There have been numerous news stories lately about cryptocurrencies, especially Bitcoin, and just how popular they are becoming. Bitcoin has hit all-time highs recently, and everyone is talking about how high it can go.
The Bitcoin Buzz
There has also been a buzz about how much money people have made with current Bitcoin prices.
In 2010, Bitcoin was worth $0.08, which means $1,000 would have purchased 12,500 Bitcoins. In April, Bitcoin hit the $60,000 mark, which is an impressive profit of $750 million.
Whilst you can never make any guarantees, there could still be potential trading Bitcoin and other cryptocurrencies. However it’s important you take the time to learn the basics and educate yourself before delving into any kind of investment.
What Are Cryptocurrencies?
Cryptocurrency – or crypto, is a form of digital currency. Bitcoin is the most popular, but there are other cryptocurrencies that can be traded.
Crypto is not controlled by a country or by banks. Cryptocurrencies are free from a country’s monetary policy. This decentralized currency is supposed to cut out the middleman, like banks, and make monetary transactions easier, and cheaper.
At this time, the most popular cryptocurrencies are:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Litecoin (LTC)
- Ethereum (ETH)
- Binance Coin (BNB)
- Tron (TRX)
- Chainlink (LINK)
- Cardano (ADA)
- XRP, formerly known as Ripple (XRP)
- Stellar (XLM)
Cryptocurrencies are held in a person’s digital wallet. These digital wallets can be mobile apps or on a desktop computer. Crypto transactions are recorded on a blockchain. A blockchain is like a database or a digital ledger that records transaction information.
Where Do Cryptocurrencies Come From?
Most cryptocurrencies are mined. For example, Bitcoin is just a number on a computer blockchain. In the case of cryptocurrencies, mining has nothing to do with digging into the ground.
Crypto mining is a process of verifying the transactions and then recording them in the blockchain ledger. This is accomplished by solving cryptographic puzzles using powerful computers. Once solved, it is added to the blockchain as a new Bitcoin. Miners receive rewards for their efforts.
Mining takes a great deal of computer power and electricity. It is estimated that the electricity needed to power these Bitcoin operations is 0.21% of all of the world’s electricity, or about what the country of Switzerland uses in a year.
What Factors Influence Cryptocurrency Price Fluctuations?
Before you can trade cryptocurrencies, it is helpful to know what causes them to rise and fall in price. Most cryptocurrencies, like Bitcoin, have a finite number of how many Bitcoins will be produced. Bitcoin is limited to 21 million tokens. It is estimated that the final Bitcoin will be mined in the year 2140.
Bitcoin's price can change each day just like stocks, bonds, precious metals, and currencies. Fluctuations in price are how traders make or lose money. Supply and demand is one reason that cryptocurrency prices go up and go down.
Bitcoin is unique as unlike actual goods, the algorithm to mine Bitcoin only allows for one block to be found or created on average once every ten minutes. As more miners join in this competition to solve the math puzzles, the more difficult, and expensive mining becomes. This is to preserve the ten-minute interval.
As more companies accept Bitcoin as payment for products and services, the demand for the token will only increase. Other reasons that can cause a cryptocurrency to change in price include:
- Good or bad news can affect the price of cryptocurrencies.
- A major event like regulatory changes or security breaches.
- Major corporations buying and holding a cryptocurrency can reduce the supply, causing the price to rise.
How to Trade Cryptocurrencies
Cryptocurrencies can be volatile, which makes trading them potentially profitable but risky. Before someone can begin trading cryptocurrencies, they need to take the following steps.
- Open a brokerage account. Not all brokerage firms allow cryptocurrency trading, and the ones that do, might limit the trading to just a few of the popular cryptocurrencies.
- Fund the account. Before trading is allowed, money is to be transferred into the account.
- Decide on which of the cryptocurrencies to invest or trade in.
- Decide on the strategy or strategies that will be used for trading.
- Get a digital wallet to store your cryptocurrencies in.
Cryptocurrency Trading Strategies
Traders might use only one strategy or utilize several to trade cryptocurrencies. Before trading, traders need to become familiar with each trading strategy and the risks involved. Always have an exit point for any trade before entering into it.
Some of these strategies are investing more than trading, and other strategies are complicated and involve technical or fundamental analysis. Those that are interested in trading chart movements should learn about technical analysis and reading charts.
Trading cryptocurrencies is no place for learning on the job or the risk-averse. Serious traders will not take money for food or their mortgage and risk it on trading crypto. But some strategies are simple enough that with some knowledge, a trader can start profiting on the price fluctuations of crypto.
Buy and Hold
Buy and hold is more about investing in cryptocurrency than trading, but it’s one way to enter the cryptocurrency market. It is unlikely we will see the incredible gains that some people made when they bought Bitcoin years ago. But other cryptocurrencies that are cheaper, could potentially appreciate considerably.
Even though Bitcoin is currently around $60,000, investors can still buy smaller amounts to hold. Other cryptocurrencies cost much less to buy, like Cardano, which costs $1.42 at this time. The value could increase if it becomes popular. (Again, there are never any guarantees.)
Dollar Cost Averaging
Dollar-cost averaging is similar to buying and holding. An investor can take a fixed amount of money to invest in crypto and buy it once a week or once per month. Dollar-cost averaging smoothes out the highs and lows of the cost. Some days it might be higher when purchased, and other days it will be lower in price.
Day trading is a common trading strategy used for trading stocks and crypto. Day trading is simply opening and closing a trade on the same day. Day traders are hoping to profit on the intraday price movements of the crypto they are trading.
Day traders will typically use technical analysis and charting to spot price direction and movement. The key is to sell all positions before the end of the trading day and not hold a position overnight.
Swing traders will hold positions longer than a day but usually no longer than one month. These traders will use both fundamental and technical analysis to make their buying and selling decisions. Swing trading is not as stressful as day trading and allows for a trade to fully develop.
This type of trading is usually dependent on waves of volatility. Volatility in the crypto market can move the underlying crypto for days or weeks in the same direction. Volatile conditions can be caused by unexpected news, expected news, or economic developments that affect a cryptocurrency. Traders can go short if the volatility is driving the crypto down or long if up.
A trend that is moving the crypto markets can last up to several months to fully play out. Trend trading is taking advantage of that trend. Traders might look at trend lines, moving averages, and other charting techniques that can point to a developing trend.
Trend traders are always watching the price movement and the charts for a reversal of the current trend. When the trend switches, a trend trader can always start trading in the opposite direction. If the trend was up, they can close the long position and go short the downtrend.
Having a sound knowledge of how cryptocurrencies work is helpful for beginner traders to understand what might cause their price to move. Trading crypto does not have to be restricted to Bitcoin only, as there are plenty of other cryptocurrencies available to trade.
Beginners should stick to basic trading strategies until they get a feel for the crypto market in general and the various conditions that cause the market to move. When trading any market, including the crypto market, the key is to stay in the game, so start by making smaller trades as opposed to a substantial amount of money on one single trade.