5 things forex traders should know before buying crypto
Cryptocurrencies have stormed into the public consciousness and show no sign of leaving. But with all the media buzz and misinformation online, it can be hard to know where to start in the world of digital currency.
These five tips will get you off to a flying start.
How to get started
The first step is getting familiar with the basic principles of cryptocurrency. What is it? What different currencies exist?
In this article, we’ll take you through some of the basics. Take your time to build your knowledge and get to know the best places for cryptocurrency research online.
If you want to trade, the next step is getting ready to buy. Setting yourself up with a Skrill wallet will mean that when you’re ready you can get straight into buying and selling crypto without having to mine yourself.
With Skrill you can convert 40 different fiat currencies into Bitcoin, Bitcoin Cash, Ether, Ethereum Classic, Litecoin, Stellar, Ripple, and 0x. Then you can sell back again when the time is right.
It’s ideal if you’re looking for one place to buy a range of cryptocurrencies safely and securely.
The difference between forex and cryptocurrency
Cryptocurrency is less affected by local political events than traditional currency trading. But cryptocurrency can still be volatile. This means that there's a big opportunity to make a profit, but it comes with increased risks.
The two markets – forex and cryptocurrency – are similar in that traders buy and sell currencies online. But the difference in volatility means traders have to rely on different strategies in order to make a profit.
Whereas forex traders tend to make many trades at speed, crypto traders tend to buy currencies and then leave them to go up in value over time. Investing in cryptocurrency therefore requires more of a long-term strategy.
The most popular coins
There are currently around 1,500 cryptocurrencies you can choose to trade, with more being introduced to the market regularly.
But they all have different purposes and applications, meaning they should be traded in different ways.
Once you understand the functions of the different cryptocurrencies, it makes it easier to know how and when they should be bought or sold.
- Bitcoin: Bitcoin was the first cryptocurrency and remains the largest, holding a 56% share of the total cryptocurrency market.
There can only ever be 21 million bitcoins. With 17 million already mined, that leaves 4 million left to enter the ecosystem. This is referred to within the crypto community as ‘scarcity-by-design’ and leads many to believe Bitcoin’s value will increase further.
However, Bitcoin currently has a scaling issue - the network can only handle 7 transactions per second.
While work is underway to solve Bitcoin's scaling problem, other cryptocurrencies are already capable of handling more transactions at lower costs.
- Bitcoin Cash: Bitcoin Cash forked from the original Bitcoin chain when two groups of developers disagreed on how to solve Bitcoin’s scalability problem.
Bitcoin registers transactions in ‘blocks’ currently limited to 1MB. Each block can only fit a certain number of transactions within it.
Bitcoin Cash’s ‘block’ transfer limit is 32MB, meaning it can handle more transactions per second.
- Litecoin: Litecoin was created as an alternative to Bitcoin.
Whilst using most of the same code, the developer made several changes to increase Litecoin's transaction speed.
Litecoin's transaction speed is four times faster than Bitcoin.
He also increased the maximum amount of coins you can mine from 21 million to 84 million.
- Ether: Ether and Ethereum are often confused.
Ether powers the Ethereum network; a blockchain for decentralised applications.
Ethereum was the first major implementation of smart contracts – computer programs that execute transactions without trusted third parties.
- Ripple: Ripple refers both to the currency (XRP) and the company behind it - Ripple Labs Inc.. The currency works as a settlement platform for banks and businesses.
- 0x: 0x is an open protocol that enables the peer-to-peer exchange of assets on the Ethereum blockchain.
0x was created to facilitate the public trade of assets of all kinds, from stocks to currencies to precious metals, as tokens on the blockchain. 0x is both a cryptocurrency and a cryptocurrency exchange system.
The problem with centralised exchanges like Coinbase is that they are at risk of hacking or theft. However, decentralised exchanges are slow, illiquid, and cannot be used with one another.
0x is an exchange that combines the best parts of both types of exchanges. The cryptocurrency (OTC) can be used on the 0x platform to trade Ethereum directly without having to pay a centralised exchange.
While you’re getting used to cryptocurrencies and their differences, it’s essential to make sure you’re up to date with global political events too.
Due to their high volatility, it’s also key to make sure you’re in the loop when it comes to cryptocurrency news. With so much noise and misinformation online, make sure you’re following the right sources.
Twitter is a great way to stay in the loop. Skrill also has plenty of tips and information.
Many of your trading tricks will still apply
Although buying and selling cryptocurrency is different to traditional forex trading, many of the same underlying trading principles still apply.
Reading charts and doing thorough market analysis will always stand you in good stead when trading cryptocurrencies. Similarly, keeping your investments diverse will help to protect you against the inevitable swings in value across your crypto portfolio.