Comprehensive Guide to Cryptocurrency Trading for Beginners
When Bitcoin was created in 2010, the future of cryptocurrency was uncertain. Many policies were against this new form of currency and there was no legitimacy to it. Many countries outlawed Bitcoin and thus, it was mainly used in the underground criminal world, and on the dark web.
However, over time, the use of cryptocurrencies continued to soar and began to go mainstream. Major companies and big brands began to accept Bitcoin as a form of payment, propelling this new form of money into the limelight.
In 2016, Ethereum was created, and with it came the smart contracts that enabled decentralized finance (DeFi). The Ethereum chain also allowed the building of decentralized applications (DApps) on top of the blockchain network.
With DeFi, anybody could be able to participate in financial opportunities that otherwise are only available to the elite or the super-rich. With cryptocurrencies going mainstream also came the opportunity for crypto-trading and today, this industry has taken off.
Exchanges were also launched to allow traders to cash in on the opportunities presented by the volatile price action of the cryptocurrency markets. Between 2010 and 2020 thousands of cryptocurrencies have been built and developed on different blockchains.
According to CoinGecko, there are over 11,000 cryptocurrencies in existence. This article is a perfect guide on cryptocurrency trading for beginners.
What is Cryptocurrency?
In knowing how to trade cryptocurrencies, we must understand what a cryptocurrency is. Cryptocurrency is a digital asset. It is also a virtual currency that has been secured using cryptographic methods. This makes it almost impossible to replicate or create counterfeit items.
The majority of cryptocurrencies are built on top of decentralized networks which are created using blockchain technology. Blockchain is a distributed ledger that has been enforced by a host of several hundred servers, which means that no single entity can alter this ledger without affecting the entire network.
Cryptocurrency can also be viewed as a form of digital currency or cash. People can use cryptocurrencies to pay for day-to-day activities, such as booking flights and hotels or even paying for groceries.
When thinking about cryptocurrency trading for beginners, it will require them to sign up for an account with a cryptocurrency exchange. But the bare-metal definition of a cryptocurrency is secure digital cash that has been proven to be legitimate and can be used with no middlemen.
What are Distributed ledgers in Crypto?
A distributed ledger is a shared database that is often synchronized across multiple nodes or servers. This means that the blockchain is constantly being updated by the thousands of computers that are logged into the network.
These computers act as public witnesses and participants of each server or node in the network can access the recordings that are shared across that blockchain network. The participant can own an identical copy of those recordings.
Also, any alterations made to the ledger are reflected on all the participants almost instantly. Hence, any unauthorized entry in the distributed ledger renders the blockchain vulnerable.
The opposite of a distributed ledger is a centralized ledger on which most of the traditional companies in finance use it. Centralized ledgers are dangerous because they have a high susceptibility to cyber-attacks, fraud, and high chances of a single point of failure.
Blockchain has been enabled by distributed ledger and is the backbone of cryptocurrencies. Examples of cryptocurrencies that exist in the blockchain include Bitcoin, Ethereum, Chainlink, Aave, Compound, Cardano, Polkadot, and many other thousands of coins.
How Do Cryptocurrencies Work
It is rare to find cryptocurrency trading for beginners guides that don’t touch on the history of cryptography and how the cryptocurrencies themselves work. well, as noted above, Cryptocurrencies are enabled by blockchain technology which in turn is secured by cryptography.
Cryptography is the science of writing codes and ciphers that help secure communication. It is one of the most essential elements that is employed in the making of cryptocurrencies in modern times. Cryptography more or less guarantees the security and uniqueness of cryptocurrencies.
The History of Cryptography
For you to understand the way crypto works and how these assets came into being, It is always important to have a brief history of cryptography. Cryptographic techniques that are used today have been in development for a long time.
Some of these techniques have existed since ancient times when people used them to transmit or send information securely. Over the years cryptography has continued to develop and become more and more complex.
In the end, these developments have given way to the sophisticated methods used for modern digital encryption. The earliest usage of cryptography was found in Egypt about 3900 years ago. This form of cryptography involved symbol replacement, concealing permissions, and at the same time enhancing the linguistic appeal of the Egyptian people.
Despite this, 400 years later, the first known cryptography technique that was used to protect sensitive information was found in Mesopotamia. This is where a scribe employed the use of cryptography art to protect the formula for making pottery glaze.
Over the centuries, cryptography and cryptanalysis became more and more sophisticated until the recent age of computers. The 128-bit mathematical encryption is far stronger than any of the techniques that were used in the ancient eras.
Quantum cryptography is worth noting as it is an entirely new form of encryption that was developed at the beginning of the 1990s. The method has continued to be perfected with the hope of increasing the level of protection that is offered by modern crypto.
How Do Cryptocurrencies Employ Cryptography?
Cryptocurrencies use some advanced cryptographic techniques such as hash functions, digital signatures, and public key pairs. These techniques ensure the security of any data that is stored on a blockchain and also ensure the authenticity of transactions.
Bitcoin and other cryptos are secured by the elliptical curve digital signature algorithm (ECDSA) which allows funds to only be accessed by the rightful owners. A digital signature is a cryptographic mechanism that is used to verify that a user is authentic and is the owner of a digital wallet.
You can think of it as the digital version of the ordinary handwritten signatures. However, it has a higher level of sophistication and complexity, and not to mention, security. This is because, unlike a normal handwritten signature, a digital signature is a piece of computer code that is attached to a message, document, or transaction.
After it is generated the code acts as proof that the transaction, the document, or the message is authentic and has not been altered along its way from the sender to the receiver. This is how the security and the integrity of the network on which the relaying of the message is taking place is ensured.
Asymmetric Cryptography in Crypto
Public key cryptography (PKC) is a framework that uses both private and public keys to protect and ensure the security of the digital wallet of a blockchain user. This form of cryptography is also known as asymmetric cryptography.
Key pairs in this asymmetric cryptography give a set of unique characteristics and functionality that can be used to solve problems that are inherent in other cryptography techniques. In a public key cryptography scheme, the public key is used to encrypt the information by the sender of the message.
On the other hand, the private key is used to decrypt the message by the recipient. Please keep this in mind because it is a very crucial component in the way digital assets are bought and sold in the market.
The public and private key pairs provide the only way through which crypto assets can be transferred from one person to the other without the need for intermediation.
Since the two keys are different from each other, the public key can be safely shared without compromising the security of the private key. Hence each public key pair is unique and it ensures that the message, which is encrypted using a specific public key, can only be decrypted using a corresponding private key.
Asymmetric encryption produces key pairs that are mathematically linked. This means that the length of these keys is longer than those used in symmetric cryptography. In cryptography, the longer the length of the keys, the more difficult to compute the key.
The length of keys usually lies between 1024 and 2048 bits. One of the most used algorithms for developing asymmetric encryption is the RSA. This is where keys are generated using a modulus that is calculated by multiplying two numbers.
The modulus generates two keys, one which is public and one which is private. Cryptocurrencies need to be signed digitally and they need to be secured using cryptographic encryption algorithms. This is how cryptocurrencies work.
How to Buy and Sell Crypto
To become involved in the cryptocurrency and blockchain space, it is important to own cryptocurrencies. Many well-to-do cryptocurrency trading beginner’s guides will tell you that one of the best places to buy or sell a cryptocurrency is on cryptocurrency exchanges.
The act of buying and selling cryptocurrencies is called trading or cryptocurrency trading. Trading is a fundamental and economic concept that has always existed since ancient times. However, in the scope of cryptocurrencies, it involves selling and buying crypto assets on a platform provided by a given company.
These could be digital shares that belong to or that have been issued by blockchain startups. For example, when Ethereum was trying to raise money for its blockchain project, it issued the Ether crypto to investors.
So, by buying and owning ETH at the time, you simply helped launch the platform. But there are now secondary markets where crypto can be exchanged from the initial buyer to someone else.
In traditional finance, assets can be options, futures, or even currencies, stocks, and bonds. However, in the cryptocurrency space, the assets are tokens, which can be offered in a range of markets that include futures, options, and even margin trading.
Step by Step Guide on Buying Crypto
There are many exchanges where users can buy or sell cryptocurrencies to get exposure to a different range of crypto assets. Cryptocurrency exchanges provide a massive opportunity for traders to make a handsome profit while trading these tokens. To buy or sell a cryptocurrency, here are a few steps that you need to follow.
- Create a Metamask account or head over to a centralized exchange, such as Binance, or decentralized exchange, such as a UniSwap.
- For decentralized exchanges connect your wallet to the decentralized exchange and for centralized markets, such as Binance, create an account by signing up with your details.
- After this, you can purchase cryptocurrencies using the different methods that have been provided on each of these exchanges. Binance has more opportunities and more avenues to buy cryptocurrencies or payment methods. However, decentralized exchanges rely on the user to have at least one crypto asset in their wallet that they can exchange for another token. Due to this, cryptocurrency trading for beginners is mainly secluded to centralized exchanges.
What to Consider Before You Buy Crypto
It is important to think about risk and reward before you begin to invest in cryptocurrencies. The majority of materials on cryptocurrency trading for beginners encourage people to rush. There is always this idea that the crypto market will outgrow you if you don’t move in fast.
While it is okay to want to have a piece of this new digital world, forgetting to assess the risks and the advantages is not wise. At the end of the day, your investment decision must be as informed as possible. The following are some of the things you can consider before you buy crypto:
Have Financial Protections Against Losses
One of the major considerations to factor in before you purchase cryptocurrency is the financial safeguards that will help to prevent any losses. It is important to plan and prepare for those times when your trade doesn’t go as expected.
Many people have lost their entire life savings in the crypto markets due to the high volatility of the market. It is not advisable to go unplanned. It is also not good to underestimate the systemic shocks of the market.
So, when you decide to buy, only risk money you can afford to lose. There are also tools like “Stop Loss” that can help you automatically exit trade positions if there is too much volatility in the market. Use them as much as you can.
Save For the Future
Secondly, before you invest in cryptocurrencies, save and invest for the future. This is important because once you have your money set aside for emergencies you will not be stranded in case the markets do not go your way.
Many people have become homeless and lost their families because of betting their entire life savings on the crypto markets. This is a terrible investment decision not just in crypto, but any other asset. Managing capital is crucial to the success of any investor. Do not over-invest!
Get Crypto Education
Lastly, it is important to get some education about cryptocurrency before you delve into these unknown waters. Cryptocurrency is a fairly young industry, not even 15 years old. The markets are highly volatile and can go from zero to 1,000% in a very short time frame.
The opposite is true. The markets can drop down almost to zero in less than a week or so. Hence, understanding the market cycles, what cryptocurrencies are, and what drives their growth is important before dumping your money into these digital assets.
Also, if you are hell-bent on investing in cryptocurrency, it is advisable to start with a small amount and grow as you continue to learn more about the market. Once you have understood how it all works, allocate some of the excess cash that you have into some of the projects that you find to be most profitable.
If you invest in crypto, think of it as a dead investment and the money will never get back. This is advice from Danny Lee, a prominent financial planner located in Denver. Investing and buying cryptocurrencies is a speculative investment, meaning it can go either way.
Introduction to Crypto Exchanges
Crypto exchanges are platforms that enable the trading, i.e, the buying and selling of cryptocurrencies. On crypto exchanges, the user can exchange one cryptocurrency for another. For instance, Bitcoin can be exchanged for another cryptocurrency, such as Ethereum, USDT, or even Tron.
Cryptocurrency exchanges act as middlemen between the buyer and the seller and make their money through hefty commissions and transaction fees they charge the users. Common cryptocurrency exchanges are categorized into two groups. The first group is the centralized exchange and the second group is the decentralized exchanges. Let’s discuss what these exchanges are all about and why they are vital in the crypto-verse.
Centralized cryptocurrency exchanges are third-party platforms that connect the buyers and the sellers. They are 100% operated and controlled by a single entity and 100% of the crypto transactions must go through the centralized exchange’s servers.
While this defeats the purpose of decentralization, centralized exchanges offer more reliability and liquidity. Examples of centralized exchanges include Coinbase, Kraken, Gemini, and Binance.
Cryptocurrency trading for beginners is easy with centralized exchanges because they are user-friendly even though they are not decentralized. However, they are at a higher risk of being hacked and also charge high transaction fees for their services.
As a rule, it may be advisable to begin your crypto journey with centralized platforms. Once you are now able to understand how everything works in the market, you can decide to choose decentralized exchanges in the future.
Decentralized exchanges allow blockchain users to carry out peer-to-peer transactions without the need for a third party or middleman. Experienced blockchain users prefer to use decentralized exchanges because of some issues associated with centralized exchanges.
It is however important to remember that decentralized exchanges do not support the trading of cryptocurrencies for fiat currencies. The best examples of decentralized exchanges in the market include Uniswap, Airswap, and Blocknet.
Decentralized exchanges are also very beneficial, especially in mitigating hacks and they help prevent market manipulation by large entities. Moreover, decentralized exchanges promote anonymity, which is one of the key aspects of decentralization.
But even with all these benefits, decentralized exchanges are complex and they lack FIAT payments. This is the main reason why most of the time they struggle with liquidity. Because of these liquidity challenges, you may suffer from something called slippage.
This is a situation where a trade is executed at a higher price than what was initially quoted. For example, if ETH is quoted at say $3000 if there is not enough liquidity in the market, it may be difficult to get that order filled at that price. As a trader, you will end up settling for the next best price which may be higher.
Is Crypto a Good Investment
The decision of investing in cryptocurrency could be a good one or a bad decision depending on several factors. If you invest in cryptocurrency, you should do it based on the facts and not the general hype that is in the market.
Also, before you purchase or sell any digital currency, it is important to know the risks associated with these actions. This allows you to judge for yourself if the investment is a good idea for you and your finances. Some of the risks of investing in cryptocurrency include the following:
This is an extreme market movement that may generate higher returns, but could also take away every last bit of cent that you put into the market. The crypto is generally volatile but this can be worsened when there is high-impact news. This may include things like sweeping regulation news and such.
You need to consider the number of scams in the crypto market before you enter. In 2021, over $1 billion worth of cryptocurrency scams were reported globally by customers. The scale of fraud on the cryptocurrency landscape is much larger. This is because the industry is not regulated.
Fake promises of high returns are common in the blockchain space. Cryptocurrency organizations or blockchain-based firms may overstate or even exaggerate how much investors could make in profits from investing in crypto while downplaying the risks.
It is important to make sure that you understand that the risks are very real and the chances of getting higher returns or losing it all stand at 50/50. Cryptocurrency does not have any compensation scheme, which means that no insurance will guarantee you your money back if it all goes down the drain.
Possible Security Breaches
If you lose the password to your crypto wallet, there is no one to get it back for you. It doesn’t matter how you lost it. Whether it was hacked or you were scammed into offering it to someone, once that private key is gone, it’s gone forever.
This is the kind of info that is so important to understand before joining the cryptocurrency movement. Don’t just follow the hype and the crazy talk.
Can You Make Money in Crypto?
Even with the possible risks involved, it is very possible to make money with crypto. For example, early investors in cryptocurrencies like Bitcoin have made a huge profit. An investor in April 2016 who put in $310 in Bitcoin has gained over $35,000 in just five years.
This presents a lucrative opportunity to more than quadruple your money in just a short time. Also, new cryptocurrencies continue to emerge daily, some solving real-world problems, while others are just riding on the hype of the most recent price movements in the crypto world.
It is important to understand how to differentiate between blue chip projects and projects that will not last. Do not fall into the trap of buying worthless digital assets in the hopes of higher returns. If something is too good to be true, it probably is.
Investing in a cryptocurrency is not a guarantee that the cryptocurrency will remain in the market for a long time. Hence, it is always good to create targets and goals for your expected profits.
According to the analysis of the previous 10 years in cryptocurrencies, long-term investing in cryptocurrencies is a good idea. Cryptocurrencies can give you lucrative returns that you will rarely get in any other industry globally. But you have to be patient for those gains to come.
What Determines Crypto Value
The market value of any cryptocurrency is determined by several factors. Some of these factors are not always under our control. But here is a breakdown of some of the driving forces in the crypto price action.
Supply and Demand
The larger the number of cryptocurrencies in circulation, the lower the demand will be. For this reason, it is likely the oversupply will lower the price. Cryptocurrencies usually are not backed by any central authority. Hence, they derive their value from other sources.
The value of anything is determined by supply and demand. If the demand increases faster than the supply, the price goes up. It may therefore be a good strategy to watch for factors that drive up demand in certain assets. This may include a change in monetary policy, increased blockchain good news, etc.
Cost of Production (Mining)
New cryptocurrency tokens are produced through mining. Mining is a process where a computer verifies the next block on the chain and is rewarded with the cryptocurrency tokens that have been locked up in that block. The decentralized network of miners allows cryptocurrencies to work as they do.
The cost of producing a block goes a long way to dictate the price of a cryptocurrency. In case the mining costs increase, the cryptocurrency associated with that chain will increase. This is done so that miners can get compensated for the work.
Volume and Availability on Exchanges
Additionally, cryptocurrencies require volume for them to be traded. If your cryptocurrency is listed on many exchanges, then many traders can have the opportunity to trade their cryptocurrency and push its price up or down. This high volume plays a key role in dictating value.
Some smaller tokens may be available on some lower or select exchanges. This limits access for some investors who would be interested in purchasing these tokens.
Remember cryptocurrencies that get a listing on many exchanges are exposed to a higher number of investors willing and able to purchase them. This increases demand and subsequently, the price goes up.
Competition in the Marketplace
Due to the development of thousands of cryptocurrencies, competition also becomes stiff over time. After all, companies need to be innovative and build very fast in a smart way.
If the competitors come up with new and better technology, users migrate to these new platforms. Subsequently, they rush to purchase the cryptocurrency of the new platform. In the end, the new users drive the price of the previous platform down, decreasing the value of the project.
How to Pick Promising Crypto Projects
Picking crypto projects that are profitable and will give you a good return in the future depends on many factors. These factors include things like revenue, history of the organization, algorithm, and even social engagement of the crypto companies behind the cryptocurrencies. Here are some other factors to consider:
The Economic Impact of the project
Examining the revenue or the economic impact of the cryptocurrency project will allow you to understand where the project will be in the next couple of years. Crypto is a financial asset and financial assets are supposed to solve a problem.
By doing so, they generate income for their ecosystems. The ecosystem of cryptocurrencies majorly consists of node operators, partners, investors, and even miners.
The organization behind the cryptocurrency is supposed to be decentralized. There should be no single entity or person or a group of people that is behind the organization. Despite this definition, this is rarely the case.
Because of this, you must check out the team that is behind the blockchain startup. This includes the developers, marketers, and founders. This helps to pinpoint weaknesses.
You can also see if there are questionable characters present in the team behind the cryptocurrency project. If the people behind a project don’t have real experience in crypto, then it is a red flag.
History of Performance
The history of a cryptocurrency can shed light on whether that project is good to invest in or to pass. Cryptocurrency projects that have a history of scamming their investors or not meeting their deadlines must be avoided.
However, cryptocurrencies that are famous for solving industry problems can perform well in two or three years.
Social engagement is important. Since cryptocurrencies and blockchains are decentralized, everything goes back to the community. This implies the popularity of a project with the people matters.
One of the best platforms to check for the social engagement of any particular cryptocurrency is the Twitter social network. On Twitter, you can find different cryptocurrencies and their communities.
You can gauge from here the social engagement and how involved the community is in the project. Higher social engagement shows that the project developers are active and are building something. However, low social engagement shows that a project is dead, or is on the way to dying out.
For new members to join the cryptocurrency universe, it is important to pay attention to all the factors we have listed above. Cryptocurrency trading for beginners is easy if you follow the necessary steps needed to succeed.
Examining projects by using the various metrics explained in this article will help users, both new and experienced, to choose better projects and make good returns in the process. The cryptocurrency space is expanding and growing at a rapid rate. Enhancing user education is highly encouraged as well.
* We hope this information will help you in your investment process, but this is not investment advice. Every investment carries risk, especially in this industry, so DYOR before making a decision.