You may have made the decision to take the leap into investing and trading cryptocurrencies, but are not sure how to get started and navigate the whole process.
What assets should you choose? How to find a trusted exchange? Which type of storage is the most secure? What type of investment strategy is best for you? Read on for information that will help you answer all of these questions.
1. Tailor your personal investment plan to your goals
Before investing one dollar into any part of the cryptocurrency market an individual should come up with a strategy that matches your capital, investment goals, and risk tolerance. Here are the most popular investment goals of cryptocurrency traders:
Passive Investing: Aim for long-term profits.
Investors who share this goal are usually more conservative. They invest in instruments because they believe in the underlying idea and their long-term growth. Before jumping into a trade, long-term investors create a thorough exit strategy with clear objectives and minimize risk. Selling at a predetermined price target is trigger that most utilize within this strategy.
Rebalancing is another way for first-timers to manage their portfolio efficiently and gain positive returns without micromanaging their investments on a daily basis. Once there is a change in the value of the assets (or a certain time interval passes, depending on the type of the rebalancing strategy), the portfolio is rebalanced, so that each coin has the exact same weight as planned initially. The investor captures the gains by distributing them equally across the whole portfolio, hedges the risk, and maintains the stability of the value held in each asset.
Active Investing: Aim for constant but smaller returns.
Traders who have enough time to actively manage their investments execute frequent trading to take advantage of small price changes. This type of trading is also riskier. Major movements in time of market turbulence can erase all profits. The more frequent trading activity involves more transactional fees. Strategies such as arbitrage, scalping, swing trading are generally not recommended for novice crypto traders. If not managed well, this type of trading activity can often result in unexpected losses.
Mix of Both
New technology provides investors with the ability to automate the trading process and manage their portfolio by employing complex trading strategies. This process optimizes the trading costs, ensures better risk management and helps fulfill initial investment goals. There are solutions that provide novice investors with the tools to apply more aggressive strategies to gain profits, while at the same time, net returns by rebalancing their portfolios.
Trading strategies like Scalping, Day Trading and Range Trading when applied separately, possess the risk of a sudden market drop that can wipe out all profits. By adding the element of a rebalancing strategy to the mix investors can increase the efficiency of the process, capture profit opportunities, and hedge their portfolio against market risk.
2. Choose an instrument
Now that you have decided on your investment goals, it is time to decide which tokens to invest. Coinmarketcap reports data on more than 2300 cryptocurrencies.
Many new investors keeps things simple in the beginning by focusing on n the most popular cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), or Ripple (XRP).
The following cryptocurrency classification shows the differences between all the types of digital tokens that you can invest in:
This is the most popular form of token. The most prominent example of a currency token is Bitcoin and are intended to serve as a payment instrument. Bitcoin payments are already being accepted by thousands of retailers around the world. Currency tokens are considered the best alternative to centralized, fiat currencies.
Security (Equity) Tokens
These provide the investor with ownership in a certain project and are distributed via ICOs. Security tokens are closely related to the price of the underlying cryptocurrency and, once it starts trading, will also gain or lose value, based on the digital coin’s performance. Similar to stocks, depending on the structure of the company, security tokens can provide their owners with the right to receive dividends. Equity tokens are covered by U.S. Securities regulations and may only be available to accredited investors.
Individuals who invest in utility tokens usually believe in the idea (the product or service) behind the ICO and want to take advantage of it at a lower price. The total supply of utility tokens is usually fixed and if the demand for the product/service increases, the value of the tokens will appreciate. The SEC is yet to issue an official guidance on utility tokens, so if you plan to invest, do your research and make sure that the project is sustainable.
Many startups are built around the idea to offer tokens, backed by physical assets such as precious metals like gold. The purchase of tokens serves as a proof that the given individual possesses a certain amount of the underlying asset. Investors interested in gold, platinum, or silver, prefer purchasing asset tokens to eliminate storage and transportation fees of actual assets. Asset tokens directly follow the price of the real asset and are not influenced by other factors.
Most of these tokens do not provide any investible value or real-life application. They are considered a gamification element to reward individuals for their contribution to a platform’s operation or cryptocurrency. Most reward tokens can be spent on the platform and cannot be transferred. There are a few projects that allow their contributors to exchange earned rewards for other cryptocurrencies.
3. Find an exchange and choose a wallet
The next step is to find a trusted cryptocurrency exchange where the tokens you want to invest in are traded, create an account, and choose a wallet provider.
How to choose an exchange?
There are more than 190 exchanges currently available globally. Novice cryptocurrency investors may be unsure who to trust. Navigate this very important safely by basing your decision on the following 3 factors:
Security and History
This is one of the most important characteristics of a cryptocurrency exchange.
A good sign for a secure cryptocurrency exchange is the complexity of the process for setting up an account. Exchanges that are trusted and renowned for their high levels of security and transparency require users comply with KYC (Know Your Customer) and AML (Anti-money Laundering) procedures. The most reputable exchanges keep 95% of their assets offline so that they cannot be hacked. THos with the strongest security measure also provide two-factor authorization for logins and account transactions.
Another important thing to consider when choosing an exchange is the fee structure. For investors with long-term strategies to buy and HODL tokens, higher fees may not be an issue. Individuals who intend to trade on a daily basis need to find reputable exchanges offer competitive fees. Most exchanges apply fees based on the size or number of trades. Some exchanges charge in the range of 0.25% - 1% while some can be as high as 4%.
Cryptocurrency Pairs and Trading Volume
Some of the largest and highly trusted cryptocurrency exchanges offer trading of the top 20-30 tokens. If you plan on trading BTC, ETH or other of the leading cryptocurrencies, you can do that everywhere. But if your strategy is built on trading emerging altcoins you may need to look at smaller exchanges.
Another thing to look for in an exchange is the daily trading volume. The higher it is, the more liquidity the venue can offer investors allowing for faster trade execution. Liquidity can vary depending on the trading pair.
Once you have completed step 3 you can now register for a Capfolio account and link your exchange account in a few simple steps. This will give you access to back testing tools and other resources to enhance your cryptocurrency investment strategies and help your reach your profit goals more quickly.
Related Article: How to link your Coinbase Pro exchange account.
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Getting Started Video -
Although cryptocurrency trading is a lucrative niche, it is also associated with increased volatility and risk of losing all your investment. The most important thing before you start trading is to do research and create a personal investment strategy tailored to your goals. Cryptocurrency trading can be profitable even if you don’t trade aggressively. Just make sure to choose the right strategy or combination of strategies and be consistent. Good luck!