5 Things to Know Before Starting Trading Crypto
Cryptocurrencies are in the spotlight again, as the pandemic exposed the weaknesses of today’s financial system, prompting retail and institutional investors to look for Store of Value (SOV), as well as high-yielding assets. The ongoing discussions about the need for digitalization in the context of lockdowns and the surging unemployment levels across many countries have stressed the need for decentralized and safe money along with better investment options.
Crypto assets are booming thanks to their unique characteristics related to decentralization, security, and immutability. Bitcoin skyrocketed well above its 2017 high, while DeFi tokens have consolidated as an independent crypto asset class. The new conditions attract many retail investors and traders that interact with cryptocurrencies for the first time.
Many novice investors are probably wondering whether it’s too late to join the crypto trend since Bitcoin is trading near $50,000. The truth is that there are many investment opportunities besides Bitcoin.
To that effect, we’ve compiled a shortlist of key aspects that will help you understand how to start trading cryptocurrency:
#1 Crypto Asset Categories
To begin with, cryptocurrency is a vague term today, as there are many types of digital assets. Learning about the different categories of cryptocurrencies will help you better understand what is best for you in terms of investment opportunities.
In general, you should know that cryptocurrency usually refers to a digital coin that has its own standalone blockchain and is meant to be used for payments and transfers. Elsewhere, a token is a digital asset with wider functionality that is built on top of an existing blockchain. For example, the overwhelming majority of tokens today are developed on Ethereum, which provides the so-called ERC-20 standard to facilitate token creation.
That being said, here are the main categories of crypto assets:
● Cryptocurrencies — this group includes digital currencies built on public blockchains. The most illustrative example is Bitcoin, which is the oldest and by far the largest cryptocurrency by market capitalization. Other examples are Litecoin, Ripple, Stellar, and Bitcoin cash. There is a subgroup called privacy coins, which have an extra layer to ensure true anonymity. ZCash and Monero are the most popular privacy coins.
● Utility tokens — these tokens have a special function within a given ecosystem. Some examples are Basic Attention Token and Golem.
● Stablecoins — these tokens are pegged to fiat currencies, most often the USD, with a 1:1 ratio. They are used as a bridge between the crypto industry and traditional finance. If you plan to start trading crypto, you might convert your fiat deposit into stablecoins, and then buy any coin you like.
● DeFi tokens — Decentralized Finance (DeFi) is the biggest trend right now. This is a group of blockchain projects whose aim is to move financial services to decentralized infrastructures. The native tokens of these projects are often referred to as DeFi tokens. Some examples are AAVE, SUSHI, UNI, and LRC (Loopring).
● Non-fungible tokens (NFTs) — every NFT that exists on a blockchain represents something unique and usually cannot be replicated, though it is possible to issue any number of NFTs to represent the same object and thus have the same value. The point is that NFTs are not mutually interchangeable like Bitcoin, for example. These tokens can be implemented to tokenize real-world items. They are also used in collectible games and crypto art, among others.
#2 Building Your Cryptocurrency Portfolio
In any market, the main approach to reduce potential risk is diversification and hedging. Your crypto asset management operations should rely on those key goals.
While there is no allocation standard when it comes to building a crypto portfolio, it should include large cap (cryptocurrencies whose market cap is over $10 billion), medium cap (cryptos with market cap between $1 billion and $10 billion), and small cap digital assets. The latter usually have tremendous growth potential because, unlike large-cap coins, they have room to increase in value by several times in a short span. The greatest part usually goes to well-established cryptocurrencies, such as Bitcoin and Ethereum. They should keep your portfolio resilient. On the other end, you should also bet on several DeFi tokens — they are much riskier but have room for growth.
#3 Trading Styles and Forms of Analysis
If you create a portfolio with a long-term goal, you may consider yourself a crypto investor. However, if you want to be more active and speculate on the price of cryptocurrencies, you are trading crypto assets rather than simply investing. Trading requires more time and dedication.
The three main trading styles are day trading, swing trading, and long-term or position trading. The main aspect that separates these styles is the timeframe, which dictates the approach and position size. For example, if you are a buy and hold trader (long-term), you would be interested in investing a larger amount.
No matter the style you prefer, there are two main types of analysis that both traders and investors use:
● Fundamental analysis — this is a method to assess the real value of an asset’s price based on the project’s potential, competition, the experience of the team, etc. For example, when you conduct fundamental analysis, you may browse through the latest news related to crypto-assets regulation, crypto integration by large companies, high-profile partnerships, and so on.
● Technical analysis — this method is about analyzing the cryptocurrency’s price action alone. The main object of technical analysis is the chart. Traders can use indicators and patterns to analyze historical data and anticipate the next price moves.
#4 Risk Management and Setting Goals
One of the essential aspects of crypto assets trading is risk management. Unfortunately, it is often ignored by many beginners who want to experience success within days.
You should start by setting reasonable goals in the medium and long-term. Whenever you lose, don’t get disappointed. Instead, treat it as a learning experience.
While the crypto industry offers many opportunities, you should never invest more than you can afford to lose. Needless to say, it is not recommended to start trading crypto with borrowed funds.
If you are an active trader, the golden rule of risk management is to never invest more than 1% of your balance per trade.
#5 Choosing a Platform to Buy, Store, and Trade Crypto
The success of your trading journey might also depend on the trading platform or the digital wallet you use. Thus, you should make sure to deal with reliable services.
You can get a digital wallet and then use the funds to trade crypto assets on an exchange platform. A better alternative would be to use a product that integrates both a wallet and a trading venue. One good example is Eidoo. Its flagship product is a non-custodial DeFi-oriented wallet, but it represents an entire ecosystem that also integrates a DeFi exchange.
With Eidoo, you can easily create a crypto portfolio and implement DeFi strategies that go beyond trading, such as yield farming and staking. This is where you can both store your digital assets securely and make them work for you.
Cryptocurrencies bring major transformation to the financial system, and there are still many opportunities for retail traders.
Enjoy your trading journey!