It is the hype of the moment: trading in cryptocurrency / cryptocurrencies. More and more people are becoming interested in trading these digital payment methods. Perhaps this hype has piqued your interest, and you are also curious about how to trade in cryptocurrency. However, you have no idea what this is, or where to start.
That’s why I put together this ultimate cryptocurrency crash course. In 5 tips I explain exactly how to start trading in digital currencies, what to watch out for, and which mistakes to avoid. This way you can also earn money trading cryptocurrency!
What is cryptocurrency?
Cryptocurrency (also called cryptocurrencies, cryptocurrencies or cryptocurrencies) is literally a digital currency . Often it is used as an alternative money system, instead of regular currencies (euros, dollars, etc.). The first (and best-known) cryptocurrency is Bitcoin, but there are more types.
You cannot take this money out of the wall, like with other currencies. It only exists online, so you can only pay with it online . If you consider how many online transactions we carry out these days, it is actually not that surprising.
You can only pay with cryptocurrency in places that accept it . There are more and more in China, for example, you can exchange Bitcoins for cash at special ATMs. A number of places in the Netherlands where you can pay with cryptocurrency are Thuisbezorgd.nl, various catering establishments and service providers.
How does cryptocurrency work?
But how exactly does that work, a ‘digital currency’ (cryptocoins)? The main difference with normal money is that it is decentralized.
Normally, a central authority keeps track of where money goes. This can be a bank, but also, for example, a system such as PayPal. All payments come through this central authority, which means that a payment system normally always depends on this.
It used to be thought that a decentralized payment system was not possible, because all parts of a network would then always have to have the same information . Satoshi Nakamato (the creator of Bitcoin) changed this. The data is continuously refreshed for all users via the so-called blockchain principle.
This has a number of consequences:
- Payment transactions via cryptocurrency are anonymous . Your identity is not linked to blockchain payment systems. Different cryptocurrencies differ in the amount of transaction information they reveal.
- You can pay quickly and internationally . You can always make a transaction quickly via cryptocurrency, whether the recipient lives next door or on the other side of the world.
- Cryptocurrency is resistant to fraud . If a hacker tries to change a transaction, it will only be done ‘in one place’. Since this is just one of millions of blockchain databases, the majority of these databases “refuse” the hacker’s modification. He would therefore have to hack millions of databases at once which is impossible.
- Cryptocurrency is very safe . It’s already in the name cryptocurrency comes from cryptographic currency, or encrypted money. The currency is so well encrypted that it is actually unhackable. Payments with cryptocurrency are also irreversible. Cryptocurrency is as secure as your ‘wallet’ (your online cryptocurrency wallet).
Trading cryptocurrency
You may have become interested in trading cryptocurrencies because of all the positive stories you hear about it.
The prices of various cryptocurrencies have also only been rising in recent years. More and more people, companies and organizations see a future in (the technology behind) cryptocurrency. That’s also the only reason cryptocurrency can be worth money at all people value the rules of encryption that this cryptocurrency actually is.
But how do you start trading cryptocurrency? It is not a simple system that you can just step into. You need to know what you’re getting into, and the best way to trade. That is why I have listed 5 tips for you , as a crash course in cryptocurrency trading. So read them carefully!
Tip 1: Choosing between buying cryptocurrency or trading through third parties
The most ‘simple’ way to trade cryptocurrency is to just buy it , and then sell it later when its value has increased. That’s how it almost always works with trading. This seems simple enough, but in practice it is disappointing.
For example, opening an account and depositing money on a cryptocurrency exchange is often very cumbersome. It takes time, effort, and then you have to export them to your own wallet. In addition, many exchanges only have a small supply of cryptocurrencies.
When you buy cryptocurrency yourself, you cannot trade with leverage . Trading with leverage means that you can earn (or lose) much more than you actually put in. This is the principle by which external parties work.
Trading with CFDs in cryptocurrencies may therefore bring more profit, but also more risk . Always be aware of these risks and that you can lose capital . Always act wisely.
Tip 2: Choose the right kind of cryptocurrency
Everyone knows Bitcoin by now. But there are many more types of crypto coins. How about for example: Ethereum, Litecoin, Bitcoin cash, monero, ripple, etc
And so I can go on and on. How should you choose between all these cryptocurrencies? First of all, it is important to do good research . Look up information about different types of cryptocurrency. How do they work? Are they well rated? Have they been around long? What are the experiences of other traders? What is the expectation for the development of this cryptocurrency?
Different cryptocurrencies try to differentiate themselves from each other . For example, some currencies are geared more towards business users, and others more towards consumers. The transaction costs between different digital currencies can also differ, as can the underlying systems. In short: cryptocurrencies can be very diverse.
So it also depends on what you want to do with the cryptocurrency. Do you really want to buy things with it, or do you just want to trade in cryptocurrency? This can affect your choice for a certain cryptocurrency.
In any case, I recommend two things:
- spread . As is often the case with trading, spreading your chances is always better. The chances of losing money are much higher if you bet everything on one cryptocurrency. So always spread out over different currencies, and invest more in currencies that are more reliable
- (almost) always choose Bitcoin . Yes, Bitcoin is popular, but the advantage of this is that you can exchange them for other cryptocurrencies (also known as altcoins ). In addition, Bitcoin is still rising
Tip 3: Don’t panic due to fast course changes
As mentioned, every cryptocurrency is decentralized. This means that cryptocurrency is not linked to any bank, institution, or any economy for that matter. Normally, the exchange rate of a currency changes along with the economy . This change is slow, so that the price remains relatively stable. This is not the case with cryptocurrency.
This means that the price of digital currency can fluctuate strongly . The price is completely dependent on supply and demand. That can be misleading if you are just starting out with cryptocurrency trading. For example, you can be shocked if the value of your cryptocurrency suddenly drops sharply.
Tip 4: Don’t invest too much money
This may sound like unnecessary advice, but I’ll say it anyway. You certainly wouldn’t be the first person to misunderstand the risks associated with cryptocurrency trading.
But Frank, if I had invested in Bitcoin two years ago, I would have been filthy rich by now!
Yes, that’s hindsight. However, you never know in advance how the course will go. Even Bitcoin can still fall sharply; that’s how cryptocurrency works. You can limit the risks by informing yourself and making smart investments, but you can never avoid them.
I therefore advise you not to invest too much money in cryptocurrency. In brief:
- Only invest money you don’t need
- Never assume that you will get rich with cryptocurrency
- Don’t become a slave to the race, let the race work for you
- Don’t start buying haphazardly, do your research first
- Trade with a reliable broker
Tip 5: Be responsible with your cryptocurrency
Whether you choose to buy cryptocurrency yourself, or via a platform; always handle your data responsibly . When you buy cryptocurrency yourself, you can choose an online or offline ‘wallet’.
With an online wallet, your cryptocurrency is stored on an online platform. You just log in here with a username and password, and then you have access to your currency. A strong password is therefore very important preferably use a random password generator. Moreover, if you lose the access data to your wallet, you will lose all your cryptocurrency!
In addition, with online wallets there is always the risk that the online service will be hacked or go bankrupt gone cryptocurrency. This has been the case, for example, with the Bitcoin exchange MTgox. Read more here .
An offline wallet is usually a kind of USB stick on which your cryptocurrency is stored. This is a lot safer than an online wallet, because such a USB stick cannot be hacked. You simply disconnect the device when you are no longer using it. The only risk of this is that you could lose the device yourself.
You can also store a wallet locally on your PC . You use special wallet software for this. The advantage of this is that you are not dependent on an online platform, but here too hackers or viruses could gain access to your wallet.
My advice: only put small amounts on an online exchange with a secure password; store large amounts on an offline wallet (or trade through a broker).