How to Trade Cryptocurrencies Online? Here Are Two Ways
Do you want to trade cryptocurrencies online? The allure of cryptocurrency trading is getting stronger, especially as most digital currencies continue to recover. Since Bitcoin first came onto the scene, our understanding of the entire crypto-concept has evolved many times. Today, many digital currencies exist, and the possibility of one earning income from trading them is more certain.
Cryptocurrency trading has had a longwinded journey. The first transaction involving cryptocurrency happened in 2009. It took another four years before Bitcoin trading started. Even then, the concept of digital currencies was still in doubt for many people. The market needed some trusting before committing funds to cryptocurrency. Between April 2013 and April 2016, the entire cryptocurrency market’s capitalization grew by 419% to $8.3 billion. Barely two years later, the market cap expanded by 9,792% to $821 billion.
Figure 1: Total Cryptocurrency Market Capitalization (Source: CoinMarketCap)
As the digital currencies continued to prove their significance as an investment vehicle, it became clear that investors could exploit the profit potential of cryptos in two ways; to trade cryptocurrencies online via a cryptocurrency exchange or a broker. Below, we discuss these avenues together with their upsides and downsides.
Trading cryptocurrencies via a cryptocurrency exchange
How it works
Trading cryptocurrencies over an exchange is like buying and selling stock on a regular stock exchange. What does this mean? One has to take possession of the actual asset and pay for the full value of the asset. If you were to buy one Bitcoin, you would need to take the delivery and then store it in a wallet. Besides, you would have to pay the full amount that is Bitcoin’s prevailing market value.
Step 1: Open a trading account
Having selected an appropriate exchange, say Coinbase, the next step is to open a trading account. The process may include verification of phone numbers for security purposes. Additionally, a user has to add a payment method – the method one will use to transfer fiat currency in exchange for digital currency. On Coinbase, the payment methods allowed are Bank transfers, debit cards, and wire transfers. The last hurdle during account creation is passing the KYC test. Coinbase has to know all its users to prevent cases like money laundering.
Step 2: Start trading
Different cryptocurrency exchanges offer a specific range of tokens for buying and selling. Also, some tokens are not available for trading in some countries because of government restrictions. On Coinbase, some restrictions exist on what coins one can buy depending on the account type. For example, all regular Coinbase customers cannot buy nor sell Civic (CVC) cryptocurrency.
Step 3: Set up a crypto wallet
As noted earlier, trading cryptocurrency over an exchange comes with certain inconveniences, such as storing one’s tokens. Crypto wallets protect your tokens from theft. After acquiring the wallet, one is assigned with a private key for private use and a public key for public use. The private key gives you access to your tokens. On the other hand, the public key facilitates receipt of tokens from senders to you.
In cryptocurrency parlance, there are hot wallets and cold wallets. A hot wallet is one that you can access easily and from any device. It is because it is “live” or “online.” The problem with such wallets is the susceptibility to theft from hackers. Contrarily, cold wallets are not online. Instead, they entail storage of tokens on hardware devices such as a USB stick. Their key advantage is that hackers cannot access them.
Pros of crypto trading via an exchange
- Traders purchase actual tokens
- Trading positions are not leveraged hence lesser risk exposure
- One can hold onto a trade position for as long as possible without being margin called
- Ideal for value trading
Cons of crypto trading via an exchange
- One has to learn how to handle the complicated technology related to storing crypto tokens
- Exchanges limit the coins one can trade
- Exchange have deposit limits
- Maintaining a trading account is expensive
Trading cryptocurrencies via brokers
In other words, this is called crypto-to-crypto trading or cryptocurrency CFD trading. Crypto CFD trading is the most popular because of limited restrictions and ease of use. CFDs trading entail buying and selling derivatives of the actual asset. For example, one can buy a derivative of Bitcoin using Ethereum without actually owning either token. CFDs trading on cryptocurrencies is simply speculation on the price movements of the digital currencies. For this reason, you can exploit both price rises and declines for profit.
How it works
All you need is to open a live trading account from a CFD broker and deposit funds.
Step 1: Account Creation
New users need a valid email address and mobile phone number to open an account with the broker. After entering all the necessary information, one has to confirm to convince the broker that he/she is not a robot. All done, the account is ready for deposit and trade.
Step 2: Start trading
From the live trading account, users can buy and sell cryptocurrency pairs easily. On ZFX, for example, you can trade Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH) without actually owning them. It means you will never need a crypto wallet.
However, CFDs trading on cryptocurrency involves more work in terms of setting up trades. Similar to Forex trading, one has to understand how to read charts, as well as how to use various technical indicators.
Pros of CFDs trading on crypto
- Easy to set up a trading account. The verification process is fast and straightforward
- Traders can exploit leverage to generate more substantial profits
- Hundreds of technical indicators are available to facilitate profitable trading
- CFDs trading is safer because most brokers operate under licenses from reputable financial authorities
- Liquidity in CFDs market is high hence the speed with which one can unwind trade positions is high
- Trading does not involve transactions over blockchain, which takes longer to complete. Contrarily, CFDs trading is fast because transactions involve market participants via the broker.”>
Cons of CFDs trading on crypto
- Risk exposure is huge because of leveraged trade positions. Setting a stop-loss is important to prevent a total loss.
- Some brokers have unholy spreads, which undermines the profits available to you
- Some unlicensed brokers are unscrupulous in their dealings where they manipulate prices of cryptocurrencies at the expense of their customer’s profits
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
ZFX (Zeal Capital Market) is an online forex & CFD broker providing more than 100 products for forex trading, commodity trading, index trading, and share CFDs trading. The minimum deposit for the account opening is only USD 50. Open a trading account and download our MT4 trading platform now!