Cryptocurrencies such as Bitcoin and Ethereum are generating a lot of interest from some would-be investors. Before you decide to jump onto the nearest crypto exchange, it is important to understand what it is that you are investing in, and what the opportunities and pitfalls could be.
What Is Cryptocurrency?
Cryptocurrency is a digital currency that is not linked to any country or government. Instead, records of who owns what is held on computerised databases that are secured by strong cryptography using blockchain technology.
While cryptocurrencies can be used to buy day-to-day items in some stores, it is more commonly traded as digital assets as a way to profit from investment returns.
Large profits can be made through buying and selling on crypto exchanges, but prices can be volatile. You could run the risk of losing quite a lot of money if things go wrong. You will need to pay tax on crypto too. Get an idea of how much using a crypto tax calculator.
What Causes Crypto Price Fluctuations?
Like all financial markets, cryptocurrency can move up and down. The cryptocurrency market, however, does differ from the stock market in the degree of volatility, as it moves very fast.
These quick fluctuations can be frightening if you’re not used to it, but for some investors, they are the key to making money with cryptocurrency. This means it is very important to try to understand what can make prices move up or down.
Here are some of the main causes for price changes:
- Media coverage. Crypto traders read press coverage of their coins very carefully. Either positive or negative news can cause traders to buy or sell coins, making the market move very quickly.
- Integration. Cryptocurrencies are becoming increasingly mainstream as a medium of exchange for buying goods. As they are accepted by more outlets and are integrated into more banking and payment systems, the prices tend to rise.
- Wider events. Political events and government decisions about cryptocurrencies can also move the market. For example, when China put in place more stringent rules about Bitcoin mining, the price of Bitcoin fell dramatically.
Unlike the stock markets, which only trade on weekdays during certain hours, remember that cryptocurrency can be traded 24 hours a day, seven days a week.
It is always a good idea to take a long-term with any kind of investment, even with less traditional types of investments like cryptocurrency. If you are new to investing, it’s smart to learn some basics first.
What Crypto Trading Strategies Are There?
Investors who try to make trading cryptocurrencies have a lot of different strategies.
Some of the main strategies include:
Day Trading
This is a fast-paced form of cryptocurrency trading where people buy and sell cryptocurrencies within a day to try to take advantage of short-term price movements. This option might not be an appropriate way for beginners to trade Bitcoin. It’s not ideal for beginners, as there is a real risk of loss when trying to time the market.
Hedging
Hedging is where one of your investments cancels out some or all of the risk of loss with another. It is a strategy used by some crypto traders who want to hold the coins but not be over-exposed to volatility movements. You can hedge cryptocurrencies using financial instruments such as contracts for differences or futures. These will allow you to bet on the future price of the currencies.
This can be a difficult strategy that should only be used if you understand exactly what you are doing.
HODLing
People who ‘hodl’ a cryptocurrency to keep hold of it through thick and thin. This name might look like a typo, and in fact, it originally was. The term comes from a typing mistake on an early forum for Bitcoin. It is often retrospectively explained to mean Holding on for Dear Life. With traditional investments, it is common for investors to adopt what is known as a buy and hold strategy.
Trend Trading
Trend trading is where crypto investors decide whether to buy or sell a particular currency based on whether the price is moving up or down. There are a lot of complex theories on how best to identify a trend, or when it is going to change. The basic theory is that these cryptocurrency traders buy in a market that is going to rise and sell when it is going to fall. The hard part is identifying which is which.
Whichever strategy you do decide to employ, it is important to be aware of the large number of cryptocurrency scams that exist on the internet and elsewhere. There are lots of scams out there, so be careful, and be sure of what you’re doing.
Which Crypto Should I Invest In?
Bitcoin and Ether are some of the most famous cryptocurrencies. There are now thousands more to choose from too.
Choosing the best cryptocurrency for you will involve a number of factors. Fundamental analysis determines the intrinsic value of an asset, but this is harder to do with crypto.
You will also need to take into account some risk management. Risk management is where you consider the factors that pose a threat to your investment and try to mitigate the risk or understand how much money you could stand to lose.
Some people are worried about the environmental impact of some currencies, which do require of lot of computing power to create. If this is you, you might prefer an eco version.
You might just be interested in using a specific coin exchange or broker that only deals with a limited number of currencies, so you will have a more limited choice. This can help you to avoid the confusion of having too much choice.
Some people might be interested in the newcomer worldcoin, which is thought to be founded on the altruistic idea of fairer wealth distribution and is supported by some big names in Silicon Valley.
Safemoon is meant to encourage day traders by placing a penalty on those who sell the currency, so could be a good fit for HODLers.
What Are The Risks Of Cryptocurrency?
Those who trade cryptocurrency should be aware of the risks. Crypto is volatile and prices can fall fast. There are other risks too, such as the potential of losing all your money to a scammer.
There is also the risk of losing your password to the digital wallet where you hold all your cryptocurrency, or the hard drive where you have stored your coins.
Whichever way you choose to invest in cryptocurrency, you need to do some research first to minimise the mistakes that you will make and enhance your potential profits.
What Are The Best Cryptocurrency Books To Read?
There are many blogs and books about cryptocurrency out there, so it can be difficult to find the best guides and know which to trust.
If you are looking for some information and advice on cryptocurrency investing for beginners, or a crypto blog that will clearly explain new launches, there are some trustworthy places to start. For crypto blogs, try this list from Detailed.com, which looks into many of the best blogs for both beginners and experts. For the best books on cryptocurrency, try digital expert David Birch’s five best picks.
What Are FCA Approved Crypto Exchanges?
There are a number of crypto exchanges that are approved by the FCA, including;
- eToro UK Ltd
- Bitstamp
- CEX.IO
- EXMO
You can check the full list on the FCA website. If a company isn’t registered with the FCA, it is wise to avoid it.