How to start trading cryptocurrency

Cryptocurrency trading has become a viable and legitimate way to turn a profit for an ever-increasing number of people. While some traders are dissuaded by the volatile and often unpredictable nature of the cryptocurrency industry, others see these things as an opportunity to make sizable returns on their investments in a short space of time.

So, what’s the best way to start cryptocurrency trading, what do you need beforehand, and how do you minimize your risk of losing your spare cash? Find out in this AAG Academy guide.

What is cryptocurrency?

Cryptocurrency is an entirely digital form of currency. You cannot touch it or withdraw it into a physical form in the same way you can with traditional fiat currencies, but that doesn’t mean that cryptocurrency isn’t useful. In fact, there are a wide range of uses for cryptocurrency coins and tokens today, including the purchase of digital and physical goods and services.

What makes cryptocurrencies unique is that, unlike traditional currencies, they do not rely on banks, credit card companies, or middlemen of any kind. Instead, transactions are processed on the blockchain by a large network of computers, and in many cases, those blockchains are completely decentralized, so anyone can participate in them and view transaction data.

Here are some of the most popular types of cryptocurrency in existence today:

• Utility tokens
• Security tokens
• Payment tokens
• Exchange tokens
• Governance tokens
• Stablecoins

If you would like to learn more about the differences between these token types, we recommend reading our complete AAG Academy guide to cryptocurrencies. If you’re already familiar with them and you want to start trading, let’s move onto what you need to know before you begin handing over your spare cash.

What to know before trading crypto

It’s a bad idea to trade or invest in anything until you’re fully prepared. There is always a risk involved, no matter what you are putting your money into or what trading method you use, and if you don’t do your homework beforehand, you are only increasing the likelihood of suffering a loss due to bad decisions or bad timing.

So, where do you begin? Here are three key things you should know:

1. Your risks
As we mentioned above, there is always a risk when it comes to trading and investing. Even for those who have years of experience and painstakingly plan every move they make, there is a possibility that not all of them will be profitable. We can take steps to minimize those risks, but it is also critical that we are aware of them in the first place.

Know that you could lose some or all of the money you put into any trade or investment, so only use spare cash that you can afford to do without should the worst case scenario happen. Do not invest money that you need to pay bills or buy essentials.

2. Your strategy
Now that you’re aware of the risks, it’s time to plan out your trading strategy. There are lots of different approaches to choose from, and it’s important to select one that works for you. Think about how much time you have to put into trading — certain strategies, such as day trading, require a lot of time and attention — and the kinds of cryptocurrencies you want to trade.

It’s also important to think about what kind of trades you hope to make. Are you looking to make small profits on a regular basis, or bigger profits over longer periods of time? It’s also a good idea to set yourself goals for individual trades, such as how much you hope to profit or how much you’re willing to lose. This can help you time your moves to suit you.

3. Your research
Once you have a trading strategy in place, it’s time to start researching the cryptocurrencies you want to trade. It is critical that you familiarize yourself with a coin or token before you put money into it. You’ll need to know how it’s performing, how it is expected to perform in the coming weeks and months, and whether the project has any major developments coming up.

You will also need to ensure that the cryptocurrencies you’re trading aren’t going to disappear any time soon. That means carrying out the necessary due diligence to ensure that projects that interest you are genuine. Try to avoid hype and FOMO as much as possible and only put money into cryptocurrencies that fit your trading strategy and personal objectives.

You might be interested in: Things to look for before investing in crypto assets

How to decide on a crypto trading strategy

We have a complete AAG Academy guide on trading, which is great for those who are new to putting together trading strategies. There’s also a guide dedicated to dollar cost averaging (DCA) if that’s something you’re interested in. Before you decide on the right strategy for you, however, here are some things you should be thinking about:

Time
How much time do you have to commit to trading every day or every week? This could help you determine the right strategy for you, since certain approaches, like day trading, require a whole lot of time on a continual basis. Others, such as dollar cost averaging, require very little. If time is limited, pick a strategy that won’t require you to keep a constant eye on the market.

Experience
How much experience you have as a trader may also play a key role in determining which strategy is right for you. More active trading strategies, in which you are buying and selling cryptocurrencies on a regular basis depending on market performance, require you to have a good understanding of the market and to make educated decisions based on that.

Less active trading strategies require less experience. Dollar cost averaging is considered an excellent option for newcomers because once you’ve decided what cryptocurrency you want to invest in, you don’t have to worry about how it’s performing on a daily basis. You simply invest your money every month until you’re ready to sell.

Money
If you’re limited in how much cash you can spare for cryptocurrency trading, you may choose a strategy that has you investing in smaller projects that will provide you with more tokens for your money. For instance, putting $30 into Bitcoin every month may be a good idea if you’re investing for the long term, but you’re not going to make a worthwhile profit in the short term.

Cryptocurrencies are incredibly volatile, and while this can certainly be a bad thing, it can also have its advantages for traders. For instance, if you do your research and make smart moves, it’s possible you can turn a small sum of money into a considerably larger sum of money by trading smaller cryptocurrency projects that see sizable increases in market value.

Benefits and risks of crypto trading

As we’ve touched upon throughout this guide, there are lots of benefits and risks when it comes to cryptocurrency trading. The sometimes significant fluctuations in value that many cryptocurrencies experience can mean that it’s possible to lose money you have invested in a short space of time. But it also means there’s a chance to make a sizable profit very quickly.

You also have plenty of options to choose from when it comes to cryptocurrency trading, with thousands of cryptocurrencies in existence. What’s more, you can start trading with very little cash if you’re on a tight budget. The downside is that a large percentage of cryptocurrencies are only available from decentralized exchanges, which are more complicated to access.

One of the biggest advantages to cryptocurrency trading is that it is open to anyone. The only thing you really need to buy and sell cryptocurrencies is an internet connection and money to invest. You’ll need to be over 18 and you’ll have to prove who you are if you want to use centralized exchanges, but there are no barriers to entry for decentralized exchanges.

There’s also no regulation and very little support outside of centralized exchanges, which is something to be mindful of, especially if you’re relatively new to trading. Using decentralized exchanges means there is no protection of any kind if things go wrong, and you may find it incredibly difficult to get assistance — at least from official sources.

Finding the best cryptocurrency exchange

The best cryptocurrency exchange for you depends on a number of different factors, including what cryptocurrencies you want to trade, how you want to buy and trade them, and what services you have access to in your country. One of the most important things to remember is that there are two key types of exchange, and those are:

Centralized exchange
A centralized exchange, as the name suggests, is operated and controlled by a central organization. They are also regulated in most countries, which means that you need to go through a formal verification process, which includes proving who you are, before you can use them. However, they come with a wallet as standard and are usually easier to access.

One of the biggest downsides to centralized exchanges is that they offer a limited number of cryptocurrencies — usually only the biggest and most valuable coins and tokens available.

Decentralized exchange
Decentralized exchanges are, as you might have guessed, completely decentralized. That means they are not controlled or governed by a single, centralized source, but the community. They offer a much wider range of cryptocurrencies, including newer and smaller projects, but they can be more difficult to access since you need to bring your own decentralized wallet.

One of the biggest advantages to decentralized exchanges is that, because they offer smaller cryptocurrencies, they can be a great place to start for those with limited budgets looking to trade more affordable cryptocurrency options.

See our dedicated AAG Academy guides on both centralized and decentralized exchanges to find out more.

References

• What are the first steps to take before crypto trading
• The 5 crypto trading strategies that every trader needs to know
• Cryptocurrency
• Day Trading:The basics and how to get started