The cryptocurrency market continues to gain traction, not only with social media headline-chasing retail traders, but also with professional ones and fund managers. The maturity of the market adds to capital inflows into the cryptoverse. Bitcoin leads the sector which, as of September 2020, consisted of 6,955 known cryptocurrencies.
The total number may exceed it as new projects enter the market at a fast pace. Since scams continue to plague the sector, traders should remain focused on the top 100 currencies for crypto trading. Volatility is one thing each cryptocurrency trader must be comfortable with before proceeding. Price swings of over 50% have occurred, sometimes in a matter of hours or days, and Bitcoin is prone to wild moves exceeding $2,000 per wave. It also creates exciting trading opportunities, and price action volatility persists. Unlike in the early Wild West days of the sector, the top 100 cryptocurrencies by market capitalization evolved from a fledgling asset to respect aspects of trading like support and resistance and breakouts and breakdowns, and technical indicators became more reliable to assist in the analysis, similar to fiat currencies. Trading with one of the best cryptocurrency brokers can enhance the profit opportunities for traders.
While the number of cryptocurrency exchanges continues to grow, they cater more to cryptocurrency investors. They remain ideal for those who prefer to buy and hold, or “hodl”, as it became known across the sector due to a typo on social media by an early enthusiast amid a surge in market volatility, which caught on with the crypto crowd. Cryptocurrency traders remain best served at brokers via contracts for differences (CFDs), a derivative that grants full exposure to price action without physical ownership. CFDs became the most used asset for traders, and Forex brokers started to add cryptocurrency CFDs to their asset list. Trading with a well-established one can eliminate risks like scams, frauds, and losses related to the hacking of cryptocurrency exchanges. Brokers maintain various product and services portfolios, catering to a different type of core clientele. Therefore, traders should find a crypto broker that fulfills their trading needs. Our Top List of the Best Crypto Brokers takes the guesswork out for traders seeking a reliable choice with a secure trading environment. The cryptocurrency market will only grow further. Adding this asset class to a well-diversified portfolio can boost the earning potential with one of the most exciting trading instruments created this millennium.
Crypto Trading: Pros & Cons
As with any other asset, there are always pros and cons to consider. Die-hard cryptocurrency enthusiasts have a positive confirmation bias, which leads to missed trading opportunities since they only view half of the equation. Traders must evaluate the positives and negatives of trading before deciding to add cryptocurrencies to their portfolio. Understanding both sides will allow traders to deploy multiple crypto trading strategies.
Crypto Trading – The Pros:
- Market Disruption - Cryptocurrencies have already disrupted markets and will continue to do so by deploying blockchain technology and increasing efficiencies across multiple sectors. Despite being around for over a decade, the industry remains in its infancy with exciting opportunities ahead. Cryptocurrencies can also combat poverty and oppression. They may deliver financial services to hundreds of millions of unbanked or underbanked individuals.
- Privacy and Security - While most cryptocurrencies hail their privacy, it is not entirely accurate. There are privacy coins that cater to those seeking it, but many are not as private as the social media crowd misleadingly claims. There is also a significant difference between privacy and anonymity. Security remains at the forefront of cryptocurrencies, or rather the blockchain technology that powers them. A fast-growing sector churns out new projects to cater to industry-specific applications, expanding the potential to achieve privacy and security.
- Decentralization - Most crypto assets are less decentralized than many understand. The form of centralization differs, which makes a tremendous difference. There is no government institution, regulator, or centralized exchange with oversight and authority over the sector. It creates a notable degree of freedom for an improved global financial system. Centralization issues arise with mining clusters, where a handful of mining farms can control the course of a project, interfere with supply, and impact transaction costs. 51% of attacks are one example of it.
- Low Transaction Costs - While it remains asset dependent, most cryptocurrencies have low transaction costs as there are not financial intermediaries. Trading cryptocurrency CFDs on leverage will add to total trading costs related to overnight swap rates.
- Elevated Profit Potential - Given the tremendous opportunities ahead, the profit potential remains elevated. While a repeat of Bitcoin, which rose from a few pennies to almost $20,000 (and more gains anticipated) may not repeat itself, there are dozens of projects with excellent long-term profit potential.
- Volatility - Many consider volatility a negative, but skilled traders will have more trading opportunities. It can increase the overall profitability. There are crypto trading strategies developed to capture profits in volatile markets.
- Diversification - Cryptocurrencies offer traders diversification and indirect exposure to industries and market trends. Some serve as an inflation hedge, others as a store of value, and they provide a broad range of short-term, medium-term, and long-term investment and trading opportunities.
Crypto Trading - The Cons:
- Acceptance - The cryptocurrency sector continues to expand its reach, but acceptance remains overall low, and the progress is slow. Social media makes it appear as if cryptocurrencies enjoy broad-based acceptance, which is misleading, but progress exists. With demand expanding, more companies will support the use of cryptocurrencies as a payment option.
- Illegal Activities - With the increased quasi-privacy of cryptocurrencies, a small sector engages in criminal activities. Tax evasion becomes another issue to consider, and all traders should follow their respective rules and regulations to avoid unnecessary future problems.
- Volatility - Included as a positive, it also serves as a negative. Most retail traders cannot stomach volatile markets, which tend to trigger their stop loss orders and wipe them out of profitable trades. Cryptocurrency traders must embrace volatility, understand it, and use it to their advantage.
- Misinformation - The amount of misinformation can pose a challenge for traders to separate useful and accurate information from make-believe and misleading ones. The majority of traders buy into a project without understanding why or what they have purchased. The herd mentality and fear of missing out have inflated and busted bubbles, resulting in heavy losses for more than 95% of traders.
- Scams - The popularity and profit-potential of cryptocurrencies attracts many scammers and fraudsters. Excellent marketing campaigns exist to lure capital out of new retail traders seeking the next breakout cryptocurrency project.
- Complete Loss - There is no way to recover lost assets. For example, if you store them in a cold wallet and you lose it, the assets are gone. Should you misplace recovery keys for a hot wallet, you cannot access it anymore.
- Technology - Traders should only trade in what they understand, and most do fulfill this requirement with cryptocurrencies and the blockchain technology that powers them. The information gap can result in avoidable losses.
How to Trade Cryptocurrency
The basics of trading cryptocurrency remain the same as with other assets, and before you think about how to earn money from it, you must learn. We cannot stress the education factor enough. Most rush into trading, driven by the life-changing opportunities a successful trading career brings. New traders cannot ignore the fact that between 70% and 85% of traders lose money. I firmly believe the start of any profitable trading strategy begins with education. Understanding volatility, market news and technical metrics are cornerstones on which many crypto trading strategies rely.
Cryptocurrency markets are volatile, and wild price swings are not uncommon. I recommend that new traders learn how to embrace volatility. Do not view it as a negative but use it to your advantage. While volatility can result in trading losses for most, it does create exceptional trading opportunities for a few.
When it comes to news, always consider the source. Never follow someone blindly on social media because they attract followers. Quality beats quantity, and some of the most profitable trading advice or analysis remains hidden in unpopular views. Keep an open mind, monitor developments, and utilize news to create an edge in the markets.
Technical analysis can offer valuable trading signals, but only if deployed and understood correctly. Since the cryptocurrency sector started to mature, price action began to respect several metrics. There is no magic tool or indicator to provide absolute accuracy. I recommend using several to confirm trends, locate entry and exit levels, determine when to be in and out of the market, and acquire an understanding of how each asset behaves.
Cryptocurrency Coin Types Available
With more than 6,955 cryptocurrency assets available, it is essential to differentiate between three distinct types of crypto assets. It will help narrow down the list to assets that fit the risk profile of individual traders.
This category includes Bitcoin, which operates on its blockchain. It also extends to Bitcoin cash, created via a hard fork from Bitcoin. Ethereum, which added smart contracts, also belongs in this group. Many projects start their journey on the Ethereum blockchain before migrating to their respective blockchains. Ripple, which cannot be mined and has a central authority, is sometimes included in this list but is a digital asset rather than a cryptocurrency.
Altcoins, including Litecoin, Cardano, Tron and thousands of others, emerged on their blockchain technologies. They offer an alternative to Bitcoin and a few select others. Many start their lifecycle on an established blockchain, with Ethereum a leader via its ERC-20 token, before maturing to their independent infrastructure.
dApps and Tokens
Tokens do not operate on their blockchain and may include any form of data, making their use virtually limitless. They incur fees in the cryptocurrency native to the blockchain. Tokens are usually created via public offerings to support specific projects and functionalities. Token examples are utility tokens, security tokens, asset tokens, stablecoins, payment tokens, equity tokens and non-fungible tokens (NFTs). dApps are computer applications utilizing distributed ledger technologies (DLT), led by Ethereum, Tron, and Binance.
The cryptocurrency sector developed its specific terminology, and we have accumulated a list of terms that new traders should understand. Knowing the below terms will assist traders in navigating the news flow and comprehending potentially market-moving events.
A block includes all transactions in the blockchain within a specific period, hashed into a Merkle tree. Depending on the technology, a block remains limited in size and secured via cryptography. It also includes the cryptographic hash of the previous block together with a time stamp.
The blockchain contains all blocks and continuously expands. Its design makes manipulation of individual blocks difficult but not impossible. A blockchain, maintained in a peer-to-peer network, has high Byzantine fault tolerance, and is often referred to as an open, distributed ledger. It allows permanent and verified record-keeping of transactions, and blockchain technology powers cryptocurrencies.
A cryptocurrency exchange allows users to convert fiat currencies into cryptocurrencies. It also supports trading between various cryptocurrencies. They cater primarily to investors and provide no to limited leverage to traders but maintain the broadest asset selection.
Physical cryptocurrencies require a wallet that stores private keys to send, receive, and maintain them. It can encrypt and decrypt transactions and sign smart contracts, making it essential to the cryptocurrency sector. There are three primary versions, a hardware wallet, a paper wallet, and a software wallet.
- Hardware wallet - A hardware wallet, also referred to as cold storage, is the most secure form of storing cryptocurrencies. I recommend using one to store investments or hodl coins.
- Paper wallet - A less convenient alternative to the hardware wallet, it compares to a fiat currency bill. Users may generate a unique private key and address, then print it on paper, and store it securely. Scanning the private key with a digital wallet will claim the funds.
- Software wallet - A software wallet, also known as a hot wallet, is the least secure wallet and vulnerable to hacking. I urge that trades keep a minimal amount of assets required for day-to-day transactions in a hot wallet.
A distributed ledger is a global network of decentralized notes or computers that replicate, share, and distribute digital data. It can be private or public and can operate regardless of cryptocurrency coins.
A fork refers to a split in the blockchain to create a different version, which results in two blockchains operating simultaneously. For example, a hard fork resulted in the creation of Bitcoin Cash from Bitcoin. A hard fork refers to a permanent divergence in the blockchain. A soft fork is a temporary divergence with backward compatibly that can fail if no consensus exists, allowing the blockchain to continue.
Hashing refers to the extraction of value from a string of text via a mathematical function. It enables securing a message or transaction so that only the intended party can read it.
An initial coin offering (ICO) allows developers to raise capital for projects. It awards tokens in the project to investors, but they remain poorly regulated, if at all, which is likely to change amid widespread fraud in the ICO market.
A token can resemble anything two parties agree on and operates on top of a blockchain. The associated fees are in the native cryptocurrency of the blockchain, for example, in Ethereum.
Mining is a computer hardware-intensive process that solves complex mathematical equations to confirm transactions on the blockchain and adds new blocks. Miners will receive a reward for their efforts, and without them, the network will fail.
Cryptocurrency margins offer traders leverage and increase the purchasing power of their portfolio. Traders only pay for the margin requirement rather than the full amount. It magnifies profits and losses alike.
Cryptocurrency transactions remain visible on a public ledger, and altering the data is extremely difficult. Therefore, the transparency of transactions, which remain irreversible, is higher than other forms of payments. Each block in the chain contains the cryptographic hash of the previous one. It adds security against tampering with the data.
What to Look for When Choosing a Cryptocurrency Broker
Trading with a cryptocurrency broker that maintains a competitive trading environment can increase the overall profitability of crypto trading strategies over the long-term. We have outlined several aspects for new traders to consider when selecting the best crypto trading platform for your needs:
Valuable apps can make the life of traders simpler. It also displays that the broker tries to grant a competitive edge to clients. I recommend trading with a cryptocurrency broker that provides excellent analysis apps together with a sentiment app. A dedicated crypto trading platform would be a priceless bonus.
Always check the history of a broker to identify potential red flags. I do not recommend trading with one that does not have a clean track record for at least five consecutive years.
While many traders never require customer support, especially at a well-managed broker, 24/7 availability and swift access show commitment by the broker.
I recommend never trading with an unregulated broker. Always ensure that your broker maintains oversight from a regulatory authority, has a clean record and a transparent presentation of its products and services portfolio.
Deposits & Withdrawals
Make sure to have deposit and withdrawal options that suit you. Consider the costs and processing times, both from your broker and the payment processor, and the minimum requirements. Some brokers provide traders with a debit card for an improved experience.
A broker with an international presence displays financial stability and a more mature operating environment. Some traders prefer their broker to have a local office, but I would consider this a bonus rather than a requirement.
The smaller the minimum deposit requirement, the greater the ability to create a manageable deposit strategy. It allows traders to build a portfolio and boost the profit potential.
The best crypto brokers will offer online payment processors and cryptocurrencies as funding methods. Processing times are faster, transaction costs lower, and it grants traders greater flexibility. I recommend avoiding bank wires due to unnecessary fees.
The more cryptocurrencies a broker maintains, the greater the trading and diversification opportunities.
While the needs of traders differ, I recommend selecting a broker that supports automated trading solutions like MT4, the leader in this category, or cTrader, which provides an excellent alternative, or a proprietary trading platform. A dedicated crypto trading platform is beneficial, but most multi-asset brokers grant CFDs on their existing infrastructure.
Traders should seek cryptocurrency brokers with tight spreads, which will increase their profit per trade and make trade management more efficient. It also points to a deep liquidity pool, a requirement for crypto day trading.
Commissions & Fees
Cryptocurrency brokers with a commission structure generally provide superior spreads, and traders must do the math to determine which pricing environment benefits their trading style. I recommend a commission-based account for high-frequency traders. The best crypto brokers will offer a cashback rebate program, which lowers the final trading costs. Traders should read the terms and conditions to determine additional fees.
Avoiding Crypto Scams
Since cryptocurrency trading gained popularity, especially among new retail traders, the sector attracted many scammers. There have been countless scams in the ICO sector, but the current trend moved towards dApps, and traders must proceed with caution. Traders should approach any offer to invest in a project that sounds too promising with extreme caution.
Selling Short Bitcoin
The most convenient and efficient instrument for short sellers in Bitcoin remain CFDs. The availability and liquidity add to the benefits of CFDs for short sellers. CFDs remain excellent derivatives for short-term traders, which many short sellers are.
Using CFD to Hodl
CFDs are leveraged derivatives that incur overnight swap rates, intended for short-term trading. Hodling is a long-term strategy conducted by buying the underlying asset. Therefore, using a CFD to hodl is counter-productive, inefficient, and not recommended.
Is crypto trading profitable?
Crypto trading remains as profitable as any asset class and depends entirely on the trader and the deployed crypto trading strategies.
What is a crypto trade?
A crypto trade consists of either buying and selling or selling and buying a crypto asset. Unlike an investment, it intends to capture short-term price movements.
How do you trade crypto?
Trading crypto derivatives requires a trading account, either with a multi-asset broker or a dedicated crypto trading platform. Traders favoring the underlying assets should use a cryptocurrency exchange and need a cryptocurrency wallet.
Can you make money day trading crypto?
Crypto day trading can make money similar to day trading other assets. Despite the popularity of cryptocurrencies, there are no short-cuts to making money.
What is a crypto broker?
A crypto broker provides traders with cryptocurrencies, other digital assets, and a cryptocurrency wallet. The best crypto brokers also offer analytical tools, educational content, and market insights.
What is the best broker for cryptocurrency?
The best crypto brokers provide traders with a broad asset selection, a competitive trading platform, and a low-cost pricing structure. Analytical tools and market insights add to the competitiveness of a crypto broker.
Do you need a broker to trade cryptocurrency?
No, it is not a requirement. It is possible directly on an exchange or via peer-to-peer transactions, but trading with one of the best cryptocurrency brokers can offer notable advantages.
Can you buy Bitcoin through a broker?
While most brokers added Bitcoin, the majority offer it as a derivative via a CFD. It grants the same exposure to price movements but does not provide ownership of the underlying asset.
What platform can I trade cryptocurrency on?
Many proprietary trading platforms exist that support cryptocurrency trading. The MT4 and MT5 trading platforms offer it, and some brokers and FinTech companies deploy a crypto trading platform.
Which crypto exchange is the safest?
Traders should select one with an established track record, and I recommend at least five years. Most physical assets should be in cold storage, and extensive security measures must exist. It is best to avoid new crypto exchanges until they stand the test of time.