The cryptocurrency market is booming. It’s not uncommon to hear about how people have become millionaires through investing in them, and as such, the number of investors has been steadily increasing. There are many different currencies on offer, but all follow a similar pattern: they take an age to do anything at first before eventually skyrocketing in value. The problem with this is that there are so many other coins out there, and it can be difficult for newcomers to know where and what to invest in first. This article will go over some of the critical things you need to know before trading cryptocurrencies.
What are They?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and control new units. Cryptography is transforming readable data into an unreadable format and vice versa. This makes it difficult for unauthorized people to access information. Cryptocurrencies are decentralized, meaning governments or financial institutions don’t regulate them.
When you’re trading cryptocurrencies, there are a whole host of factors to consider to maximize your profit and minimize your losses. If this is the first time you’ve come across cryptocurrency, you need to get up-to-speed with what makes them tick before participating in any trade. Research is key in any investment, especially true when it comes to cryptocurrencies.
Some of the key concepts that you need to know to make informed decisions when trading cryptos:
- They Are Volatile
Cryptocurrencies are incredibly volatile and can fluctuate significantly in price over short periods. When you’re trading cryptocurrencies, it’s essential to be aware of the market conditions to make an informed decision. Suppose the market is experiencing a bull run, and there’s good news coming out about cryptocurrencies. In that case, it might be more beneficial for you to buy them on the dips to maximize your potential earnings while this momentum lasts.
- They Use Blockchain Technology
Cryptocurrencies almost always use blockchain technology. The blockchains of different currencies can either work together or be completely separate. Bitcoin, the first and most well-known cryptocurrency, operates on its blockchain. Ethereum, on the other hand, has a different blockchain that allows for the creation of decentralized applications – or dapps.
When trading cryptocurrencies, you need to know what type of blockchain each currency is using. If two currencies use the identical blockchain, they’re compatible and can function in unison. However, if two currencies are using different blockchains, it’s unlikely that you’ll be able to use one currency for something that the other doesn’t support.
- They Should Have a Function.
Cryptocurrencies typically fulfill at least one out of four functions: serving as a means of exchange, a store of value, a unit of account, or a protocol. Bitcoin and Ethereum serve as a means of exchange and a store of value, Litecoin only serves as a means of exchange whereas, Dogecoin only serves as a unit of account.
The way a cryptocurrency serves the function(s) can affect its value and, ultimately, your trading decisions. Suppose you’re looking to trade cryptocurrencies for their means of exchange capacities only. In that case, coins like Litecoin will be perfect for this because they have low transaction fees and high speeds compared to Bitcoin. However, if you’re looking to invest in a store of value, Bitcoin and Ethereum will be better options because they have been around for longer and have shown more stability than other currencies.
- Cryptocurrencies Are Still a Young Industry
Cryptocurrencies are still in their early stages of development, and there is a lot of room for growth, meaning that there is potential for substantial profits, but it also comes with significant risk; if you’re aware of them and take steps to minimize them, then you can increase your chances of success. It’s important to remember that the government does not regulate cryptocurrencies, and there is no guarantee that they will be around in the future.
- You Need to Be Careful With Your Private Keys
Your private keys are essential for accessing your cryptocurrencies and should be treated as such. If you lose your private keys, then you’ll lose access to your funds and will not be able to retrieve them, which is why it’s essential to keep your keys safe and secure and only share them with the right people.
Your private keys are also used to confirm transactions that you make, so if someone gets a hold of your private key, then they can use it to steal all of your money in an instant – even when it’s stored on different devices or offline. It’s best not to keep large amounts of cryptocurrency on exchanges because this makes them vulnerable to theft. Instead, it would help to store them in a secure wallet that only you have access to.
- Cryptocurrencies Are Taxable
Cryptocurrencies are taxable, and you need to be aware of this when trading them. The government will want its share of any profits you make, so it’s essential to keep track of your transactions and report them correctly. Not doing so can result in significant fines and penalties.
The tax laws surrounding cryptocurrencies are still relatively new and are subject to change, so it’s best to speak with a tax professional if you have any questions about how they apply to you.
- You Can Trade Cryptocurrencies on Different Platforms.
You can trade cryptocurrencies on various platforms, including exchanges, brokers, and online marketplaces. It’s essential to do your research before choosing a platform because not all of them are created equal. Some platforms have higher fees than others, some offer limited currencies pairs, and others are not as secure as they should be.
When choosing a platform, it’s crucial to consider the following factors:
- Currency pairs
- Ease of use
It would be best to read reviews from other traders to understand better how the platform works and whether or not it’s a good fit for you.
Cryptocurrencies are still a new and volatile investment, so it’s essential to proceed with caution. However, if you’re aware of the risks and take steps to minimize them, there is potential for substantial profits. Be sure to do your research before choosing a platform and trading cryptocurrencies.