If you’ve followed along with this series of articles, you’ll have read up on the basics of cryptocurrency and learned about the technology that powers and supports this emerging financial sector. In this article, we will go over the concepts you will need to grasp before you can start trading.
There are two types of cryptocurrency exchange – those that allow you to buy currencies with fiat money and those that only allow trading from one cryptocurrency to another.
Generally, exchanges that allow trading of fiat against cryptocurrencies limit the cryptocurrencies they support. For example, CEX.io only allows you to use USD, GBP, EUR, and RUB (and other currencies, converted by your credit card company) to buy ETH and BTC. Meanwhile the other exchanges have many more cryptocurrencies available for trading – Bittrex and Poloniex have a few hundred altcoins each.
Buying and Selling
The easiest way to trade cryptocurrencies is to buy and sell the coins you think will generate gains. Different exchanges handle this differently, some allowing you to create stop-limit orders, others only allowing you to enter the limit order directly.
If you are buying and selling any more than a few hundred dollars it would be wise to set up a personal wallet. The last thing you want is to have made $20,000 profit this year, only to have the exchange get hacked or close and you lose everything . Remember, unless you control the keys that hold the cryptocurrency, the coins aren’t yours. I will be making recommendations on wallets and coins to consider trading in future posts.
Margin trading is another way of making profits off cryptocurrencies. It can be much more lucrative than regular trading, but also carries additional risks.
Margin trading is effectively using your own coin has collateral in order to borrow more to purchase another – Poloniex has a really good explanation of this on their FAQ.
Unfortunately, margin trading requires that you keep your holdings on the exchange as collateral. This is one of those additional risks – you’re trusting the exchange with your finances.
The final way of making a profit from your holdings is lending it to others who wish to margin trade. The profits you make will be smaller this way – only making interest on the coin you lend. As the collateral of the borrower, covers the losses, the risk is completely eliminated. Again, Poloniex’s FAQ has a good explanation of exactly how this works.