The Cryptocurrency Trading & Investing Starter Guide explains how to get started trading digital currency like Bitcoin, Ethereum, and the entire world of altcoins.
The focus of this article is on trading and investing so we’ll skip diving deep into the underlying technology, and instead discuss why someone may want to get involved in this space and the websites, tools, and resources, to help you along the way.
We’ll cover a lot of topics so I encourage you to skip around if you’re already familiar with the basics.
We’ve also recorded this guide in video format and I’ve outlined the major sections in the article below with corresponding timestamps in case you want to jump into the video.
My experience trading cryptocurrency dates back to 2012 when I began trading bitcoin on an exchange called Bitfinex. Ever since then I’ve been active in the space trading bitcoin and, more recently, altcoins.
As a friendly reminder, nothing written below is a recommendation to trade or invest in anything. You are responsible for your own financial decisions and due diligence. Please reference our site disclaimer.
Let’s start with a few definitions, and then move into trading.
What Is Cryptocurrency? (2:34)
Cryptocurrency, at a very high level, is digital money created from code.
Bitcoin was the first cryptocurrency created back in 2009 and it is commonly referred to as the internet of money.
Bitcoin has a value, and just like any world currency, it can be used to purchase goods and services by those who choose to accept it.
Many new cryptocurrencies have emerged since Bitcoin and these are referred to as altcoins. Altcoins, simply represent all coins that are not Bitcoin.
It’s worth understanding a slightly more rigorous definition of cryptocurrency, so here it is:
A cryptocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography.
If you’re not sure what cryptography is, we’ll cover that in the next section.
Cryptocurrencies have been created to serve as more than just a medium of exchange from person A to person B.
Ethereum, for example, is a full Turing-complete blockchain that functions as an open platform where decentralized applications and contacts can be implemented.
Ethereum is the platform and Ether is the cryptographic token which fuels the Ethereum network by allowing clients of the platform to pay for the machines executing the requested operations.
Cryptocurrencies just like Ether, have a unique network in which their specific currency was created to incentivize.
For the scope of this article, we won’t go any deeper, but from a trading perspective, understanding the technology behind specific cryptocurrencies would be similar to researching the fundamentals of an individual company. Combining fundamentals with technicals bring together the best of both worlds.
What is Cryptography? (5:14)
Cryptography is the science concerned with the study of secret communication.
Cryptography is responsible for converting data into a format that is unreadable by the public, allowing it to be transmitted without being able to decode it.
Only the person(s) with a private key, will be able to decode the message.
Think of your private key as a password. If you lose your password to your online bank account, you can’t access your funds.
With cryptocurrency, the stakes are a bit higher, because if you lose your private key, there’s no bank branch to call to recover it, you are the bank.
Your funds are gone forever.
In addition to proving the identity of transactions, cryptography is also the mathematical magic behind:
- Keeping the integrity of the ledger (blockchain)
- Authenticity of transactions
- Privacy of transactions
There is much we could dig into on the math/technology side, and if you are interested in learning more, I encourage you to check out this video which does a good job at explaining more of the details behind the blockchain.
Why Invest In Cryptocurrency? (11:58)
Cryptocurrency is an emerging technology (asset class) that is undergoing rapid growth. The development teams forming in the space are attracting top talent and investment dollars are flowing graciously.
So why invest in it?
- Growth: It’s a new emerging asset class with the high potential to disrupt a number of traditional industries.
- Low Competition: Professional hedge funds and sophisticated investors are still largely sidelined from investments due to illiquidity, market caps, regulatory uncertainty, and lack of know-how.
- Diversification: This could change as these markets mature, but cryptocurrencies have very low correlation to virtually any other asset class.
From a utility standpoint, most cryptocurrencies are far away from reaching main street adoption, and in some cases even proof of concept. But remember, markets feast on growth and like to price events far into the future.
The clear applications are not yet in front of our eyes, but from an early stage investment standpoint (hello risk), this is the time we want to be paying attention.
Why Trade CryptoCurrency? (15:55)
Most of the investment rationale we just discussed apply directly to trading, but here are a couple of added insights:
- Opportunity: The volatility and day-to-day price fluctuations offer up some great opportunity for traders. Moves in this space, from a percentage basis, mirror that of options contracts.
- Lack of Professionals: Unlike the stock market, cryptocurrencies are not yet littered with high-frequency traders and sophisticated algorithms solving for every market inefficiency. Most skilled traders should find an increased edge here.
What are the risks of Investing In AltCoins? (17:55)
You can’t enjoy large 1,000+ percent returns without a healthy number of risks. Some may be a lower probability than others, but everything that follows should be considered if you are planning on allocating to this space.
- Regulation risks are a big question mark right now. Will ICOs continue to fly under the radar? Will crypto investing be limited to accredited investors only? How about specific tax laws? Heavier exchange regulations?
- Cryptocurrencies share this wonderful property of decentralized governance. However, this does not apply to exchanges. When you trust a 3rd party to hold your private keys (passwords) you are at risk to hackers, thieves, and illegitimate actors. Here’s a disaster story example, and a second example.
- You are your own bank. You need to make sure you don’t keep your funds in a hot wallet connected to the internet, lose your private keys, or make mistakes transferring tokens from one wallet to the next.
- These are not mature markets. Extreme moves due to illiquidity or news events can cause severe spikes in markets. Just take a look at what happened to GDAX on June 21st, 2017.
- There is a high probability that many of these cryptocurrencies never get main street adoption, or worse yet, a working network. Development teams can fail, competitive coins can emerge, regulation risk could derail projects, or the marketplace simply doesn’t care about what that coin offers.
In traditional financial markets, the usual disclaimer is to only invest or trade with money you can afford to lose. In crypto, you should probably cut that number in half given the even greater risks to this still young market.
Where To Buy CryptoCurrency (23:52)
There are a lot of websites (exchanges) to choose from when you decide you want to buy some cryptocurrency, and depending on how much you’re looking to buy, what country or even state you are in could influence your choices.
The most popular and easiest way for US residents to get their hands on Bitcoin, Ethereum, and Litecoin is Coinbase. Coinbase is where I personally go to exchange fiat for crypto and vice versa, they make the process very easy to get started. Use this link to receive $10 BTC on your first purchase through Coinbase.
There are alternatives, and when you’re looking at them, the most important consideration to take into account is security.
- Where is the exchange located?
- How long have they been in business?
- Do they have active support?
- What kind of volume do they transact?
Fees and how quickly you receive coins are good second and third considerations.
Some other exchanges I have heard good things about, but haven’t personally vetted myself:
- Kraken – San Francisco-based, low fees.
- Bitstamp – London-based, one of the longest in business, good volume.
- LocalBitcoins – Peer-to-peer marketplace to exchange bitcoin online and locally.
Where to Trade CryptoCurrency (28:25)
My standard procedure is to exchange fiat to Bitcoin on Coinbase, and then transfer those coins immediately off to a secure location where I own the private keys, or to another exchange if I’m looking to do some trading.
Coinbase does have their own exchange for trading called GDAX and that is highly liquid for Bitcoin, Ethereum, and Litecoin, but if you’re looking to trade a larger universe of altcoins you’ll need to go elsewhere.
When thinking about exchanges to trade on, here are the considerations I suggest researching before diving in:
- Security. Have there been any major security holes or incidents in the past? Do they store customer coins in cold storage? IP withdrawal restrictions? 2FA?
- Reputation and support. Do they have moderators that are standing by to field questions (live chat)? Twitter support?
- Liquidity. For trading altcoins, liquidity is important, especially during periods of elevated volatility. For a snapshot of volume rankings of exchanges, check here.
- Trading tools and advanced orders. These are things like stops, OCO orders, technical indicators, etc.
Once again, country and state are prerequisite considerations.
The top US exchanges for trading are:
- The most liquid of the exchanges in the United States. Largest selection of altcoins available to trade, tight spreads due to high volume and advanced orders like stops and OCO are available. Support, however, is a concern. My worst experience is having a help request in queue for an excess of 20 days waiting in limbo without any response. Ultimately they handled everything appropriately, but the time they took was just exhausting. They have not had any major security breaches to my knowledge.
- What Bittrex lacks in volume it makes up for in support. I haven’t done any serious trading here or needed to contact support but I see their staff active on Twitter and I have heard good feedback from other traders on the platform.
- No first-hand experience on this exchange, but the overall volume on the exchange is high (not as much as Poloniex but greater than Bittrex) and once again I have heard good feedback from other traders on this platform.
As a reminder, keeping funds on 3rd party exchanges (regardless of how good their security is) is extremely risky because you do not control your private keys. If the exchange is hacked, found to be fraudulent, or comes under extreme regulation pressure, your funds could be frozen or gone for good.
Keep the minimum amount possible to conduct your trading and routinely move profits off to a more secure wallet.
Software, Sites & Resources for Trading Cryptocurrency (36:16)
- Coinmarketcap – The go-to site for keeping up with percentage moves, market caps, volume studies, and much more.
- Coinigy – My preferred crypto trading software. By connecting to your exchange (Poloniex, Bittrex, etc) via API you can trade directly through Coinigy’s platform which uses Tradingview charts for full access to technical studies and custom indicators.
- TradingView – Currently the best platform for tracking and charting cryptocurrencies across all major exchanges.
- CoinCap – iPhone/Android app for tracking crypto movers and keeping track of your own portfolio of coins.
- Changelly – An extremely convenient way to exchange out of one cryptocurrency to another without ever needing to create an account or deposit money on an exchange.
Where to Securely store your CryptoCurrency investments (39:35)
Controlling your own private keys and not relying on a 3rd party to do it for you is the best way to safeguard your coins from intruders.
The best way to achieve this is by adopting a cold storage solution.
Cold storage simply means your private keys (password) is stored offline and is not connected (accessible) to the internet.
The most popular way to do this is:
- Create a paper wallet.
- Store them securely on your own USB drive.
- Purchase a hardware wallet.
I keep 90% of my funds on a hardware wallet and the rest sit on an exchange for trading opportunities.
The Trezor and the Ledger are the two dominant hardware wallets in this space and I highly recommend either one for a safe cold storage solution. The Ledger currently supports more altcoins, but both do a fantastic job in terms of security.
Cryptocurrency Trading & Investing Starter Guide – Final Thoughts
Cryptocurrencies are an exciting new space that is exploding in popularity.
The market capitalization of all coins has gone from a combined 15 billion dollars at the start of 2017 to over 100 billion dollars just six months later.
It’s exactly this type of magnitude move over such a short time period that presents both significant risk and opportunity for investors and traders.
These types of ebbs and flows are probably not going away anytime soon which means you have plenty of time to do your homework and decide if this is an area you want to get involved in.
I hope this article has been helpful, please leave any comments or questions below.
Good luck out there!