What to Do Before You Start Trading Cryptocurrencies

Friday May 8, 2020

With more people seeking an alternative to traditional investment strategies, the appeal of cryptocurrencies has skyrocketed. Traders continue to be drawn to cryptocurrencies’ general lack of correlation with mainstream markets, something that is a real advantage during periods where those mainstream markets are stagnating or falling.

Statistics from Q1 in 2020 testify to the rising popularity of cryptocurrency trading, with that popularity likely to encourage the development of more digital coins in the coming months and years. The total futures trading volume across all cryptocurrencies in Q1 surpassed $2.1 trillion, a 314% increase from Q4 of 2019.

Perhaps even more eye-catching is that the total market turnover in Q1 2020 was eight times the respective level from 2019. This increased trading activity has boosted the liquidity of cryptocurrency markets. Low liquidity was once perceived as one of the biggest disadvantages of crypto trading, but that issue may be consigned to the past.

That sharp rise in trading volume is likely to encourage many newcomers to explore cryptocurrency markets for the first time. Here are three steps that all aspiring crypto traders should take before getting started.

Learn how forex trading works

Hang on, weren’t we talking about crypto trading? Well, the act trading cryptocurrencies works in a similar way to trading standard currencies, even though crypto and forex markets ultimately behave in different ways. Without a general appreciation of forex trading, it is easy to be overwhelmed by the nuances of cryptocurrencies. The basic premise of crypto trading is buying and selling two different currencies, hoping to capitalize on price changes to generate a profit – just like forex trading.

Make the most of the demo accounts provided by online forex brokers, as these provide a risk-free environment to learn how to trade currencies without requiring real funds. Many of the brokers that provide the best forex demo accounts also facilitate crypto trading, so you can easily switch between the two. While it is possible to trade purely between cryptocurrencies, it is wise to start with fiat to crypto trading. Fiat currencies like USD or GBP act as the base which cryptos are then traded against, so forex trading and crypto trading are closely related.

Learn what affects the price of cryptos

Appreciating the idiosyncrasies of cryptocurrencies is much easier when you have an understanding of a more ‘normal’ market, which is another reason why it is valuable to practice forex trading beforehand. While using a forex demo account it will become clear that fiat currencies are massively driven by real-world events, such as key economic meetings or geopolitical developments.

Cryptocurrencies fluctuate in value based on different factors. Specific crypto headlines drive prices, rather than more general business or political news. Keep an eye out for major companies embracing crypto payments, as this can create a positive sentiment that boosts value. It is wise to stay apprised of general technological developments, while you’ll want to regularly check specialist crypto news sites as a barometer for public mood.

Learn how to manage risks

Any form of trading has inherent risks, but an individual can take steps to mitigate those risks. The most basic form of risk management is controlling your bankroll; set a clear investment limit and never exceed that limit, no matter how the markets move. Don’t be afraid to diversify your portfolio across multiple coins, so that you’re covered if one crypto goes south.

While you’ll find crypto experts with opinions that you trust, it is also prudent to develop and hone your analytical skills. Technical analysis is a vital part of anticipating crypto price movements, so don’t open up a position on a crypto market until you feel comfortable with the analytical side. If you can independently complete research, you’ll be able to confirm or challenge those expert opinions. That way, you’ll never make a trade purely because someone on the internet told you to!

There are practical decisions required before you can get started, such as choosing a cryptocurrency wallet and settling on an asset, but don’t neglect the strategic side of crypto trading once those practical aspects are in place. If you know how to trade currencies, how to anticipate price movements, and how to manage risks, then you’ll be able to head into the world of cryptos with much more confidence.