the "stop level") has been reached. Stop orders work in the opposite direction as limit orders: A buy stop order is placed above the market, and a sell stop order is placed below the market (see below). Once the stop level has been reached, the order is automatically converted to a market or limit order (depending on the type of order you specify). In this sense, a stop order acts as a trigger for the market or limit order." (3)
5. Choosing a Cryptocurrency Exchange.
There are so many cryptocurrency exchanges, it's mind boggling. It really is a difficult decision on which one to choose. During my time as an investor there have been many I've tried and liked, and many I've tried and I have not liked. I think the appropriate response would be to give you ways in which to choose so that you can make your own decisions. I don't want to particularly recommend specific exchanges and then for that exchange to not meet your needs.
6. Things to ask yourself when choosing an exchange.
a. In what country is the exchange located?
b. In what ways can I deposit Fiat (your local currency) and Cryptocurrency?
c. In what ways can I withdraw Fiat and Cryptocurrency?
d. What are the restrictions for deposits and withdrawals. Eg. is there a minimum/maximum (min/max) deposit? Is there a min/max exchange value? Is there a min/max withdrawal limit?
e. What are the fees associated with deposits, withdrawals, buying, and selling?
f. What are the trading pairs offered? Eg. ETH/BTC, BTC/XMR, and so on. Also, which cryptocurrency/fiat do I need to deposit for the cryptocurrency I would like to buy?
g. What is the reputation of the exchange?
h. Has the exchange had any security breaches and what remedies have been made to protect funds?
i. Does the exchange offer Limit Orders and Stop Orders?
j. CoinGecko offers an invaluable resource comparing exchanges, and the trading pair options. It ranks mainly based on volume, coins, and trading pairs.
Earlier I mentioned that the values of cryptocurrencies are highly volatile and I wanted to mention some important things to consider about the supply and demand and value of cryptocurrencies. They are:
1. Demand
If there are more sellers than there are buyers, then the value drops, and if there are more people wanting to buy compared to those selling, then the price goes up.
2. Volume (Availability)
There is not an infinite supply of a particular cryptocurrency, if there was, it would be worthless, and by controlling the availability of the cryptocurrency, creators can control to some degree, it’s value. If it’s hard to get, it costs more, if it’s easier to get then it goes down.
Other ways to make money in cryptocurrencies.
One way people make money in cryptocurrencies is by mining crypto. By utilising your computing power (hash power), your computer will analyse all transactions on the blockchain and authorise/confirm those transactions. The blockchain is where information about all transactions are stored. Think of it like a bank statement, all the debits and credits are listed, but they need to be confirmed by a predefined number of miners for the transaction to be finalised and added to the blockchain. This increases the safety of the cryptocurrency and helps prevent the hacking and stealing of cryptocurrencies. The blockchain is stored and shared by millions of miners and computers world-wide. This is what is meant by being decentralised, and that all information is not stored in one server/location (centralised). For example, imagine that a pile of gold was sitting in one vault deep underground and the World Bank holds on to that gold and creates money based on the amount of gold stored. What would happen if there was an earthquake where the vault was, and the earth split open and the vault collapsed into a sea of lava? All gold would vanish and technically so would the value of money. However, if the gold was hidden in a million different vaults around the world, the likelihood that all those vaults were to be compromised is greatly reduced. Hence the idea of a blockchain and miners contributing to the safety of the network and the information about transactions and ownership of cryptocurrencies.
You are in control. You are your own bank.
Another important point about Cryptocurrencies is that you are your own bank. Your money is stored by you (electronically) in either a mobile phone app, a desktop app, on a piece of paper, or a piece of hardware, often called cold-storage. There are facilities that can hold your cryptocurrencies for you, and you may have heard of exchanges that give you a place to store those coins and trade them for other coins. Yes, this is a viable option but you need to understand that there are risks with leaving your coins in those exchanges, which can be hacked, or simply, they go bust or out of business and you lose your coins. These exchanges entice you to trade on their sites, but you need to know there are fees involved in trading your cryptocurrencies. There are also fees for withdrawing those currencies into your own personally held wallet. Nothing is free, and be careful because it can become quite confusing when you’re dealing with many different exchange rates and values. You can be caught out so I advise you always check how much you are paying to swap, buy or sell your currencies. And every exchange or trading pair is valued differently at every exchange. So there are a lot of factors you need to consider before trading. I suggest you find a suitable cryptocurrency converter tool, CoinMarketCap offer this as a free service and you can find a link to the Cryptocurrency Converter Calculator here. I am not affiliated or paid for recommending them. I am just a casual investor that has spent months learning the different resources.
If you have any questions, feel free to leave a comment and I'll do my best to respond as soon as possible.
References
- Investopaedia, Introduction To Order Types - Market Orders by Jean Folger. Accessed on 11/05/2019. https://www.investopedia.com/university/intro-to-order-types/market-orders.asp
- Investopaedia, Introduction To Order Types - Limit Orders by Jean Folger. Accessed on 11/05/2019. https://www.investopedia.com/university/intro-to-order-types/
- Investopaedia, Introduction To Order Types - Stop Orders by Jean Folger. Accessed on 11/05/2019. https://www.investopedia.com/university/intro-to-order-types/stop-orders.asp
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