How to Trade Cryptocurrencies
One of the most widely discussed and appealing aspects about cryptocurrencies is the combination of volatile prices and the fact that they can easily be traded, meaning that money can be made in doing so. However, cryptocurrencies can be high risk investments and it is important to have a solid awareness about how to safely invest as well as an understanding of what you are investing in. In this segment we will examine the fundamentals of cryptocurrency trading.
Trading cryptocurrency works on a very similar fundamental principle to trading stocks. The aim is to acquire a coin before its value grows, or alternatively while its value is in a dip. The main difference between trading stocks and trading cryptocurrencies is that while stocks are acquired with fiat currencies, such as euros or dollars, cryptocurrencies are generally bought with Bitcoin, or less commonly Ethereum. This means that in order to buy tokens such as LSK a potential investor would need go to through a Bitcoin broker to buy the currency before then transferring it to an exchange in order to use.
It is important to buy into concepts that provide genuine value. If the project booms, this will increase the value of a token more so than any other factor. Similarly, if the idea or team behind a cryptocurrency turn out to be worthless, the value of that cryptocurrency will follow. This is why considerable research is advised before any investment.
As detailed in the previous module the value of a cryptocurrency is dependant on factors such as:
- Supply and demand.
- The price of Bitcoin.
- Energy/electricity required to validate transactions.
- Difficulty level.
- Public perception.
- Large investors.
- Utility of the currency or product.
It is advised that all of these factors are taken into account before investing a cryptocurrency, preferably by reading the whitepaper of the cryptocurrency as well as doing extensive further reading.
Do I have to buy a whole Bitcoin?
No, you do not. A lot of people worry that they cannot begin using cryptocurrencies because they cannot afford the thousands of dollars that single one costs now. This is entirely untrue and is an unnecessary psychological barrier for people investing in cryptocurrencies.
Bitcoins can be broken up into fractions known as Satoshis (after the founder of Bitcoin) and any amount of these Satoshis can be bought.
As such, people can begin trading cryptoassets with whatever amount of money they wish to invest. It is always advisable to start investing with smaller amounts. Using cryptocurrencies can be confusing at first, although in reality it is quite simple, but learning how to interact with blockchain and cryptocurrencies is best done with smaller amounts of money.
Only ever invest what you are willing to lose. Cryptocurrencies are high-risk investments.
Is Bitcoin legal?
In developed and progressive countries the answer is resoundingly yes, Bitcoin is very much legal and there are no laws against owning any cryptocurrency. However, it is advised to do your own research on the exact legal standing of Bitcoin and cryptocurrencies as it can be subject to change and varies considerably from country to country.
It is also very important to consider that there may be tax implications from buying, owning or trading cryptocurrencies. Tax evasion is never encouraged and despite the relatively anonymous nature of cryptocurrencies there are still ways to track someone who is making money from them.
A lot of tax systems also act retroactively, meaning if tax laws suddenly change, people are eligible to pay tax on the transactions that happened before the law came into place. If you are unwilling to keep precise track of all cryptocurrency dealings, it can sometimes make sense to open up a separate bank account for this purpose, as this can help to avoid any confusion. Should you have any concerns, please discuss further with a qualified and trustworthy accountant.
Different countries have different Bitcoin brokers of choice. It is worth researching which is best suited as prices can dramatically vary between brokers. As with everything in cryptocurrency, extensive research is always recommended. Similarly, buying Bitcoin can work in many different ways, be that bank transfers, cash or other forms of transacting. It is always important to only go through legitimate sites and always prioritize safety over everything.
How To Keep Your Cryptocurrency Safe
Cryptocurrencies can sometimes get an unfair and inaccurate reputation for being insecure. This is not the case at all. However, as with anything valuable precautions do need to be taken to keep them safe. In this section of the Lisk Academy we will advise on all best practices to follow in order to keep you and your cryptoassets secured.