Since its electronic inception a little more than a decade ago, cryptocurrency has grown from a largely-unnoticed non-regulated e-currency to being recognized worldwide for its discretion and accessibility.
There are about 3,000 cryptocurrencies being traded with a total market value of $221 (Dh812) billion and the reality is the top 10 cryptocurrencies represent roughly 85 per cent of the total market value.
Being faced with innumerable options of cryptocurrencies to choose from, it’s important to know how to narrow down your choices and trade the currency on the exchange, while also looking at what are the risks one should know before taking the plunge.
Brief run through basics
But first, before we dive deep into the subject, we need to briefly brush through what cryptocurrency trading is and how is it different from investing in the currency.
When people invest in cryptocurrency, it usually means that they are buying crypto for the long term. In other words, they believe that the price will ultimately rise, regardless of the ups and downs that occur along the way – investing in it because they believe in the technology, ideology, or team behind the currency.
Cryptocurrency traders, on the other hand, buy and sell the currency in the short term, whenever they think a profit can be made. Unlike investors, traders view crypto as an instrument for making profits.
Now, a couple of key reminders to keep in mind about cryptocurrencies:
- First, the currency is very volatile. In other words, you can make a nice profit if you manage to correctly anticipate the market. The inverse of it is also true, if you sell out as soon as you see a drop, you are in for significant losses. (But despite the volatility, investors now treat crypto like volatility-sheltered or safer assets like gold and other currencies as they have been rising recently despite market-wide uncertainty.)
- Second, unlike traditional markets, crypto trading is open 24/7. Most traditional markets, such as stocks and commodities, have an opening and closing time. With crypto currencies like Bitcoin, you can buy and sell whenever you please.
Crypto trading in a nutshell
To put it briefly, in order to trade cryptocurrencies you’ll need to do the following:
- Open an account on a cryptocurrency exchange
- Verify your identity
- Deposit money to your account
- Open a ‘position’ on the exchange (deciding whether to buy or sell)
That’s crypto trading in a nutshell. Before we take a detailed look at each of those aspects on how to trade in cryptocurrency, let’s understand how to choose the exchange and cryptocurrency to trade in.
How do you decide on what exchange platform you’ll use?
To decide what exchange to trade in, one must make sure to check the following:
Availability – Before you even do anything, first make sure that the exchange is available in your area. Eg. Coinbase, one of the largest exchanges, is not available in United Arab Emirates. So before you do anything please check this. In the UAE, global exchanges such as Kraken, Bittrex, and Binance are supported, alongside local options like BitOasis.
Before you even do anything, first make sure that the exchange is available in your area. Eg. Coinbase, one of the largest exchanges, is not available in United Arab Emirates.
Public opinion – Next thing that you need to check is the reputation of the exchange. Are people happy with their services? Has it been hacked recently? How secure is it? Have people complained about it? Twitter and Reddit are good sources for checking this.
Exchange rates – Different exchanges have their own transaction fees, which may vary. Do your homework here and preferably research 5 to 10 exchanges and their rates.
Safety – Please always choose exchanges which need some sort of ID verification from you. Even though they may take time, they are significantly safer and secure than exchanges that don’t ask for them. At the end of the day, it is your hard earned money. You must take that extra step to keep it secure.
A mammoth task that you will now be faced with is a long list of cryptocurrencies to trade in, with the question arising how do you choose and narrow down the list.
How to choose what cryptocurrency to trade in?
There are several aspects that may help you to get to know any crypto coin better. In the whirling sea of crypto, the real lighthouses are rankings. They can tell a great deal about a coin and navigate your way though. One way to decide is by seeing which are the most popular cryptocurrency and exchanges that are used.
You can take a look at widely-used platforms like CoinMarketCap and Coin360, among others, which regularly monitors the trading volume, market value of different cryptocurrencies, and which exchange sees the most trade.
This is one of the platforms most commonly used by traders to research the latest information on the newest types of coins, study the performance on each coin and exchange.
Basically, market value (market capitalisation or market cap) reflects the size of the currency and the metric is calculated by taking the coin’s price and multiplying it by the total number of coins in circulation.
Example: If there are 1 million coins in circulation and if its current price per coin is $1 (Dh3.67) then its total market cap is $1 million (Dh3.7 million). This value changes as per the trading price of a crypto coin in the market.
It also provides insight into the level of risk an investment represents, and this is why it’s important to check a digital asset’s market cap prior to buying.
Crypto coins with a high market cap and large circulating supply are theoretically less vulnerable to manipulation and wild volatility, whereas coins with a smaller market value can see wild price spikes on positive or negative news. A small market cap coin with lesser supply is also often vulnerable to manipulation by large holders.
Prior to making a purchase, investors should also take a quick look at the digital asset’s ‘trading volume’, which is the number of assets that changed hands in a given period. Volume gives an investor an idea of the price action of a security and whether they should buy or sell the security.
A number of professional traders use volume to decide what currency to trade in, following the mantra that if the price falls along with the trading volume, it generally signals a reversal will happen soon – you could capitalise on this trend and buy.
While conversely, a rise in price with a drop in total volume presents a stronger case for the bears as they drag prices for a lower bid, usually upon meeting a key resistance zone – then literally hold your horses or in this case hold on to your crypto coin position.
Open an account, verifying your identity
Now that you have decided what cryptocurrency and what exchange to trade in, the next step is opening an account in a crypto exchange.
Here is a step-by-step process of how to set up a crypto trading account on an exchange website, whose sign-up and verification processes work like any other website.
- Sign-up and account creation – Signing up is a very simple process. On the (crypto exchange) website you have chosen just click on ‘Sign Up’. Since you are creating your own personal account, create an ‘Individual’ account as opposed to a ‘Business’ one. It’s then a simple matter of putting in your details and website.
- Security steps and account addition – Next up is security and account addition. In this section, phone verification is necessary to give your account a 2-step verification process. Firstly, you’ll have to enter your phone number. You will receive a text message with a verification code. Simply put in that code and you are done.
- Adding a payment method – Most payments can be done via bank account, debit card, and wire transfer. Terms often used on the websites include ‘buy’ and ‘sell’ – which refers to buying and selling cryptocurrencies like Bitcoin, Bitcoin Cash, Litecoin, and Ethereum; ’deposit’ and ‘withdraw’, which refers to depositing and withdrawing amounts in your account.
- Identity verification – Finally, you will need to verify your identity. Most websites are regulator-compliant, as laws and regulations require that it verifies your account by asking who you are and where you live. According to global KYC (Know-Your-Customer) and AML (Anti-Money Laundering) regulations, before you can use your card to purchase anything on any crypto trading platform, you will need to verify your identity. It is a pretty straightforward process – mostly requiring documents like valid government-issued ID (passport, driver’s license or national ID card), proof of residence and a photo.
- Set up a digital wallet – If you want to use Bitcoin or any other cryptocurrency, you will need to first have a digital wallet (specifically for the use of crypto trading). A cryptocurrency wallet is a software program that essentially stores passwords, all transaction records of that particular cryptocurrency (public and private keys) and enables users to send and receive digital currency and monitor their balance. (Note: Digital wallets don’t store currency. In fact, currencies don’t get stored in any single location or exist anywhere in any physical form – only records of transactions.)
- Minimum deposit required to start trading – It ranges from Dh300 to Dh700. In case of deposit limits, unverified accounts (with no ID requirement) are capped between Dh2000 to Dh15000 per week. For verified accounts there is no cap.
- Fees – You will be charged for every kind of transaction made. From placing an order at the current market price (Taker Fee) to a much a higher charge when it is a limit order and the exchange has to wait for the transaction to be completed (Maker fee). Another example is digital asset withdrawal fees, when you withdraw money from your crypto account you get charged a fee. In some cases if you are willing to pay more, your transactions get processed faster.
Depositing money, deciding to buy/sell
Now that your account is activated, but before exploring the rest of the exchange, you’ll need to add funds to your account if you wish to buy or sell any cryptocurrencies.
The exchanges have a feature that allows users to purchase certain cryptocurrencies directly with their Visa or Mastercard credit and debit cards. However, cryptocurrency purchases by credit card are limited to only a few choices of crypto coins. You will then be required to enter the purchase amount of the desired cryptocurrency and specify the currency you will be paying with.
There is a minimum processing fee of about $10 (Dh36.7) or 3.5 per cent of the total order – whichever is higher. After completing this step, you will need to confirm your billing information, email address as well as your identity.
There is a minimum processing fee of about $10 (Dh36.7) or 3.5 per cent of the total order – whichever is higher. After completing this step, you will need to confirm your billing information, email address as well as your identity.
Once all of the required steps have been completed, the newly purchased cryptocurrency should reach your digital wallet within 10-30 minutes. You can also make a deposit by sending funds from your cryptocurrency wallet into your exchange’s account. Once that’s complete, wait for the transaction to process and you’ll be ready for trading.
Placing a trade
Now that your funds are ready to be used, we will now look into how one can place a trade. Here, you will again see all the cryptocurrencies that are tradeable on your respective platform.
There is a section on the page known as an ‘order book’. Here, you will see all active ‘buy’ and ‘sell’ limit orders. A limit order is simply an order that will only be placed at the user’s desired price, given there are buyers or sellers interested at that level.
There should also be another segment that shows the other cryptocurrencies that can be traded and another section detailing the public trade history of the market currently being viewed. The center of the page should show real-time price movements and just below the chart is where you will actually execute the trade.
The process
If your priority is ensuring that an order takes place, select ‘market’ order. If you are interested in only buying at a specific price level, select either ‘limit’ or ‘stop-limit’ order. A market order will be placed immediately at current market prices and stop-limit or limit order at a specified price (whenever it touches the level).
Now, just enter the amount desired to be spent and how much crypto you want to purchase, and that particular order will be completed. In order to sell, simply follow this same process but execute a ‘market’ or ‘limit sell’ order.
When to buy and when to sell
Like trading on the stock market, use the ‘buy low, sell high’ strategy, which is otherwise phrased as ‘buy the dips (BTD)’.
This basic investment technique refers to purchasing more assets as the price falls and/or once it settles. This move is best recommended to use in a ‘stagnant’ or ‘bear’ market, when prices are unchanged or always falling, rather than in a ‘bull’ market (general direction is upwards).
The ‘BTD’ strategy involves analysing charts, the average of price movements in the short-term and long-term and historical trends. Investors can ‘buy big dips’ or ‘little dips’ in the price-chart movement. The former refers to when the price drops below average while the latter means when the price falls from the last placed order price.
Like trading on the stock market, use the ‘buy low, sell high’ strategy, which is otherwise phrased as ‘buy the dips (BTD)’. This basic investment technique refers to purchasing more assets as the price falls and/or once it settles.
People who buy dips can choose to sell fast for a profit or hold onto it to build a long-term position or use it to incrementally take gains. Bottom line, the crux of the strategy is to buy at a lower price, not high. Doing so gives you less room for big mistakes.
There are cryptocurrency websites that provide a “moving average” chart (prices over a defined period of time, anywhere from a few days to a couple years) that illustrates the best possible points to enter and exit the crypto market. Don’t buy when the price is peaking. Instead, wait for it to settle and purchase after the sell-off point.
When it comes to selling your coins, you need to consider a number of factors. It's a tough choice to decide whether to sell some of your cryptocurrencies or keep all of it invested. Some experts recommend selling up to 50 per cent of your coins if you are risk-averse or have pressing financial needs. It also makes sense to sell some of your coins if you don't want to wait years for a potentially massive payoff.
Analysts have suggested that if someone's looking to pay the bills, it may be logical to take out, say, a month's worth of necessities, selling between 20 per cent to 50 per cent of their cryptocurrencies, while also cautioning that they should still keep at least half invested.
Risks faced by new crypto traders
Fear of missing out – It may be hard to watch Bitcoin, Ripple, or other coins peaking like crazy in just a few minutes and finding people flooding trading groups, Reddit, Twitter and other discussion groups to talk about the rise is even harder to watch as an outsider.
Missing out on big activities often causes beginner traders and investors to immaturely buy an asset so as not to miss out on a presumed opportunity.
However, you shouldn’t let this fear of missing out trigger your impulse decisions (buying the coins in demand, panic selling those that aren’t) and join the bandwagon. Missing out on big activities often causes beginner traders and investors to immaturely buy an asset so as not to miss out on a presumed opportunity.
The best way to get over this situation is to shrug off the noise and base your investment decisions based on logic, not on emotion.
Price manipulation – By far the biggest issue in the cryptocurrency market is the excessive volatility. The prices of cryptocurrencies on exchange platforms rise and fall dramatically over a short period of time. When a tradeable asset can drop by as much as 49 percent in less than 24 hours, then the volatility of the market is high.
They do this by taking a ‘buy’ worth a lot of money (probably running into millions of dollars). Regular investors who trade in small amounts will notice this big buy position that has been opened and interpret it to mean an imminent price increase. Once this happens, the price of the cryptocurrency will inevitably go up.
The biggest reason why this sort of asset price manipulation is possible is due to the lack of price limits/fees on many cryptocurrency trading platforms. If adequate limits or fees are put in place, it will discourage the movement of large buy and sell market positions. So it can largely be avoided when using a platform that offers these options – essentially verified accounts and trading limits.
Cybercriminals – The cryptocurrency market has right from the start been plagued by the activities of hackers and cybercriminals. There have been a number of high-profile cryptocurrency hacks and heists that have resulted in millions of dollars being stolen.Traders and investors have lost funds and some platforms have ceased to operate. In the aftermath of these hacks, the price of particular cryptocurrencies has dropped considerably.
Due to the activities of hackers, some traders prefer to store the bulk of their cryptocurrency holdings in ‘offline’ wallets (not always connected to the internet), but this means that anytime they wish to trade, they have to move from offline to online before participating in the trade. This constitutes another hassle but might be safer.
Transaction delays – Even after being a decade in existence, the cryptocurrency market is beset with delays across almost every type of transaction. Many transactions are being held up in the queue awaiting approval. The market is volatile and as such, delays can be costly. Traders end up missing out on favourable positions because the transaction didn’t get posted on time.
Crypto network traffic is unusually high due to increasing demand – when people try to purchase a high number of coins, they can get stuck in a queue for confirmation by miners (people who secure the network and processes every bitcoin transaction using specialised computers.)
Regulations – Authorities around the globe face challenging questions about the nature of crypto assets and their regulation, as certain aspects of the rapidly evolving ecosystem and its related risks are still largely unknown. There have been debates on crypto regulators, including the existing regulatory bodies exploring the possibility of regulating exchanges and other key players.
There have been debates on crypto regulators, including the existing regulatory bodies exploring the possibility of regulating exchanges and other key players.
Different jurisdictions have adopted varying approaches to regulate and address crypto asset-related issues. However, most jurisdictions have not benefitted from a specific regulatory regime to cover crypto assets, though this is beginning to change. A gap in the regulation of crypto assets has arguably increased the risk of fraud.
In the long term, better, more comprehensive regulation of crypto assets will have advantages for investors and financial services, but it’s been widely debated. It could aid the development of new technologies, restrict the potential uses of crypto assets in fraudulent or illicit transactions, and reduce the risk of cyberattacks.
The UAE Central Bank governor Mubarak Rashid Al Mansouri has frequently warned against trading in cryptocurrencies, having said that such currencies were susceptible to use in money laundering or terrorism funding.
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