Cryptocurrency is a digital asset composed of decentralized networks. Investors should be aware of the basics of cryptocurrency before beginning to trade. Crypto transactions occur in a distributed ledger known as the blockchain. Cryptocurrencies are not regulated by a central authority in the same way as fiat currencies and securities. While that makes them appealing to investors since they can conduct transactions more swiftly and easily, it also creates greater risks.
Investors face greater vulnerability to having their crypto wallets hacked, and the lack of protocols for tokens can lead to huge drops in token prices, causing investors to suffer huge losses. Investors can place market or limit orders to execute transactions on crypto exchanges once they verify their account and have private keys to their crypto wallet. Before beginning crypto trading, investors should know how to invest in cryptocurrency and how cryptocurrency exchange works.
How to Invest in Cryptocurrency
Investors should know how to invest in cryptocurrency before beginning to trade. In crypto trading, investors have access to their crypto wallet where they can securely store their coins. Exchanges typically provide wallets for their users as well as private keys so that investors can authorize transactions.
Like stock exchanges, traders can put in a limit order or a market order. A buy limit order is when an investor puts in an order to be executed only at the limit price or below that price, while a sell limit order is when an investor puts in an order to be executed only at the limit price or above it. If the cryptocurrency does not reach the specified price, then the order will not be filled and the investor might miss out on an opportunity to make a potential profit. A market order is to be executed at the prevailing market price.
In the cryptocurrency marketplace, traders are called makers and takers. When an investor aims to buy cryptocurrency at a specified limit order, the crypto exchange places it in its order book until an investor on the other side of the transaction can match it. Once the limit order price is matched, the investor who set the limit price is called the maker. Market-makers set the bid and ask prices for a security or digital asset. On the other hand, a price-taker is someone who accepts prices at the current market price because they do not have market influence.
How Cryptocurrency Exchange Works
Before beginning to trade cryptocurrencies, investors should know how cryptocurrency exchange works. A crypto exchange is a platform open 24 hours a day that is composed of buyers and sellers who are trading cryptocurrencies at their convenience. The exchange reflects the prices of these assets in real-time, which is why they can be traded so easily. Crypto exchanges are currently the primary means for trading crypto since investment firms rarely offer the trading of the asset. Before beginning to trade cryptocurrencies, another aspect that investors should know about is that investors have to go through an array of verification processes to verify their identity. Only then can they successfully open an account to transfer their funds and begin trading.
On a crypto exchange, investors can convert one cryptocurrency into another. Investors can also use fiat currency, like US dollars, to buy cryptocurrency like bitcoin. Investors incur a currency conversion fee when they make a transaction between two cryptocurrencies.
Unique Characteristics of Cryptocurrency that Investors Should Know About
There are some unique characteristics of cryptocurrencies that investors should know before they start crypto trading. The fact that cryptocurrencies are decentralized makes them more appealing to investors because they are not regulated by the federal government or any central body. The decentralized aspect of crypto also enables investors to transfer funds more swiftly and easily without a third party like a bank monitoring each move and slowing down the process.
However, investors should be wary of how the lack of regulation in the industry can make them suffer tremendous losses. Cryptocurrencies are extremely volatile and can have significant intraday price fluctuations that can weigh heavily on investors. As of recently, several tokens like TerraUSD and LUNA whipsawed due to the lack of standard protocols and oversight in crypto exchanges. These situations present heightened risks for investors.
Furthermore, investors should be aware of the safety risks associated with cryptocurrencies. Investors may be vulnerable to hackers who can break into their crypto wallet and conduct transactions if they gain access to the key. While private keys should not be shared with anyone, hackers can still find ways to break into investors’ accounts. The lack of regulation over exchanges has made it far too easy for hacking to take place. Additionally, exchanges do not have to adhere to any specific protocols when they develop new tokens to better compete in the crypto marketplace.
The Bottom Line
Trading cryptocurrencies can offer traders many opportunities (as well as risks) however, traders should be aware of how crypto trading works before they begin trading. Cryptocurrencies are a decentralized asset, which means that there is no central body that oversees transactions between two parties. Additionally, the lack of regulation over cryptocurrencies can lead to more hacking and even more price volatility among different types of crypto currencies.
Before starting to trade, investors should also know how to invest in cryptocurrencies. Investors, or market makers, can place limit orders, which will be filled if the price of an asset meets the specified limit order price. When an investor seeks to buy crypto at a specified limit price, the order will be filled if the price hits the limit price or below. If the investor seeks to sell crypto at a specified price, the order will come through if the price hits or exceeds the limit order price. Investors can also place market orders that are executed in real-time based on the current price of the asset.
Investors can buy and sell cryptocurrencies on crypto exchanges. Exchanges operate 24 hours a day and can be used to convert one cryptocurrency into another or fiat currency into cryptocurrency. Understanding these aspects of crypto trading is crucial to investors before beginning to trade crypto.