There is no chance to disregard the cryptocurrency market anymore as Bitcoin and altcoins continue to outpace traditional investments like technology stocks, the S&P 500 and commodity markets. Bitcoin has gained approximately 122% YTD in 2019.
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Crypto market outlook
First and foremost, Bitcoin is unarguably the pioneer of cryptocurrency, breaking through from the obscure to the mainstream in a way that no other alternative currency has.
It has been a wild ride, but the popularity and profitability of Bitcoin has spawned hundreds of new digital currencies.
According to currency.com, the top 5 cryptocurrencies at the time of writing are:
- Bitcoin (BTC) – USP: The original
- Litecoin (LTC) – USP: Faster transactions
- Ether/Ethereum (ETH) – USP: Smart contracts
- Ripple (XRP) – USP: Cheap international payments
- Monero (XMR) – USP: Privacy
Even with the intense pushback from world governments surrounding particular crypto projects like Libra, initiated by Facebook, the cryptocurrency market is becoming a more viable option for all investors.
As more investors become interested in trading cryptocurrency it is valuable to learn some of the basic methods that can be used to gain exposure to these markets.
How to start trading crypto?
The most important aspect to consider when trading cryptocurrencies is their extreme volatility. With no doubt, this can lead to significant gains, but novice crypto investors should be wary of jumping in too quickly.
Most experienced investment managers recommend investing no more than 5% of your portfolio in cryptocurrencies. This is a matter of risk preference and should be considered by each individual.
The most crucial aspect to remember is that crypto markets are for the most part unregulated and operate 24/7 so dramatic shifts are possible at any time.
Online exchanges are the most straightforward way to begin trading cryptocurrencies. It is recommended to ensure that trading cryptos is legal in your country and that the site you choose is reputable.
Many exchanges offer a built-in wallet but be wary of storing your currency here for a long time. These are known as online (hot) wallets and although they are more agile and are considered safe for exchanging fiat currency and conducting transactions, they are vulnerable to external risk as they are connected to the internet.
Large sums of cryptocurrencies should be stored in offline (cold) wallets which are hardware devices safe from hackers when not actively connected to the internet.
Types of crypto exchanges
There are hundreds of crypto exchanges currently operating and deciding which one is best can be a daunting challenge. It is best to consider in broad terms what you are looking for in an exchange and narrow down the options.
Some of the main aspects which should be considered are:
- Security – Typically the harder it is to create an account the safer it is. Do your research and choose an exchange with a clean track record and verifiable history.
- Fiat Currency – Some exchanges offer to trade in crypto and fiat currency such as USD, while others only offer only crypto to crypto transactions.
- Crypto Availability – Some exchanges offer a streamlined number of cryptos available for trade. If you are looking to invest in some of the newer or more obscure cryptos this will need to be considered.
- Fees – As with the vast majority of investment accounts, crypto exchanges can charge a fee per transaction. After balancing the previous considerations transaction fees should be included in your final decision based on your anticipated activity.
There are essentially three types of crypto exchanges, although it is important to note that with the large number of exchanges currently available there are multiple variations within each definition. The three main types of crypto exchange are:
1. Centralized Exchange – Based on the traditional idea of an exchange, centralized crypto exchanges are governed by a controlling company, organization or government. They will offer either fiat-crypto, crypto-crypto transactions or both and much like a stock exchange the central authority acts as the middleman for buyers and sellers.
2. Decentralized Exchange – Based more on the founding ideology of cryptocurrency itself, decentralized exchanges do not require an intermediary to control the transactions conducted. These exchanges match buyers and sellers directly and are considered peer to peer trading.
3. Hybrid Exchange – A hybrid crypto exchange is exactly as the name implies, they combine aspects from both centralized and decentralized formats. Hybrid exchanges seek to offer the anonymity of decentralized exchanges with the liquidity and fast transaction speeds of centralized exchanges. Many crypto investors consider hybrid exchanges as the best method for trading currencies.
How to invest in cryptos without buying them
It is possible to trade cryptocurrencies without actually purchasing any of the currencies themselves. Many trading platforms offer investors the opportunity to trade cryptocurrencies with a contract for difference (CFD).
CFD is a type of contract between a trader and a broker where the two parties agree to exchange the price difference between the opening and closing the trade and try to profit from it.
Trading cryptocurrency CFDs makes you flexible: you can trade any cryptocurrency you like in both directions. No matter whether you have a positive or negative view on the crypto forecast, you may try to profit-taking either a short (if the market’s price goes down) or a long position (in case of an upward market’s price movement).
Crypto CFDs allow the trader to bet if the price of a particular crypto will rise or fall relative to another crypto or currency, for example, Bitcoin-USD pair.
CFD trading allows the investor to benefit from shifts in the price of cryptocurrencies without actually purchasing the asset or going through the legwork of setting up a storage wallet.
CFDs typically involve leveraged trading and like all investments, inherently involve risk. Leveraged trading increase the chance of losing a larger sum of money and this risk should be carefully considered before engaging in this form of trading. CFD positions are held in your trading account and this does provide the benefit of additional security in comparison to holding cryptocurrency itself.