Want to know how to invest in cryptocurrency? This cryptocurrency trading guide will tell you all about it.
What Exactly Is Digital Currency?
Cryptocurrency refers to a class of digital assets where money transfers aren’t monitored or recorded by a single institution (like a bank or credit card company), but by a distributed, public ledger called a blockchain. The most widely used cryptocurrency at the moment is Bitcoin (BTC).
Cryptocurrencies don’t have a physical form and “live” digitally on the blockchain as tokens. This is in contrast to traditional money, also known as fiat currencies, which are produced and supported by a centralized government and physically exchanged.
Moreover, cryptocurrencies are not yet commonly accepted as a kind of currency; nonetheless, some early adopters are beginning to recognize their utility as a unit of account in the real world.
The demand for cryptocurrencies on the market dictates both their potential for growth and decline, just as it does for equities and bonds. This is one of the primary reasons why so many people are interested in trading, as well as investing in cryptocurrency.
What Sets Cryptocurrencies Apart From Traditional Currencies?
The United States dollar (USD) and the Canadian dollar (CAD) are examples of fiat currencies. This type of currency is issued by the government, which means that a centralized authority regulates its price, rates of interest, and total supply.
Many people consider the degree to which the government is involved in the workings of the free market to be an act of manipulation and an antiquated and fruitless attempt to exert control over an extensive and intricate market structure.
It’s basically a good idea that, at worst, causes inflationary pressure and makes it impossible for the common person to get ahead financially.
On the other hand, digital currencies are decentralized money, which means that all transactions are carried out between users directly or through the use of smart contracts, and there is no central authority that regulates them.
Because of this, many believe using cryptocurrency is significantly superior to using traditional money because it grants them complete control over their crypto holdings. Unfortunately, as we shall see, this isn’t entirely true.
How Do Cryptocurrencies Actually Work?
The blockchain is a decentralized network of computers that records and stores all crypto transactions. Each time a new crypto exchange takes place, it is added to the public blockchain that stores all previous transactions.
The computers that make up the blockchain, known as “nodes,” can be centralized or decentralized to various degrees and located in any part of the world. These nodes compare and verify the new data to be included in the blockchain, known as a “block,” against their records before it is added to the public ledger.
This renders the blockchain extremely secure and makes it extremely difficult, if not impossible, to hack it. A forger would have to compromise 51% of a network’s nodes to successfully forge a transaction, a task that is far too time-consuming and costly to be advantageous.
Investing in Cryptocurrencies
Before we get into the specifics of how to invest in cryptocurrencies, you must have a firm grasp that there are both sound and questionable motivations to do so. Keep in mind that for every crypto investor who became wealthy overnight, there was another who lost everything. If you can’t or won’t invest in something with the prospects for both huge gains and devastating losses, then cryptocurrencies may not be the best investment vehicle for you.
With this in mind, continue reading if you have a sincere interest in the prospect of cryptocurrencies fundamentally altering how we handle monetary matters, are open to new knowledge, and are confident in your ability to minimize potential losses of your crypto investments.
Where Can You Buy Cryptocurrencies?
There are currently four key entry points available to prospective investors in the market. Traditional investing platforms, cryptocurrency exchanges, specific mobile payment systems, and other alternative platforms and crypto ATMs all provide customers with the opportunity to purchase cryptocurrencies.
Traditional Marketplaces for Cryptocurrency Investments
Common investments on traditional exchanges include stocks, options, and bonds. To this end, many companies are now also providing cryptocurrency.
The process of investing on these platforms is analogous to the process of purchasing a stock. Utilizing limit orders can benefit investors who want to get exposure to the market at a particular price. With limited orders, your get filled once they reach a specified rate.
Market orders, on the other hand, are an option for those who wish to enter the market as soon as possible. However, it is important to keep in mind that it is entirely feasible for your order to be fulfilled at a price different from the one you really want.
One significant advantage of conventional investment platforms over alternative crypto trading platforms is their streamlined security. Namely, they handle the majority of the security procedures on their own for their users.
On the other hand, some traders might feel like they don’t have full control over their cryptocurrency holdings because most brokerage platforms do not currently permit cryptocurrency withdrawal to a private or “cold” wallet.
For instance, cryptocurrency stored on a conventional investment platform cannot be used as a direct form of payment for merchandise and services.
The cryptocurrency ecosystem would be incomplete without exchanges, which perform one of the most important functions. To put it another way, crypto exchanges function as a gate or threshold between the world of fiat currency and the world of cryptocurrencies, or, put simply, as fiat gateways.
Cryptocurrency exchanges are online marketplaces that deal exclusively in digital currency. Users who have registered their accounts can take advantage of the cryptocurrency exchange services provided by a centralized exchange (CEX). Its principal function is to bring together buyers and sellers via an order book. However, a CEX can also provide its authenticated customers with access to a variety of cryptocurrency-related products.
Moreover, a centralized cryptocurrency exchange is the easiest way to get started with blockchain technology for newcomers since it eliminates the requirement for in-depth expertise of blockchain architecture and instruments.
On the other hand, decentralized cryptocurrency exchanges (DEXs) are characterized by their use of smart contracts executed directly on the blockchain. Moreover, a DEX does not require you to register, which means that it is accessible to everyone with a wallet and some cryptocurrency. Users are granted a great deal of flexibility through the employment of DEXs, which serve as the entry point to the realm of decentralized finance (DeFi).
Nevertheless, they do not offer the assistance that a CEX does, and it is rather simple to make errors that cannot be undone while using the crypto trading services of a DEX.
Now, let’s take a quick look at the steps involved in the process of making investments through these crypto trading platforms.
But before you dive headfirst into your first crypto deal, it’s a good idea to do some research and compare prices and safety features at a few different exchanges. These aspects can vary a lot from one exchange to the next. You can take a look at our assessment of the 22 most prominent markets in 2023 for a general overview as a reference.
To begin, let’s discuss the costs involved. Most of the exchanges presently levy what is known as “maker fees” and “taker fees,” which are often detailed on the websites of the respective platforms. Once you place a limit order, your trade won’t go through unless you can buy the item at the price you set or at a better price. If you can’t do that, you’ll have to pay maker fees.
If you set a limit order to purchase crypto at $30,000, for instance, the exchange will only fulfill your trading position if the price drops to or below that amount. The amount that a maker deducts as their fee can range anywhere from 0.01% to 0.30% of the combined worth of the placed order.
When you place a market order, you’re purchasing an asset at the subsequent applicable rate, which makes you liable to taker fees. Be aware that placing a market order does not guarantee that your order will be fulfilled at the price you want.
If you put a market order to purchase crypto at $30,000, for instance, it’s possible that your order will be fulfilled at a value that’s slightly lower or higher than $30,000. Taker fees can range anywhere from 0.01% to 0.40% of the combined worth of your order. The minimum fee typically amounts to $0.01.
If you’re still worried about security but don’t have time to learn the ins and outs of crypto, a brokerage platform may be your best bet.
Investors should take into consideration both fees and security before making a decision. Because cryptocurrency is still in its early years, not every exchange is created equal, making some exchanges more trustworthy than others.
Think about sticking with exchanges that are ranked in the top 10 for trading volume on the global scale. This may lessen the likelihood of you falling victim to cons, such as phony exchanges that prevent you from withdrawing your funds, low-volume markets where your market orders are more likely to be filled at prices you don’t want, and other unwelcome occurrences.
In addition, you should investigate the security features offered by the exchange to determine the extent to which they can protect the confidentiality of your financial and personal information. Two-factor authentication, Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, and cold storage are just a few examples of industry-standard practices for security.
For the majority of the platforms analyzed here, including those that offer higher returns, investors must often take the extra step of securing their own funds. If you lack the technical know-how, this can be difficult, as mistakes can result in the complete and permanent loss of access to your holdings.
Registering a Trading Account
In order to open an account with the majority of cryptocurrency exchanges, users will be required to provide some form of identification.
After creating an account, you will be given the opportunity to link a bank account and deposit the funds you want to invest in crypto. After that, you can choose whether to enter the market with a limit or a market order.
Since the crypto market is highly volatile, always deposit an amount you can afford to lose.
Investors can also participate in the market through mobile payment apps. Users can buy cryptocurrency with their linked bank accounts through these apps, which customarily have a dedicated crypto toggle displayed on their user interface.
In spite of the fact that mobile trading apps are highly convenient for trading on the go, there is one significant drawback.
Namely, most mobile payment apps have both a flat rate and a spread added to your total for each transaction. When all of the expenses are factored in, they typically come out to be quite costly.
Some crypto investors prefer to use their credit or debit cards to purchase cryptocurrency, and they typically do so via a digital platform developed to facilitate this type of transaction. These platforms may well be expedient, but they sure charge hefty fees of up to 4.5% of the transaction value for convenience.
Keep in mind, too, that it is not unusual for the value of cryptocurrencies to increase or decrease by ten percent in the span of just one day. Using a credit card to make a purchase involves taking on additional debt in order to acquire an extremely volatile digital asset.
Bitcoin ATMs (or crypto ATMs) are physical vending machines that allow you to purchase cryptocurrency using a credit card or a debit card. Crypto ATMs are operated by private companies, and they make money for their operators by billing processing fees to clients using their services.
Please note that even though Bitcoin ATMs are a handy option, they are very expensive and just as vulnerable to hacking as any online cryptocurrency exchange that accepts credit cards.
How to Buy Cryptocurrency Through a CEX?
The first step is to find a centralized exchange that trades crypto in your local fiat currency. After that, you will need to sign up for an account and upload appropriate documentation to verify your identity. You might wait a few days for the platform to complete your identity check.
Once your account has been verified, you will need to transfer fiat currency from your bank to the exchange using one of the following methods: direct deposit, e-transfer, SWIFT money transfer, or credit card (options could vary depending on the exchange’s offer). At last, you are prepared to make your initial coin purchase.
How to Buy Cryptocurrency Through a DEX?
If a DEX is your preferred trading venue, you will first need to register with your preferred exchange. Please note that if you want to buy another cryptocurrency via a DEX, you’ll need to have some cryptocurrency first, because decentralized platforms typically don’t accept fiat. The best way to obtain your first coins is through a beginner-friendly fiat gateway, such as Coinbase, for instance.
Once you’ve done this, you can move your cryptocurrency from the centralized exchange’s wallet to your hot wallet. Last but not least, you must locate a DEX operating in the ecosystem of your choice that provides access to the desired degree of liquidity and asset selection. You’re ready to make your first cryptocurrency investment.
Which type of exchange you should use for your cryptocurrency trading endeavor depends on a number of factors unique to you and your trading needs. What is your comfort level with taking financial risks? When it comes to investments, what are your long-term objectives and timetables? How would you describe your approach to investing or trading? What weight do you give to the importance of decentralization, confidentiality, and reliability?
There is no single correct solution because of the many factors and alternatives involved. Investing in cryptocurrencies can be risky, so it’s important to do your own due diligence and avoid rash decisions.
If you’re considering investing in cryptocurrencies, we hope this article will make you more knowledgeable, in control of your financial future, and eager to start your crypto business responsibly.