Crypto: should I buy or trade cryptocurrency?
Unpredictable — this is one of the most common words used to describe the cryptocurrency market. When you consider that unstable investment prospects are typically something that money managers and traders want to avoid at all costs, it makes you wonder: why does crypto still command such attention and popularity? Furthermore, why has it broken through to the mainstream in the last five years?
Without a doubt, the ever-expanding and contracting market of cryptocurrencies is gaining more and more traction as people try their hand at trading. It is certainly this volatility that makes crypto such an alluring investment opportunity. While the potential risk factor is something to be wary of, the returns can be very lucrative indeed.
When you know the difference between buying and trading crypto, you’ll soon learn that there need not be as much risk involved. Here we outline the difference between buying and trading crypto and offer some tips to help you get started dealing in cryptocurrencies.
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What is cryptocurrency?
Cryptocurrency refers to digital or virtual money, which is traded in the form of tokens or ‘coins’. Crypto is a decentralised currency that utilises cryptography to maximise security and allows traders to operate anonymously without government interference.
There is a common misconception that still abounds among the public concerning cryptocurrency. Many believe that bitcoin (BTC) is the primary currency synonymous with crypto, which is quite far from reality. While bitcoin is the frontrunner when measured in terms of market capitalisation, popularity and userbase, there are in fact over 1,600 cryptocurrencies on the market. Other major players include ripple (XRP), ethereum (ETH), monero (XMR) and litecoin (LTC), while new currencies are being introduced all the time. Another term for the kind of cryptocurrencies that have expanded on the foundations of bitcoin is ‘altcoin’.
Which cryptocurrency should I choose?
With so many different variations, you are advised to become well acquainted with a specific coin — perhaps one that you already know something about — and research that market. If you put in the time to gain some expertise on your crypto of choice and its price fluctuations, your chances for successful investment will multiply.
The phrase ‘Jack of all trades, master of none’ applies here — a weak, poorly informed approach to a number of cryptocurrencies pales in comparison with a comprehensive knowledge of just one. It is a matter of personal preference which one you choose, just be sure to do your research first.
When investing in cryptocurrency, one option is to buy it outright. This means paying the full price and owning units of cryptocurrency. Buying crypto can minimise any losses you make, but the flip side is that your exposure is limited to the amount of capital you have to invest. Another downside of buying is that you will have to pay tax — in the way of capital gains — on any profit you make from buying and selling.
Trading cryptocurrency is a way of investing without ownership. Instead of buying crypto directly, you can trade CFDs — a type of derivative trading. This requires you to only put up a minimal proportion of your trade size. In contrast to buying, trading allows you to maximise your investment amount. However, it also means you may lose more if you’re not careful. This aside, trading can be more economical than buying — not only do you avoid the deposit and withdrawal fees that come along with owning crypto, you also don’t have to pay tax on any profits made.
I’ve decided on my crypto, what next?
- • Open an account. Buying and selling cryptocurrencies must be done through an exchange account. This allows you to buy crypto directly and store it in a digital wallet until you choose to sell it. Trading cryptocurrency, on the other hand, requires a brokerage account.
- • Understand the market. Cryptocurrency pricing is impacted by a variety of factors. The state of fiat currencies, government policy, media reporting and the opinion of influential figures all cause fluctuation in price. The more you know, the smarter your investment can be.
- • Decide your exit point. Given the volatility of cryptocurrencies, it is vital that you determine when to close a position. Decide on a target and a maximum loss — you have the option to set these up to be automatically implemented if you want to. If you’re just starting out with crypto, experiment with small investments or demo accounts to gain knowledge first.
The bottom line
When it comes to buying and trading cryptocurrencies, investor success can be maximised through diligent market research and familiarisation with your crypto. Whether you decide to buy or trade crypto, the most important thing to remember is to educate yourself on the altcoin of your choice and its market. While it might be more time consuming, trading offers minimised risk when compared with holding and buying crypto. Don’t forget the golden rule of trading — never invest more than what you can afford to lose, regardless of whether you are buying or trading.
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