Cryptocurrency is encrypted digital currency in which transitions are verified and records are maintained by a decentralized system using cryptography, rather than a centralized authority. This digital currency is an alternate way of making payments, which is created by encrypted algorithms. For the most part, people think that other people trade in cryptocurrency because the whole concept of traditional currencies is going to be replaced by digital assets, but it is not completely true, because more than 50% of people invest, buy or sell in cryptocurrency to earn money, that the most basic concept.
Although cryptocurrencies have ‘currency’ in their name, it is not regarded as the same, even after applying varied treatments, and classifications like commodities, securities, and even currencies. These currencies still have the power to change the landscape of any country’s economy without even being the legal tender itself. Bitcoin is the first decentralized cryptocurrency and Blockchain is a distributed ledger technology through which each cryptocurrency works.
The cryptocurrency was invented in 2008, by Satoshi Nakamoto (an unknown person or group of people) and the currency began its use in 2009. The first country to adopt cryptocurrency as legal tender, after a bill was passed in the Legislative Assembly with a huge majority, was El Salvador in 2021.
Cryptocurrency trading means taking a financial position on the price direction of individual cryptocurrencies against the dollar or another crypto, that is, in crypto/dollar pair and crypto/crypto pair respectively. Before investing in cryptocurrency, a person must be sure about it and understands how it works, because on the surface cryptocurrency is just huge gambling, one might make a huge profit or one might lose everything.
Image Source: CoinDesk
Step to take before trading in Cryptocurrency-
- First, understand cryptocurrency, analyze the currency you want to trade in, and learn about it through its webpage, only then you should proceed.
- Second, use a trustworthy wallet, don’t let viruses or anything else disrupt or destroy the security of your cryptocurrencies. Choose wisely, and use the level of security that comes parallel to the level of your investments.
- Thirdly, always have a backup strategy, consider the worst scenarios like your device being stolen or getting hacked, etc, because without a backup strategy you can never get back your investment if any of the above things happened.
Types of Cryptocurrency Trading-
There are two types of cryptocurrency trading-
- Long-Term Trading: These traders buy or hold cryptocurrencies over a long period, it can be up to weeks, months, or even years. They do this to sell it later when the market is right, to make a profit.
- Short-Term Trading: It’s more about taking advantage of market and price swings, by planning, creating, and executing a strategy. This is more risky & stressful, but more active. But there’s a possibility that the trader will benefit from both cryptocurrency prices falling or rising.
These trading methods are about short-term trading and don’t suit well with long-term trading.
- Trade Cryptocurrencies directly against each other: In this people trade a range of cryptocurrencies against each other or against ‘fiat currency’ (real currency), by repetitively buying low and selling high. This is less risky, good for beginners, and best for accumulating cryptocurrency. But not so good for high reward, or profiting from markets dropping.
- Trade Cryptocurrency Derivatives: This is simply betting on the market, and you don’t need to own any cryptocurrency. Derivatives trade is flexible but complex, so it’s not so good for beginners and suits only advanced traders. The good in it is higher profit, high-reward strategies, and flexibility. But not so good part is huge sudden losses and not for first-time cryptocurrency traders.
- Derivative Financial Instruments: This is like a financial contract that pays the differences in the settlement price between the open and closing trades, like a Contract for Differences (CFDs)
When was it easier to take a step in the financial field and not have risks, so does it with cryptocurrency, it comes with greater risks, but having intensive knowledge, after doing elaborate research, skills, and capital will make it easier for one to trade in cryptocurrency. It is riskier than traditional trading, but yet more volatile. So, think twice before trading in cryptocurrency, and don’t step in without complete knowledge and understanding.