In this guide, we look at five essential tips for beginners looking to get started trading with cryptocurrency. We’ll cover some vital information to know before you get started, how to spot the right exchange for you, and what you need to actually start trading.
1) Choosing the right type of exchange for you
Choosing the right type of exchange for your needs is a vital aspect when trading with cryptocurrency. If you are a beginner, you will need to know the fundamental differences between centralised, decentralised, and hybrid exchanges.
A centralised exchange, or CEX, functions similar to a traditional stock exchange. Buyers and sellers are able to use the service to buy, trade, or sell their crypto. The exchange then plays the role of a middleman – the party that brokers the deal. Centralised exchanges are often easier to use for beginners as they have more user-friendly interfaces and can provide more useful tools.
Centralisation is often seen as an enemy in the world of crypto, because it requires an element of trust in a third party to handle your money which is otherwise not needed if you were to use a decentralised exchange. A centralised entity is also more vulnerable to a hack because it has a singular location, whereas a distributed and decentralised system is powered by multiple nodes across the world, meaning decentralised exchanges are less likely to be compromised.
A decentralised exchange, or DEX, does not store your funds like a CEX does. Since there is no middleman, a DEX facilitates peer-to-peer trades. Because they are not centralised and therefore do not have a central server/device running the operation, they are significantly harder to hack than a CEX. However, this does in turn mean users are more vulnerable to locking themselves out of their money. Another drawback for DEXs is that there may be periods of low volume and low liquidity if there is a lack of people using the exchange.
You can find out more about the differences between centralised and decentralised exchanges here.
In the end, both CEXs and DEXs have their strengths and limitations. Choosing the right one for you will ultimately be a decision between trusting a CEX with your crypto or choosing a DEX for their added security. Hybrid exchanges are currently being developed to provide the best of both worlds; the functionality and liquidity of a CEX with the security of a DEX. But, for the moment, you will need to decide between a CEX or a DEX until there is a live hybrid exchange.
2) Choosing the right platform
Once you are able to determine what type of exchange you want to use, you then need to know how to pick a suitable platform for your requirements. The right platform for you will ultimately depend on what you are looking for. Below is a list of common things to look out for when choosing a platform:
- Available currencies: Be sure that the crypto you want to trade with is supported on your chosen platform.
- Leverage: This refers to the amount you are allowed to trade above your initial deposit and by how much you can multiply your gains. A higher leverage will suit risk takers who look for the high reward. A high leverage is not recommended for beginners, however. A common leverage is typically 20:1 with crypto. Again, though, this is dependent on your chosen platform.
- Hedging: Hedging is a risk reduction tactic that typically involves taking an offsetting position on your primary asset. This provides insurance and reduces the possibility for loss.
- Minimum investment: This refers to the minimum amount you can deposit and invest with. This is important as different platforms will require different minimum investments. Choose one that suits your budget.
3) What do you need to begin trading?
The list of things you need to begin trading is relatively small:
- A cryptocurrency wallet: Choosing the right wallet to hold your crypto is a matter of preference. Typically, an electronic or software wallet is ideal for beginners with a low amount of crypto that you wish to trade with. But, these wallets are not the most secure, and for large amounts, you would do well to invest in a hardware or paper wallet. Again, there are different wallets available for different needs (click here for more information on wallets).
- Access to an exchange: As mentioned above, it is best that you do adequate research to ensure you are happy with your chosen exchange.
4) Understanding the difference between trading cryptocurrency and trading with stocks
- A cryptocurrency exchange is not part of a regular stock exchange. Two popular cryptocurrency exchanges are Coinbase and Coinbase Pro, formerly GDAX, both of which function differently to Wall Street exchanges. Coinbase is designed for beginner to intermediate traders, whereas Coinbase Pro is aimed towards people who have a greater understanding of crypto trading. Binance is another leading exchange that is popular with many traders.
- Cryptocurrency trading is a 24-hour market. This is different to traditional stock markets which do not trade within a 24-hour window.
- Beginners may prefer to trade cryptocurrency stocks. One of the biggest Bitcoin (BTC) stocks is GBTC, which is a trust. Trading with stocks means users do not have to trade crypto directly, though this comes at a cost. Stock trading works through premiums, which in short means that Bitcoin itself is cheaper than its stocks. It is an avenue for beginners to help them get acquainted with trading, however.
5) Markets are volatile
Crypto markets are extremely volatile, and the impact of volatility on markets cannot be understated. Just because at one moment your favourite crypto is doing well does not guarantee that when you wake up the next day it will still be doing well.
Trading is conducted through ‘speculation.’ Traders make an educated guess based on their experience, knowledge, and expertise. Any ‘tips’ you may see from traders must be taken with a pinch of salt and not as sovereign. If you follow a ‘tip,’ it is at your own risk. You cannot place blame onto another for a move that results in a loss for you.
(Note: please be advised that cryptocurrency trading is notoriously difficult and carries substantial risk. Never trade with money you can’t afford to lose. Trade at your own risk.)
Hopefully, this guide has provided you with the basic knowledge to help you feel more comfortable with trading. For more information and guides from Coin Rivet, click here.