A Beginners Guide Trading Cryptocurrency
Everything You Need to Know to Start Trading Cryptocurrencies Like BitCoin, LiteCoin, and Ethereum
From there it is as simple as filling out a form and waiting for the transaction to process (once your information is verified with the exchange you pick).
In other words, if you want to trade cryptocurrency you need:
- A cryptocurrency wallet (or two).
- A cryptocurrency exchange (or two) to trade on.
Simple as that. The rest of the page will explain the details and other important things to know.
How to invest in cryptocurrency: If you want to invest in cryptocurrency, and not just buy/sell/trade, then you have a few options. Generally new investors can choose between the GBTC trust sold on the stock market, a cryptocurrency IRA (we don’t want to recommend one until we have reviewed them), or an exchange-broker-wallet hybrid like Coinbase/GDAX (which allows customers to buy/sell actual cryptocurrency). Each option has its pros and cons, but notably only an exchange-broker like Coinbase/GDAX allows one to trade and invest directly. This page will focus on that option.
TIP: A cryptocurrency wallet is a place where you store encrypted passwords that represent coins (the equivalent to storing money in a bank account) and a cryptocurrency exchange is like a stock exchange or like a currency exchange in a foreign airport (a place people can trade cryptocurrency for other cryptocurrencies and for fiat currencies like the US dollar). Just like if you want to trade stocks you need a bank account and access to the stock exchange, it is the same deal with cryptocurrency.
What You Should Know Before You Start Trading Cryptocurrency
There are only a few things to know about trading cryptocurrency beyond what was noted above. Two of the most important things to know are:
- A cryptocurrency exchange is not part of the regular stock exchange. Below we will suggest using an exchange coinbase, but you can also use the related GDAX (the pro version of the coinbase exchange with lower fees). Neither of these are the same as Wall Street and its exchanges (same generally mechanics, different specifics, and different entities).
- A beginner might prefer to trade cryptocurrency Stocks on the stock market (GBTC is a trust that owns Bitcoin and sells shares of it; trading this avoids you having to trade cryptocurrency directly). A stock transaction is generally much faster than a cryptocurrency transaction. The main BitCoin stock here in 2017 is GBTC. Be aware that GBTC trades at a premium (meaning bitcoins are generally cheaper than buying shares of the GBTC trust), which isn’t ideal, but in exchange GBTC can be traded instantly and on a regular stock exchange (trading coins for USD any other way is not instant and cannot be done on the normal stock exchange). Learn more about the GBTC Bitcoin Trust before you invest.
- The simplest place to trade coins is coinbase (and our tutorial below will help you get set up with that), but you can only trade Bitcoin, Ethereum, and Litecoin on coinbase. Thus, if you are serious about trading cryptocurrency you’ll need another exchange like Bittrex or Kraken. See a top 5 list of cryptocurrency exchanges.
- The cryptocurrency market is insanely volatile here in 2017. You can make a fortune in a moment and lose it in the next whether you trade BitCoin, another coin, or the GBTC Bitcoin trust. Consider mitigating risks, hedging, and not “going long.” TIP: If you trade only the top 3 or so coins (that is Bitcoin, Ethereum, and Litecoin), or GBTC, then the chances of losing everything overnight are slim (not impossible, but slim). Other cryptocurrencies are more risky.
TIP: You are free to choose any popular exchange, but coinbase is a smart place to start due to ease of use (so our page will focus on that). See The Best Bitcoin Exchanges ranked.
TIP: There are a few sides to cryptocurrency. 1. you can trade and invest in it, 2. you can use it for transactions (anywhere a coin type is accepted), 3. you can break out a graphics processing unit and some software and mine coins (see how to mine coins). Those are all valid and interesting, but with that in mind this page is focused on “trading” cryptocurrency (and therefore also investing in it). With that said, even if you want to do the other things with cryptocurrencies, you still essentially need to be set up for trading.
On cryptocurrency mining: As noted, one way to invest in cryptocurrency is via cryptocurrency mining. That is a valid way to start investing, if say you love computer gaming and need a new rig and want to invest in small amounts of cryptocurrency while maybe making back some of the cost of the rig (and maybe even breaking even)… but that is a whole other subject. The average investor will want to trade USD for cryptocurrency on an exchange and avoid the complexities and investments of mining. In all cases, unless you already have a good rig with a great graphics card, you’ll need to put down USD upfront anyway.
What You Need to Know to Start Trading Cryptocurrency
For those who want to trade cryptocurrency despite the above notes:
- A beginner should start by choosing an company with a good reputation that offers an exchange and wallet (to help keep the process simple).
- A beginner should also start by trading prominent coins, so in 2017 that is Bitcoin (BTC), Litecoin (LTC), and Ethereum (ETH)… in the future this could change.
Since the above is the case, a good start for any American wishing to trade cryptocurrency is starting with coinbase.com (the most popular cryptocurrency website in America, and a service that offers a single platform for a Bitcoin wallet, Ethereum wallet, Litecoin wallet and a currency exchange).
After you master coinbase, then you are ready for say GDAX and Kraken.
TIP: Do not do “margin trading” unless you know exactly what that is. Cryptocurrency is volatile and you can end up losing all your money in an instant if you aren’t careful.
TIP: If you don’t understand the tax implications of trading cryptocurrency tread very carefully. There are some really nasty traps to fall into when trading coins (because they aren’t considered “like-kind assets.”) If that is confusing, then consider sticking with trading USD for coins in coinbase until you grasp the concept. Learn about cryptocurrency and taxes.
How to Get Started Trading Cryptocurrency With Coinbase.com
The process for getting started trading cryptocurrencies is simple, but there are a few notes that are vital to understand (just like above, but this time applied to using coinbase).
First, to sign up for coinbase.com.
- Sign up for coinbase.com to create a digital currency wallet where you can securely store digital currency.
- Connect your bank account, debit card, or credit card so that you can exchange digital currency into and out of your local currency.
- Buy Bitcoin, Ethereum, and/or Litecoin (trading USD, aka US dollars, for cryptocurrency).
- Sell Bitcoin, Ethereum, and/or Litecoin (trading USD, aka US dollars, for cryptocurrency).
- Consider signing up for another exchange and trading cryptocurrency for cryptocurrency (and then transferring that back into Bitcoin, Ethereum, and/or Litecoin, and then back into coinbase, and then back into USD). Don’t forget to record your transactions for the tax man and to brush up on the tax implications (I can’t stress that enough).
- I strongly suggest you use a bank account, and likewise strongly suggest you don’t use a debit or credit card. The fees are way lower with a bank account. The fees are rather high without one.
- When you sign in with your bank account you’ll need to input your bank account login. That may feel shady, but is the process (read about it at coinbase).
- If you use your bank account, you have to wait 3-5 days for your bank to approve the pairing (so you can’t trade for about a week after you sign up).
- There are limits to how much you can buy/sell in a week. Adding a photo ID and other payment methods will increase your limits. Otherwise your limits increase (quickly) over time as you trade.
- There are fees involved with trading (they get lower as you trade more). Other exchanges have better rates (like gdax for example). In other words, you’ll pay a little bit more than market price (or sell for a bit less than market price) and pay a small fee when trading on coinbase (this is a trade-off for ease of use).
- Set up 2-factor authentication. That helps to secure your account by sending a code to your phone when you log in.
- To actually trade coins you need to go into settings and make sure your wallets are set up (BTC, LTC, ETH, and USD wallets can be found under “accounts”).
- The benefit of a USD wallet on coinbase is that you can put money in that and then buy coins instantly from the wallet. If you try to buy directly with your bank account the transaction can take about a week. A credit card doesn’t have this problem, but generally limits are lower on a credit card.
- You don’t have to buy a whole coin. You can buy fractions of coins. BitCoins are expensive here in August 2017, so consider buying fractions of a coin to start if you don’t have a big bankroll.
- When you buy a coin, take a breath and review the information. An extra decimal place can mean big money considering a single BitCoin can trade for over $4,000.
- Download the app. This lets you trade cryptocurrency from your phone. The market is volatile, transactions are slow, when it is time to buy or sell you need to do it ASAP.
- Cryptocurrency is volatile! There is always the chance that the market will crash, or that you will face some other catastrophe. Cryptocurrency isn’t a centrally controlled and regulated fiat currency. If you lose a coin or someone cheats you, there is essentially nothing you can do about it (which is why you want to have 2-factor authentication set-up).
In other words, trading cryptocurrency is simple to start, but there are some very important aspects to understand before you start trading with a wallet-exchange like coinbase.
The last thing to note is that there are countless other options for setting up wallets and trading currency. Most will however pair with a coinbase account (making it a good place to start).