This guide is for anyone who has felt overwhelmed by the idea of trading cryptocurrency.
For those who have always considered the concept of cryptocurrency as, well, cryptic, the digital asset arguably became even more mainstream in October.
On Monday, Oct. 19, panelists at an International Monetary Fund seminar discussed the benefits and challenges associated with central bank digital currency (CBDC). During the panel, U.S. Federal Reserve Chairman Jerome Powell said the U.S. will take a cautious approach before deciding on introducing a CBDC. While this was not an official endorsement, he did acknowledge the U.S. has been carefully considering the idea.
Later in the week, PayPal announced its users will now be able to buy, hold, and sell cryptocurrency directly from their PayPal account. With over 26 million merchant accounts and over 300 million users, this move makes cryptocurrency transactions more available to millions of businesses.
In the wake of this attention, the price of Bitcoin, the world’s largest cryptocurrency, rose to just under $13,000. With the price already over 19 percent this month, Bitcoin hit its highest price since summer 2019.
As the digital asset continues to make headlines and drive volatility, trading cryptocurrency can be enticing to traders. Understanding how cryptocurrency works, as well as its risks, may be helpful before deciding if it’s right for you.
Cryptocurrency is a digital asset based on a network that is secured by encryption techniques. Because it is digital, there is no physical coin or bill.
Unlike other currencies, such as fiat money, cryptocurrency operates without the middlemen of banks or other institutions. Instead, records about crypto transactions are recorded in a public ledger known as “blockchain.”
Investors can buy cryptocurrencies with a credit card or by completing auditing work known as “mining.” Then, they can store their cryptocurrency in a digital “wallet,” which is software that stores private and public keys while interacting with various blockchains.
WAYS TO TRADE
There are a few ways to trade cryptocurrency. One way is to buy crypto in anticipation it will increase in value. To do this, traders would need to open a cryptocurrency wallet as well as an account with a cryptocurrency exchange. Be sure to research an exchange’s reputation, fee structures, and security when selecting an exchange.
Another way is to speculate on cryptocurrency price movements via a contract for differences (CFD) trading account. In a sense, this method is similar to forex trading, where traders can trade with a buy-and-hold strategy or trade with the daily or weekly volatility.
However, unlike forex trading, cryptocurrency is decentralized, meaning the economic and political conditions that influence fiat currency prices may not affect crypto markets. Instead, crypto traders consider factors such as the supply of coins, security breaches, integration into other payment systems, and media coverage.
ADVANTAGES OF THE ASSET
Some traders may prefer the unlimited market hours for cryptocurrency trading. Without a centralized governance of the market, cryptocurrency transactions can happen at any time all over the world. This can offer flexibility for traders who are unwilling or unable to commit to the market hours of other exchanges.
On the other hand, for those who are unwilling to monitor the market 24/7, setting an automated trading strategy may help with their time management.
Another advantage of trading crypto is its price movement. Although cryptocurrency has only been around since 2009, the market has had a considerable amount of volatility due to speculative interest. For day traders, significant intraday price movements can offer opportunities for those who use long or short selling strategies.
RISKS OF THE TRADE
Heightened volatility may be advantageous for some trading strategies, but it is also inherently risky. Although we can’t predict how volatile crypto markets will be, traders should consider past volatility data when considering their risk tolerance. Cryptocurrency’s value may change dramatically by the hour.
Since cryptocurrency is not backed by a government, it doesn’t have the same protections that fiat money has. For example, cryptocurrency that is stored online is not insured like U.S. bank deposits are, so if the company that provided your digital wallet is hacked, you may not be able to recover your money.
Because cryptocurrency offers less protection in that sense, investors should research the entities involved with the cryptocurrency trades and payments to avoid potential scams.
With the topic of cryptocurrency buzzing through the headlines, many traders may consider adding this investment to their portfolios. Luckily, Score Priority has the tools to help you know the score. Please feel free to visit our website to learn more.