A Beginner’s Guide To Trading Cryptocurrency

Ever since Bitcoin was invented in 2009, not a single day goes by without people tweeting, posting and reading newspaper headlines about cryptocurrencies. A lot of people are excited about exploring this investment option. If you are one of those people, here are the basics of how to trade cryptocurrency for beginners.

Register yourself

You will need to create an account on a cryptocurrency exchange. If you want to buy it using fiat money, you should choose a centralized exchange. Most well-known exchanges like Coinbase and Gemini are centralized exchanges. They will take custody of your funds, connect you with a seller and execute the transaction on your behalf. 

If you already own one cryptocurrency and want to exchange it for another, you can do that too from a centralized exchange account. Alternatively, you might consider a decentralized exchange, where you directly connect with buyers and sellers and take control of your transactions. It is to be noted that decentralized exchanges don’t allow the exchange of cryptocurrency for fiat money. 

Centralized exchanges charge commission and transaction fees and require you to complete a KYC process while signing up. This option is preferred by beginners because the exchange does most of the work for them. Decentralized exchanges, on the other hand, provide anonymity, control and commission-free transactions. 

Fund the account

If you have registered on a centralized exchange to buy cryptocurrency using fiat money, you will need to link your account to a payment option. Most exchanges accept payment through your bank account, credit card, debit card or Paypal account. 

Set up a wallet

You will need a wallet to store your cryptocurrency and trade in the future. A cryptocurrency wallet keeps a record of your transactions and secures it with a public address and a private key. The private key, known only for you, is for the purpose of sending cryptocurrency to others. The public key is a public address that you give to others for transferring cryptocurrency to you. For the sake of security, the public address is different for each new transaction. You can keep a web wallet on the exchange for your day-to-day transactions and another personal wallet to store the rest of your funds. You might want to read up a bit on types of wallets

Buy cryptocurrency

Before registering on an exchange, you need to make sure that it lists the cryptocurrency you want to buy. Popular ones like Bitcoin, Ethereum, Litecoin, Ripple are listed on most exchanges. You can place a market order, meaning that you will buy your chosen cryptocurrency in the chosen amount at whatever is the current price. Alternatively, you can place a limit order, meaning that you will buy it only when it falls to a certain price. 

Do you pay tax on cryptocurrency trading?

Yes, the Internal Revenue Service (IRS) sees cryptocurrency as a property, and gains from that are taxable income. If you have sold cryptocurrency for fiat money, exchanged it for another cryptocurrency, used cryptocurrency to buy goods or services or accepted payment in cryptocurrency, you need to file cryptocurrency taxes. Those who have failed to file them in the past years can amend their past years’ taxes. The only transactions that are not taxable include buying cryptocurrency, transferring it to another wallet, gifting it to someone or donating to a tax-exempt organization like a charity. This is specific to the tax laws in the United States. Other countries have varied stances and laws on cryptocurrency.

Is cryptocurrency trading profitable?

At the end of the day, investing in cryptocurrency is a gamble. But there are ways of making a profit.

  • The conventional way of making a profit is to buy an established cryptocurrency like Bitcoin or Ethereum, hold it and sell it when the price peaks. 
  • You can also engage in day trading wherein you buy cryptocurrency, wait for the price to rise and sell it on the same day.
  • You can invest in stocks of organizations that sell products and services related to cryptocurrencies like crypto mining equipment, digital payment services, or cryptocurrency exchanges, or even banks that provide digital currency services.

Besides trading, there are other ways in which you can make money off cryptocurrency.

  • If your cryptocurrency blockchain operates on a proof of stake model for mining coins, you can earn money by staking your coins for a reward. The purpose of PoS is to verify transactions on a blockchain. For every block on the chain, they select one user who is supposed to validate the transactions and is rewarded with freshly mined coins. That user is chosen by randomly selecting from a number of users who have staked their coins. The more coins you have, the higher is the probability that you will win. Cardano is one blockchain that has implemented this model. Bitcoin and Ethereum don’t use it as of now.
  • You can sign up for an affiliate program wherein the cryptocurrency company pays you commission for sending traffic to their platform through your website. 
  • You can participate in a bonus airdrop, a marketing stunt wherein cryptocurrency companies send you small amounts of coins for free or in return for promoting their cryptocurrency on social media.
  • You can sell products or services in return for cryptocurrency, assuming that it is legal in your country.
  • You can look for companies in your profession that pay salaries in cryptocurrency.

Keeping in mind the risk of volatility, cybersecurity issues and the fact that blockchain technology is still in its early stages, you might want to consider your financial background before investing. Generally, people invest a small portion of their money that they wouldn’t mind losing. Most of them are side investments alongside stocks and bonds. 

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