How to Trade Cryptocurrencies

Adam Lemon

Cryptocurrencies are a highly volatile new asset class. Learn how to harness the power of crypto and build profitable cryptocurrency trading strategies.

What is Cryptocurrency and How Does it Work? 

Cryptocurrency is cryptographic, digital currency that operates through a decentralized blockchain technology network. Cryptocurrency coins are secured by cryptography, making it virtually impossible to counterfeit them or double spend. What makes cryptocurrencies unique is that they are not issued by central banks or governments, and usually have a defined supply that cannot be arbitrarily extended and are (so far) relatively free from government interference and manipulation. Therefore, many believe that cryptocurrencies represent a superior store of value to fiat (government issues) currencies and are likely to rise in value in terms of fiat currencies.

Profit from Cryptocurrencies

Are Cryptocurrencies Legal?

The legality of cryptocurrencies is a grey area in some countries.

Countries such as the United States, United Kingdom, the European Union, Canada, and Australia have no laws preventing crypto trading and investment, although they do have regulations and some restrictions. For example, the UK has banned Forex / CFD brokers regulated there from offering trading in cryptocurrencies to their clients.

There are a few countries such El Salvador, Panama, Guatemala, and Paraguay where Bitcoin is legal tender. On the other hand, there are some countries such as Bahrain and Vietnam where crypto investment is legal, but certain uses of crypto are illegal.

A few countries have completely banned the usage, mining, trade, and investment in any cryptocurrency. China is one of them. India and Russia have also proposed similar complete bans, but these have not yet been implemented.

How Much Should I Risk Investing or Trading in Crypto? 

Cryptocurrencies are an extremely risky investment. So risky that in fact, you should be prepared for the possibility that the value of ANY cryptocurrency could fall to zero within a few hours.

If you choose to invest, you can invest in more than one cryptocurrency. This diversification should reduce your overall risk.

If you choose to trade, trade such small quantities that you are effectively not leveraged or even de-leveraged.

What is My Time Horizon? Should I Invest or Trade? 

You need to decide how long you are prepared to wait for potential profits, and how much of your time you are able and willing to devote to your operations. The answers to these questions will decide whether you should be a “trader” or an “investor”. If your timeframe is short, you are probably better off trading cryptocurrencies through a brokerage. If you are prepared to wait weeks, months, or even years, then you are an investor. Consider the table below before deciding which path is right for you:

 

INVESTING

TRADING

Available Currencies

All

8itcoin, Ethereum. Ripple

Time Frame

Long Term

Short Term

Profit Targets

Higher

Lower

Transaction Fees

Lower

Higher

Ruin Risk

Higher

Lower

Labour intensive?

No

 

Leverage?

None or Low

Yes

Vehicle

Exchange/Fund

Brokerage

Long/short

Long Only

Long/short

 

Investors can expect wild rides over the long-term so need to be emotionally prepared for that. On the plus side, investing is not time-intensive, and involves low transaction costs.

 

How to Buy and Sell Cryptocurrency in 5 Steps 

Now let’s look at the practical steps you can take to buy and sell cryptocurrencies.

1.            Choose a crypto exchange or broker

To start investing or trading in cryptocurrencies, you’ll have to register with a cryptocurrency broker or cryptocurrency exchange. Each exchange or broker charges a fee for these services. This is called a trading fee.

What is the difference between a crypto broker and a crypto exchange?

Both offer dedicated platforms for buying, selling, and trading cryptocurrencies. One fundamental difference between the two is that brokers offer several additional investment options in addition to crypto. Brokers generally offer only a limited number of cryptocurrencies. Trading fees are also different on each platform.

Should you choose a crypto exchange or a broker?

A crypto exchange will probably be a good choice if you’re only interested in cryptocurrencies. If you are interested in other assets beyond cryptocurrencies, a broker is likely to be a better choice. One major issue with using a broker is that there are typically large swaps (overnight fees) to be paid on open cryptocurrency trades, so longer-term investors should probably look to exchanges.

               How to Choose the Best Crypto Exchange?

Different crypto exchanges offer different features and fees. To find the best crypto exchange for you, you should consider the following issues:

  • Trading fees and incidental fees
  • Range of payment methods
  • Selection of cryptocurrencies available
  • Ease of using the platform

2.            Create and verify your account

Most crypto exchanges and brokers require users to complete a KYC (Know Your Customer) check.

You should also remember to enable 2FA authentication when creating your profile if your chosen platform has the feature.

Every crypto exchange or broker requires clients to be at least 18 years old.

3.            Deposit cash to invest

Available deposit methods usually include bank transfer, wire transfer, and credit cards. Some exchanges or brokers offer instant buy features. This means you can instantly buy crypto with PayPal or Apple Pay, or a credit/debit card.

Deposit or instant buy, which one should you choose?

It’s always better to deposit and hold the money in your crypto exchange/broker account before investing. This gives you flexibility in terms of investment timing. Cryptocurrency prices can fluctuate wildly with high volatility.

It’s also important to note that instant buy often incurs higher fees. If you’re using credit cards, you might also experience additional credit card charges.

4.            Buy and sell cryptocurrency

Once your account is set up and funded, placing an order is simple. Choose the cryptocurrency you want to buy, enter the amount, and choose your payment method. Your final price will include all the additional charges and trading fees of the transaction.

When you’re buying cryptocurrencies at the current available price, it’s called a market order. Most crypto broker and exchanges also offer limit and stop orders.

5.            Select a storage method

When you buy a cryptocurrency, you need to safely store it in a digital crypto wallet.

Most crypto exchanges have their own built-in crypto wallets, but not all do. That’s when you’ll need to use an external crypto wallet.

There are two different types of crypto wallets.

Hot wallets are online software which stores the digital keys of your cryptocurrency using secured encryption. Hot wallets are always online, so your cryptocurrency is essentially stored on the cloud.

Cold wallets are offline hardware wallets that securely hold the digital keys of your cryptocurrency in a physical location.

Hot wallet vs cold wallet, which is better?

Cold wallets are generally more secure because they are offline.

Although hot wallets are highly encrypted, they are at higher risk of being hacked. In recent cases of successful crypto exchange hacks, almost all stolen cryptocurrencies were stored in hot wallets. However, hot wallets are more convenient and quicker to use.

Top 10 Ways to Make Money with Crypto 

There is a surprisingly wide range of methods you can use to make money with cryptocurrency:

  1. Buy and HODL

Buy and hold – “HODL” - is the most popular way of earning money from the market. It involves buying Bitcoin or other cryptocurrencies, “hodling” it for a few months or years and selling it when the price increases. The investing strategy here involves doing your research and identifying a coin you believe has the potential to experience a surge in value within a few months or years. However, before you can do this, you will need a wallet to store, buy and sell the coins. You can buy the coins from cryptocurrency exchanges and transfer them to external wallets for safekeeping.

While most investors focus on the bigger coins such as Bitcoin, Ethereum, Litecoin and Bitcoin Cash, there are thousands of other altcoins with growth potential within the market.

  1. Trading Cryptocurrencies

Although potentially very rewarding, day trading crypto profitably is very hard to do. Unlike long-term investing, cryptocurrency trading (especially day trading) requires either extremely strong analytical and technical skills, or nerves of steel and a preparedness to endure long and deep losing streaks. As a trader, you will need to forecast short-term price movements in cryptocurrencies using technical analysis and other analytical tools. With the crypto market’s volatility, you can make huge profits from day trading, but you can also suffer big losses if you get it wrong too often.

  1. Cryptocurrency Mining

Crypto mining involves programming a powerful computer to solve complex mathematical problems, to unlock and receive new coins by approving transactions on a blockchain network. Mining is only applicable to the proof of stake cryptocurrencies like Bitcoin. Unfortunately, this way of making money with crypto requires huge investments in hardware and electricity. For some time now, most individuals have not been able to mine profitably – this requires a large-scale operation.

  1. Earn Cryptocurrency Dividends

This way of making money from crypto is directly linked to buy and HODL: once you are holding, you can receive dividends. Some cryptocurrencies pay users who buy and hold the coins for a certain period. COSS, CEFF, NEO and KUCOIN are some of the cryptocurrencies that pay owners a dividend. Unlike staking (covered below), you don’t need to hold the coins or tokens in special wallets to put your crypto holdings to work.

  1. Run Cryptocurrency Master Nodes

A cryptocurrency master node maintains a real-time record of a blockchain’s activities. Keep in mind that operating a master node is expensive and involves running costs which could exceed the reward. Operators of master nodes are rewarded with coins, usually a share of the block rewards.

  1. Stake Cryptocurrency

Staking is like holding and earning dividends. However, the process differs as staking involves holding coins within a special wallet and earning coins as a reward.

  1. Crypto Arbitrage

Crypto arbitrage involves you taking advantage of tiny, split-second price differences between the same cryptocurrency asset on different platforms. You buy the asset or coin at the lower price on one exchange and sell it at the higher price quoted on another crypto exchange. However, this is very challenging and requires special hardware and software to give you a chance of executing the trades quickly enough to make profit.

  1. Cryptocurrency Faucets

A crypto faucet is a reward system that operates on a website or an application. The qualified users are rewarded with free Satoshis (the lowest denomination of Bitcoin). The rewards are given to users after they complete a few set tasks.

  1. Create Cryptocurrency Content

You can make money from cryptocurrency as a cryptocurrency content creator. The crypto market is growing and evolving, and lots of websites are looking for crypto writers to publish. If you are doing your own analysis to trade or invest in crypto, you already have a product which you might be able to monetise. You can make money by creating a video or written cryptocurrency content. It can be news, tutorials, in-depth articles, blog posts etc. Cryptocurrency podcasts can also be successful.

  1. Airdrops

Getting involved with an airdrop is another way you can earn from cryptocurrency. You can earn free coins or coin tokens via airdrops, which are usually done to generate awareness. A crypto exchange might offer an airdrop to active members of a particular blockchain community to generate awareness for a new project or new feature it is about to launch.

 

The Best Cryptocurrency Strategies for Trading or Investing: How to Trade Cryptocurrency and Make Profit 

During their short lifespans, cryptocurrencies have exhibited dramatic price trends, very high volatility, and huge increases in value. This means that the best-performing cryptocurrency / bitcoin trading or investing strategies are the ones that are best aligned to benefit from these price properties of cryptocurrencies.

Traders or investors need to be aware of what vehicles are available to get exposure to cryptocurrencies and how much you need to trade in them. It is possible to buy or sell cryptocurrencies directly, speculate long and short with Bitcoin futures (although the margin required for just one micro futures contract may be too high for many traders) and CFDs (only a few other cryptocurrencies are available as CFDs), and from October 2021 it has been possible to invest in a Bitcoin ETF with exposure to Bitcoin futures.

Long-term investors will probably have most success by researching cryptocurrency in general and then drilling down into individual cryptocurrencies to determine which have the best growth potential, and then buying that cryptocurrency when it reaches a new multi-month high price in fiat currency terms. Investments should be kept small as a percentage of liquid capital, because many cryptocurrencies have more than halved in value in a matter of days. A big question for investors is when to get out when an investment goes bad. For example, you might decide that when the cryptocurrency you have invested in falls in value by 25% from its peak, it is time to get out. The beauty of this trailing stop loss strategy is that it can also be used to tell you when to take profit.

For more short-term traders, trend following has worked very well with cryptocurrencies, especially the major ones. The other feature that can help bring trading success is the fact that cryptocurrencies, being very highly speculative, tend to respect key support and resistance levels. Taking trades in the direction of the long term, multi-month trend from bounces off key levels can be the basis for an extremely powerful crypto trading strategy.

 

How to Day Trade Cryptocurrency 

Day trading cryptocurrency can be extremely challenging due to the relatively highly volatile price movements of most cryptos, and relatively high spreads. I would not advise any beginner to day trade cryptocurrencies as it will take skill and strong emotional control to be profitable day trading cryptocurrencies.

Anyone wanting to day trade crypto will need to open an account with one of the best crypto brokers or alternatively with a cryptocurrency exchange. The typical spreads offered at the alternatives considered should be carefully noted at the times of day you usually want to trade and factored into a back test of your trading strategy to ensure it has a record of appropriate profitability under the trading conditions provided.

The final element required to successfully day trade cryptocurrency is deciding on your trading strategy or strategies and which cryptocurrencies to trade. Concerning which currencies, the two most liquid and largest cryptocurrencies Bitcoin and Ethereum are worth focusing on. If a more minor cryptocurrency is in the news and moving with strong directional momentum, it may be worth trading that temporarily.

Any cryptocurrency day trading strategy should be based upon what is happening on higher time frames. As a rule, it is best to only look for long trades if the price is higher than it was 1 and 3 months ago, or short trades if lower than both. If the price is in between, it will be a good idea not to trade.

Now you know which cryptocurrencies you should be trading and the higher-level trading strategy you should use, you only need to find pinpoint entries and exits during your day trading session, using any technical strategy you like.

Another good tip is to pull up an hourly price chart of Ethereum and Bitcoin and draw horizontal lines which have recently acted as both clear support and resistance from both sides. These major cryptocurrencies tend to respect technical price levels, so when you see a reversal from one of these levels on a short time frame back into the direction of the higher time frame trend, these can be great opportunities for high reward to risk day trade entries.

Remember that the best day trades usually keep running into more and more profit as the trading session goes on, so do not be in a hurry to exit from a winning trade.

 

Direct Purchase of Cryptocurrencies 

For most investors today, the cheapest purchase method once transaction fees are included, is just to buy cryptocurrency directly and store it. This leaves you, the investor, with the legal ownership of the asset as well as the responsibility of storing and protecting it. The worry is in protecting the code, as the proof of ownership of most cryptocurrencies is like a bearer share: anyone with access to the code can “spend” the cryptocurrency. Remember that even if you have the code on a piece of paper, and receive and store it by email, it is just as vulnerable to hacking as your email is. An alternative storage and protection method is to use a digital wallet and/or vault. These can be a third party’s server, a smartphone app, or a program you store on your computer or on a flash drive. You can download any of these for free.

There are two main direct purchase methods:

  1. Using an online cryptocurrency exchange, such as Coinbase. They typically charge fees of at least 5% of the transaction value.
  2. There are ATMs in some cities which accept cash, debit, and credit cards in exchange for cryptocurrency. A fee of up to 18% will be charged on a transaction, and you must have a wallet set up before you can make the purchase. Many ATMs offer only Bitcoin, but some can also be used to buy Ethereum, Litecoin, Dash, and Dogecoin.

Don’t forget that ATMs only allow the purchase of cryptocurrencies, and not sales. This means that if you own cryptocurrency and want to cash in your investment later, you will have to open an account with a cryptocurrency exchange to make the sale.

 

Purchasing Bitcoin by ATM 

Although the cheapest possible method of direct purchase is usually through online exchanges, it can take a while to open an account and fund it, by providing ID and other required proofs, and making the bank or credit card transfer. It is also true that many exchanges do not yet accept deposits from residents in many countries. This means that if your country has an ATM where cryptocurrency can be purchased, this may be your only option, even though the fees are higher.

The usual method is as follows:

  1. Download a wallet application onto your smartphone which can store your desired currency.
  2. Obtain the amount of cash you wish to invest. At the ATM, select your purchase and feed in the required cash. The ATM then allows you to scan your smartphone and deposits your cryptocurrency into your smartphone’s wallet. You now have the proof of ownership stored in your phone.
  3. The wallet may not show you the cryptocurrency’s current value in the fiat national currency you want to value your investment in, so you will need to make a note of the price at which you made the purchase and judge its fluctuations from there.

 

Alternative Ways to Buy Cryptocurrency 

Another option which might be useful if you want to be highly diversified and invest in a range of different cryptocurrencies, is to buy shares in a cryptocurrency fund which owns different cryptocurrencies. You buy a share of the fund, hoping that at some point in the future, the fund’s investments will have increased in value, and you will be able to sell your shares at a profit.

While crypto exchange and brokers are the most popular way of buying crypto, there are also other underlying methods you can use such as Bitcoin ATMs, as detailed above.

It is also possible to buy cryptocurrency direct from individual owners through P2P transactions. Although this is not a popular way of purchasing crypto, this can be a useful method in countries with unclear laws or regulations concerning cryptocurrency. Some crypto exchanges like Binance also offer this feature.

 

Final Thoughts 

Cryptocurrency is a new and exciting asset class, prone to high volatility and dramatic price movements, meaning it offers traders and investors a chance to make heathy profits, although of course there is risk involved.

If you wish to be involved in the crypto market, you first should decide whether you will be a longer-term investor or a shorter-term trader, or both. You will need to decide which cryptocurrencies to buy or sell and the strategies you will use for timing your purchases and sales, as well as whether you will use a cryptocurrency broker or a cryptocurrency exchange. There are also a range of alternative methods which can be used to make money from cryptocurrencies, and it is possibly to buy major cryptocurrencies at ATMs and a few alternate methods.

As cryptocurrencies, especially the major ones, have been very prone to trending price behaviour, and tend to respect key technical levels, using trend following and support and resistance trading strategies tends to be the most profitable way to trade them. Cryptocurrency investors should also pay attention to the long-term trend of both the coin and the broader cryptocurrency market, as well as researching the fundamentals behind individual coins.

 

FAQs

Is crypto trading profitable?

Cryptocurrencies are extremely volatile which means they can offer tremendous opportunities to traders or investors, who make profit from price movement. Cryptocurrencies also tend to follow technical piece levels as they are so highly speculative, which can make them easier to trade than assets with less speculative demand.

Which platform is best for trading cryptocurrency?

Many Forex / CFD brokers now offer accessible trading in cryptocurrencies, notably eToro. Crypto exchanges are another alternative but may be less secure and regulated than Forex / CFD brokers.

How much money do you need to start trading cryptocurrency?

The minimum trade size for cryptocurrencies tends to be about $25, so assuming a worst-case losing streak of 20 trades, you should always start with more than $500. The higher your deposit the better trading terms you are likely to be able to get, but it is important always to only trade with money you can afford to lose.

How do you successfully trade cryptocurrency?

You can successfully trade cryptocurrency by trading strong multi-month breakouts, or by entering early after reversals at counter-trend extremes, such as 1 or 2-day highs or lows or other obvious technical support or resistance levels, using price action to determine the likely strength of the reversal. Use of a trailing stop is recommended.

How should beginners trade cryptocurrency?

Beginners are likely to have most success by starting with a rules-based technical trading strategy on only the top two major cryptocurrencies by market capitalization.

How Many Cryptocurrencies Are There?

There are over 10,000 cryptocurrencies available in the market at the time of publication.

What is the best way to buy cryptocurrency?

The best way to buy crypto for most investors is through a crypto exchange platform.

What is the best site to buy cryptocurrency?

This depends on what cryptocurrencies you want to buy and where you are resident.

How do beginners buy Bitcoins?

Beginners can buy bitcoins by registering with a crypto exchange or broker, opening, and funding an account, and then placing the Bitcoin buy order.

Is it still profitable to buy cryptocurrency?

The cryptocurrency market is highly volatile and has recently recovered from major losses to see coins make new highs. These factors suggest that cryptocurrencies still have a good chance to be profitable buys, even more so if cryptocurrency reaches its full potential of fully or partially displacing fiat currencies.

What are the most popular cryptocurrencies?

Some of the most popular cryptocurrencies include Bitcoin, Ethereum, Litecoin, Ripple, Cardano, and Bitcoin Cash. However, there are many other cryptocurrencies available to investors and traders.

Are there other ways you can make money from crypto?

Yes, you can work for crypto companies if you have the skills they require. You can also become an influencer or an advertiser for a cryptocurrency project and get paid for your work.

Do I need to spend to make money from crypto?

Yes, in most cases. An initial investment is required in virtually every aspect of the crypto space. You need money to invest, trade, set up a mining operation, stake or lend, and even to operate a master node.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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