Crypto – What is it?
Cryptocurrency is one of the most exciting and innovative technological developments in the modern financial world. Each designed with their own unique features, cryptocurrencies are powered by a blockchain ledger – which is a secure and self-regulating record of who possesses how much of the currency – maintained by ‘miners’ who receive rewards to keep them up to date. At its simplest, cryptocurrency can, like fiat currencies, be used as a way of buying products and services, especially on the Internet, where the transactions can take place quickly and easily.
Cryptocurrency also has a distinctive social benefit. It is arguably more trustworthy than many major real-world currencies, thanks to its decentralised nature and the absence of a major authority figure – such as a government or a central bank. It’s often used in community-focused schemes as a way of providing value-based rewards for specific actions.
Thanks to the apparent high value of many cryptocurrencies, they have quickly become investment objects as well as sources of purchasing power and ways to achieve specific social goals. By buying a unit of cryptocurrency in much the same spirit as an investor would buy a real-world currency, traders hold on to it in the hope that it will rise in value over time.
The History of Cryptocurrency
Cryptocurrency is now so well known that it feels like it’s been around forever, but it’s a relatively new development. It was only as recently as the 1980s that professionals in the computer science field began to discuss how this technology could be applied to the world of finance and payments. The 1990s saw a range of other institutions pick up on this burgeoning field, including government organisations such as the US National Security Agency.
- Discussion of cryptocurrency’s potential began in the 1980s
- Papers on the field were released by major organisations such as the US National Security Agency in the 1990s
- Bitcoin was developed in the 2000s
- Many cryptocurrencies are available today
The main milestone for the cryptocurrency world came in 2009 when an anonymous developer going by the moniker Satoshi Nakamoto invented and released Bitcoin, which then went on to become by far the most well-known cryptocurrency of them all. Since then, developers in a whole host of different settings have produced new cryptocurrencies. It’s believed that there are now almost 2,000 in existence. Each cryptocurrency has its own aims and its own community – often, each cryptocurrency has a subtly distinctive technical make-up as well.
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CFD or Real? Trading Crypto
When it comes to trading in cryptocurrencies, you have two options. The first is to purchase the actual asset through the best crypto broker services on the market. This means you’ll own the piece of the currency that you buy. To find the right provider for this service, conducting a quick crypto broker comparison is a smart move.
The other option is to use a CFD (contract for difference) broker. Using this system, you won’t own the cryptocurrency itself, but because the value of the asset is derived from the actual market for your chosen cryptocurrency, you’ll be able to take full advantage of market shifts, and it will seem like you’re trading as usual.
Both options have their advantages. CFDs, for example, allow for margin-based trading, which means you can leverage any gains you might make and walk away with a higher profit (or a higher loss if the market nosedives). Deciding which of these options you would like to go for is an excellent way to start thinking about your trading strategy. A CFD broker, for example, may offer you useful tools that help you understand the way your investment is performing, but if you purchase a cryptocurrency as an asset, this may not be available. Factors such as these can inform the rest of your crypto trading strategies, so it’s an excellent place to begin.
WHY STRATEGY IS ESSENTIAL
When it comes to trading in cryptocurrencies, it’s possible to access early profits over the course of a few weeks or months, but the key to sustainable success usually lies in finding strategies that work on a systematic basis. Treating cryptocurrency trading as a lottery will not yield consistent results. While you may experience a ‘win’ here and there, it’s likely that these gains will be offset by the losses that a non-strategic approach often encourages.
- Trading is a skill, not a lottery
- Profits are more likely if systematic tactics are used
- Trying out strategies in a virtual environment is an excellent first move
- CFD brokers often offer this service
It is possible to opt for a broker who gives you the chance to try out your strategy in a safe environment that uses virtual rather than real cryptocurrency. This allows you to hone your strategies before you get started and is another reason why trading cryptocurrencies as CFDs may be a smart move. A free test area is often included as part of the broker’s platform. This sort of test space is available if you trade an actual asset, but it may take more effort and planning to achieve it.
CHOOSING CRYPTO-FRIENDLY TACTICS
Some crypto traders begin their careers with good intentions but end up falling at the first hurdle. Searching for and finding information about potential strategies is something most people can do, but novice traders may find themselves applying strategies that were designed for other asset classes – such as stocks & shares – to their crypto trading activities.
Cryptocurrencies have some very distinctive features that make it difficult to trade them with the same strategies as other assets. Traders who buy cryptocurrencies as an asset rather than as a CFD, for example, may need to pay relatively high fees to cover the cost of mining the transaction, and they may have to pay the exchange that they bought the asset from as well.
- It’s essential to select crypto-specific strategies
- Stocks, shares and Forex strategies may only be partly relevant
- Cryptocurrency fees could mean a different approach is needed
Depending on the exact fee level, this could have a significant impact on profit margin, especially if the trader plans to sell on the asset in a short space of time to incur a small profit. Strategies that cover stocks & shares, for example, probably won’t consider this, given that many share traders choose to build a long-term portfolio. Therefore, when selecting strategies, the trader should always keep the unique properties of cryptocurrency in mind.
MARKET VOLATILITY: AN ADDED CONCERN
The market volatility associated with many cryptocurrencies is perhaps the best reason to ensure that the trading strategies you select are specific to crypto. Volatility occurs for many reasons. Many cryptocurrencies are very new, and investment cycles can be prone to bubbles. There’s not as much crypto data available for backtesting as there is for other tradable asset classes, such as commodities. Crypto also has several purposes, such as company or start-up fundraising (through initial coin offerings, or ICOs) and community-focused projects. As a result, there are many different players in the market, all with some slightly different aims, and this can contribute to volatility as well.
- Cryptocurrency users have differing and sometimes unusual aims
- These aims can include social projects as well as wealth management
- Crypto’s relatively new status makes it more unpredictable
- Market volatility is more likely for all of these reasons
For these reasons, the sorts of strategies shared in the stock trading world, that encourage long-term investment to smooth out any small peaks and troughs in the market, may not seem relevant to you as a savvy cryptocurrency investor. Forex trading techniques may not be that useful either, as they don’t allow for the unusual cultural and societal issues that cryptocurrencies face. You may prefer, then, to opt for strategies that explicitly take into account the volatility of the crypto market.
Selecting Strategies Based on Priorities
There are a whole host of major cryptocurrency strategies out there, and it’s crucial that you choose one that complements your goals. Whether you opt for RSI strategy and day trading, or you prefer to mix and match components of Ichimoku and other methods, any decision about strategy should be made purely by how that particular tactic fits into your own goals and aims. It’s important not to get too attached to a specific strategy (perhaps one you’ve read about, or one that was recommended to you by someone else). The precise aims and goals of the person who suggested it might be very different from yours.
- Your strategy should be based on your priorities
- Consider how large your deposit is
- Risk tolerance levels are also important
In the first instance, you should consider how much you have available to trade. Some crypto trading strategies are suitable only for large deposits, while others are designed to help you grow a smaller initial investment into a much larger one over time. You should also weigh up your attitude towards the inherent risk involved in trading. If you have low-risk tolerance and you’d prefer to keep your goals low, it may be wise to avoid high-risk strategies and instead stick to more dependable options instead – even if that reduces your overall potential yield.
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Don’t Forget Trading Volume
When it comes to finding a strategy for trading cryptocurrencies, you should consider the role that volume will play in your trading decisions. Many strategies revolve around one of two perspectives on trading volume. The first group of strategies encourages the purchase of several cryptocurrency units or CFDs, perhaps spread over a range of markets and coins to encourage diversification. They can then be individually sold on if they lose value, while they can also provide areas of focus for future investment opportunities.
- Different strategies focus on different volume levels
- Buying many coins offers a chance for diversification
- Buying one coin may be more suited to long-term or small initial deposit investors
- It’s important to make your volume choices according to your own aims
The second group of strategies tends to focus on targeted investments, perhaps in one coin in particular, with the aim of holding onto it for a long time to weather any market storms that may arise. These strategies all deserve consideration in their own right, but it’s important to remember that they must suit you and your investment resources. Some cryptocurrencies may require a minimum level of purchase for your trades to be viable, for example, and if you’re operating with limited funds, then a high-volume strategy like this may not suit you.
Copy Trading for Crypto
The rise in cryptocurrency trading has coincided with the rise of another trading technology – copy trading. This is a new type of trading platform that allows the trader to copy the decisions made by a more experienced trader. When the trader you are copying profits, so do you – but when they lose, you lose too. One of the most famous copy trading sites is eToro, although there are other similar services also available.
There are plenty of reasons to consider this route. The filtering systems on these sites allow you to limit your trader choices to those that match your risk profile, for example. You can also go back over data about their historical profit and loss levels to work out whether or not they seem like a consistently successful trader. Remember that nothing is ever a simple and easy solution in the trading world, and sites like these are just another possible tactic rather than a guaranteed big win.
If you do choose to mimic experienced traders, make sure that it’s an informed decision. Outsourcing your trading and hoping it works should only be something you do if you’re certain that’s the best option available to you. It’s also wise to look around the full range of copy trading sites to find one that matches your needs. If low-risk is part of your chosen strategy, your chosen site should have comprehensive risk appetite filtering options available.
Cryptocurrency in the form that we know it today may be less than 10 years old, but the idea has been around for decades. The high level of interest in this blockchain-powered innovation means that many traders and investors have found it a good opportunity to make some cash. Cryptocurrency does sometimes get a bad reputation for being a little volatile compared to other asset classes, and volatility is certainly an inevitable part of crypto trading, but it’s more than possible to develop tactics that can help you mitigate the ever-present risks.
What is clear is that having effective trading strategies in place is the primary way to give yourself a fighting chance of trading your way to a profit. A good crypto trading strategy brings a host of advantages to any crypto trader – ranging from methods of finding the optimal open position duration, to specific ways to counter problems like competing aims on the part of crypto users. By thinking carefully about what your cryptocurrency trading aims are, you can quickly work out a way to give your trading game a boost. With options like copy trading available, the power of the Internet means that there are more choices than ever before when it comes to developing effective strategies.