As outlined in our previous post, Digital Currency was originally created to replace traditional currency, like the US Dollar. But as fascinating as that is, traders are utilizing digital currency in special ways with the goal of profiting from this new market.
Traders dabbling in the realm of digital currency are mostly buying cryptocurrencies in the hope that its value will go up, similar to the way they purchase other securities. Traders are buying and selling this digital currency to profit on fluctuations in value/exchange rates. And fluctuate they will!
The cryptocurrency market is extremely volatile. You could stand to make a lot of money, or chance losing it all. And that’s the main appeal. The risk can often times be likened to the dot com startups in the early 2000s. Add in a few other ingredients: miniscule commissions, open markets 24 hours a day 7 days a week, simpler charts, and more accessibility. Plus, traders don’t need a lot of capital since the amount needed to begin trading cryptocurrency can be as low as just a few dollars. Now you have a mouth-watering recipe for potential profitability.
New cyptocurrencies are added to the market on a daily basis, and the taste for an appetizing return on your investment may lead you to buy into a brand new cryptocurrency at a discounted rate before it is launched. Day Traders are speculating and buying and selling several times within the course of a day to make quick gains based on short-term volatility. This is pretty much a full-time job that requires paying constant attention to movements in price. Swing Traders hold the position for a few days or weeks, at the most. Still others bet on a safer, less stressful trading method of holding long-term, waiting weeks, months, or even years for values to appreciate, reaping the benefits at a later time.
Day traders mitigate the risks or trading cryptocurrency by hedging and utilizing stop and limit order functions. Stop losses are set for obvious reasons. They diversify. Instead of putting all the eggs in one basket so to speak, day traders reap the benefits of growth from multiple coins, instead of magnifying a profit or loss on just one single cryptocurrency.
Traders know playing it safer means trading the major cryptocurrencies listed at the top of the Coinmarketcap.com chart, such as Bitcoin, Ethereum or Ripple (XRP). These are less likely to plummet and disappear. Traders willing to take bigger gambles know that the smaller, lesser known altcoins can offer quicker gains in a shorter term, along with much greater risks. In either scenario, a lot of traders get into the habit of taking some smaller profits on the incline, and hunting for re-entry to continue reaping the potential profits.
But it always comes back to one: Bitcoin. They are the standard to watch. If its price surges drastically, then other altcoin prices can go down too as people offload smaller cryptocurrencies to ride the swell of Bitcoin. On the flip side, if the price of Bitcoin nosedives, then so can other cryptocurrencies as people unload and cash out. It may seem like a lose-lose situation, however when Bitcoin is stagnant or has smaller movements in either direction, you will often find other altcoins growing.
More experienced traders are trading currency pairs, or “crypto pairs”. This involves comparing the value of one cryptocurrency (the base currency) to another when purchasing (the quote currency, or mainly Bitcoin or Ethereum). Traders are then able to leverage the constant price fluctuations of all the other cryptocurrencies to earn more BTC or ETH. With the increase in complexity on this trading comes the increase in risk, and the increase in potential rewards.
However, since the cryptocurrency market travels at the speed of light compared to other markets, the chance of losing is always increased, and not just because of simple dips in the market. True, there is the risk of the market crashing, but there are also added security risks such as hacks, bugs, or other governmental regulations that could be catastrophic. There are also no laws in the cryptocurrency realm that prohibit “insider trading”. Since cryptocurrency is not controlled by a central entity and transactions are irreversible, if you get cheated, hacked, or lose a coin, your money will be permanently lost with no recourse. With cash and stocks you have peace of mind; they’re both insured by the FDIC and SIPC, and this ultimately means that the government would be responsible to reimburse your funds, up to $500,000. Not the case with cryptocurrency. With the exception of just a few, almost all cryptocurrency exchanges provide no cash or asset insurance whatsoever.
Trading cryptocurrency is not for the faint at heart. Traders are intrigued with the possibilities, they do their homework, and they are absolutely okay with the elevated risks that come with the territory because they know they may stand to make a fortune one day.
Traders ready to step over into the world of trading cryptocurrency must first convert their fiat currency (USD) to cryptocurrency. This is where the Fiat Exchange comes in. Some of the top Fiat Exchanges are Coinbase, GDAX, Kraken, or Gemini. If you are interested in trading currency pairs, then you'll need to involve another exchange for that. Some of the top Crypto-to-Crypto Exchanges right now are Binance, Bittrex, and Huobi.
Please note: This information is provided only as a general guide and is not to be taken as official IRS instructions. Cogenta Computing, Inc. does not make investment recommendations nor provide financial, tax or legal advice. You are solely responsible for your investment and tax reporting decisions. Please consult your tax advisor or accountant to discuss your specific situation.