You’ve more than likely heard the term “cryptocurrency”, and wondered if it’s something that you should take an interest in. With the potential to make a significant amount of money for financial cushioning, many people have become extremely engaged with this modern form of investment.
In simple terms, cryptocurrency is a form of digital currency trading that has become increasingly popular, with approximately 43 active traders as of 2019. It’s also referred to as a speculative investment, as it involves a high level of risk with the potential for high rewards. Although some people choose to invest in crypto for long-term gains, as they would with other assets, there are also those who choose to take a faster, short-term approach.
There are several benefits and disadvantages to cryptocurrency trading that must be considered, as well as the following factors:
1. Choosing The Right Cryptocurrency Exchange
You may think that you’re ready to dive in and start buying and selling digital assets; however, this isn’t possible without online trading platforms, also known as cryptocurrency exchanges. These exchanges facilitate your trading endeavors, including transaction and fee-collection assistance.
When choosing an exchange, local or international, it’s vital to consider a few factors in order to determine whether it’s the right platform for you. Considerations may include:
- Their reputation and authenticity
- Selection of coins
- Security/protection systems
- Customer support services
- Hidden costs
- Fee structures and purchase methods
A few notable exchanges include:
The above exchanges are a mixture of both local- and international-based. Australia-specific platforms can be found on this list of Australian crypto exchanges.
2. Different Approaches Of Trading
It’s essential to evaluate your short-term and long-term aspirations before deciding on what sort of trader you’ll be; adopting a long-term strategy, for example, won’t serve you kindly if you’re looking to make instant gains. It’s essential to understand this contrast before analyzing each style.
This form of trading involves patience, and a level of protection against daily market volatility. Long-term traders will generally buy coins at their lowest price, hold them for at least a year and only sell them when they’ve reached their highest value.
Potential benefits of long-term trading include:
- Ease: You won’t have to constantly check for ever-day market changes. You have more breathing space to research, and to act accordingly if anything were to affect your long-term trades.
- Less risky
- Reduced tax rate
Potential disadvantages include:
- Missing out on larger and/or daily market gains.
Short-term trading is considered to be the more exciting approach of the two, as it requires quick thinking and action. It involves buying and selling in short periods of time (sometimes hours or even minutes) with the hope to make instant gains.
Therefore, it’s essential for short-term traders to constantly keep an eye on the market. While this approach may seem more stressful than long-term holders, it provides traders with the potential to create returns in a much more timely manner.
Potential benefits of short-term trading include:
- Obtaining a large percentage of profits during a short period
- If acting quickly, can avoid large losses
Potential disadvantages include:
- The need to stay alert and act fast
- Increased stress due to the unpredictability of the market
- Requires a level of understanding in analyzing market trends
- Initial investment is usually a higher amount than required for long-term trades
3. Different Types Of Trading
There isn’t any one trading style for cryptocurrency that caters to everyone’s desires. Depending on your asset goals and preferred tactics (long-term or short-term), you may lean towards one trading style more than others.
- Scalping: Requires constant analysis and action, as the predominant goal is to make returns (even if low) within a few minutes.
- Day trading: Similar to scalping, day trading involves continual monitoring but generally occurs over the course of a day.
- Intraday trading: Allows you to hold positions for more than one day.
- Hold trading: Involves waiting for assets to increase in value over time.
- Swing trading: Involves a specific (long-term) target after predicting future price increases and drops.
- Position trading: Similar to swing trading, position traders only act if future gains are guaranteed (as per their predictions). This form of trading requires an extensive level of analytical intelligence.
- Bull trading: Only trades with assets on a steady incline. Assets will be dropped if growth stops.
- Bear trading: Utilizes the falls in the market.
- Range trading: Works within a defined crypto range.
4. Tax Implications
It’s important to consider the tax implications of trading both locally and internationally. Some exchanges will be linked to a country’s tax department (fiat), and therefore, the government will be made aware of your trading success and seek you out for taxation payment. It’s recommended to keep documentation on all your transactions, to ensure that this process is simple and smooth.
While some exchanges are outside of government control (decentralized), there may be consequences for trading with foreign countries.
5. Cryptocurrency Scams
It can be tempting to sign up to an exchange after reading promising testimonials and relishing at the prospects they guarantee. However, there are several cryptocurrency trading scams that can send you into financial and personal crisis.
Keeping an eye out for illegitimate exchanges and dodgy practices is key in order to ensure that your trading ventures remain secure and authentic. One of the best ways to determine this is by reading reviews and observing platform functionality.
Scams may include:
- Imposter websites
- These sites often promise high and fast returns.
- Their site’s appearance may look cheap/underdeveloped.
- Fake mobile apps
- Wallet hackers
- Promotional bots on social media
- Email scams
6. Popular Cryptocurrencies
It’s important to consider the most-traded cryptocurrencies, as well as the perks and downfalls of each, before trading yourself. While you may choose to trade with more obscure coins, it doesn’t hurt to understand why a majority of traders favor one (or a few) over others.
Popular cryptocurrencies may include:
- Ripple XRP
Before trading with cryptocurrency, it’s essential to understand the various pros and cons of doing so. It’s important to choose the correct exchange platform and trading approach for your aspirations, as well as assessing all potential risks, before diving in.