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. New investors can choose between
- The GBTC trust as sold on the stock market.
- A cryptocurrency IRA (we don’t want to recommend one until we have reviewed them).
- An exchange or broker to buy coins on and a wallet to store the coins in.
- An exchange-broker-wallet hybrid like Coinbase/Coinbase Pro (which allows customers to buy/sell/store cryptocurrency).
Each option has its pros and cons, but notably, only an exchange-broker-wallet hybrid like Coinbase/Coinbase pro allows one to trade and invest directly using a single platform. This page will focus on that option due to its ease of use for beginners (although we will note Coinbase alternatives along the way).
NOTE: Coinbase Pro used to be known as GDAX.
TIP: A cryptocurrency wallet is a place where you store encrypted passwords that represent coins (roughly the equivalent to storing money in a bank account). 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 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. Below are a few of the most important things to know before getting started:
- A cryptocurrency exchange is not part of the regular stock exchange. Below we will suggest using an exchange/broker Coinbase, but you can also use the related Coinbase Pro (the pro version of Coinbase with lower fees) once you sign up for a Coinbase account. Neither of these is the same as Wall Street and its exchanges (same general mechanics, different specifics, and different entities).
- A beginner might prefer to trade cryptocurrency stocks on the stock market. For example, GBTC is a trust that owns Bitcoin and sells shares of it. Trading GBTC avoids you having to trade cryptocurrency directly, but still allows you exposure to Bitcoin. Beyond GBTC (and the Ethereum Classic version ETCG), your options are very limited for crypto stocks. Be aware that GBTC trades at a premium (meaning bitcoins are cheaper than buying shares of the GBTC trust), which isn’t ideal. Also, cryptocurrency trading is a 24-hour market, where the traditional stock market is not. Learn more about the GBTC Bitcoin Trust and the related pros and cons before you invest.
- A beginner might prefer to use the Square Cash App or Robinhood. The Square Cash App lets you buy/sell Bitcoin, but it doesn’t net you Bitcoin you can send to an outside wallet. In words, you get exposure to Bitcoin without having to fully learn about crypto wallets and exchanges. It is simple, so it is a decent starting point. Robinhood essentially functions like Square at the moment, but they offer a larger selection of coins than Square and plan to allow transfers in the future. That said, Robinhood isn’t an option in all states.
- For those who really want the real cryptocurrency experience, I think the simplest place to buy, sell, and store coins is Coinbase (and our tutorial below will help you get set up with that), but you can only buy, sell, and store Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and a small (but growing) selection of other coins on Coinbase. However, if you are serious about trading cryptocurrency, you’ll want to also sign up for another exchange like Coinbase’s Coinbase Pro, Bittrex, Binance, or Kraken (and may want to find another solution for wallets to store your coins in). See our list of exchanges for beginners for a more complete list. TIP: Even if you are going to get fancy with wallets and exchanges, Coinbase is a good starting point because it works as a simple on-ramp / off-ramp for fiat (i.e. you can easily trade dollars for cryptos on Coinbase, and this is not true of most exchanges).
- The cryptocurrency market is insanely volatile. 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” with all your investable funds. TIP: If you trade only the top coins by market cap (that is coins like Bitcoin and Ethereum), or GBTC, then the chances of losing everything overnight are slim (not impossible, but slim). Other cryptocurrencies are riskier (but can offer quick gains on a good day).
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), 4. you can develop for it, etc. All those and more are valid and interesting ways to interact with the crypto space, 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 need to be set up for trading (as most miners will sell at least some of the coins they mine).
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 an entirely different 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 with the above notes in mind:
- A beginner should start by choosing a 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. Currently, in 2019, we are referring to coins like Bitcoin (BTC) 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, Bitcoin Cash wallet, etc and a currency exchange).
After you master Coinbase, then you are ready for say Coinbase Pro and other exchanges like Bittrex, Binance, or Kraken.
TIP: A good first foray into cryptocurrency investing is the obvious, buying a major cryptocurrency like Bitcoin. After that, you’ll probably want to trade USD for crypto on an exchange like Coinbase Pro. Once you have done that, you could try trading BTC and ETH for other cryptocurrencies. Trading “crypto pairs” can be rewarding, but it is more complex and often more risky than just buying a single cryptocurrency as an investment.
TIP: Do not do “margin trading” unless you know exactly what that is and are an expert. Cryptocurrency is volatile; 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 nasty traps you could fall into when trading coins. For one, they are not necessarily 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 beginning to trade cryptocurrencies is simple, but there are a few notes that are vital to your understanding. These are similar to the ones above, but this time they are 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, Litecoin, etc (trading USD, aka US dollars, for cryptocurrency).
- Sell Bitcoin, Ethereum, Litecoin, etc (trading cryptocurrency back to dollars).
- Consider signing up for another exchange and trading one cryptocurrency for another cryptocurrency. You can then transfer that back to Bitcoin, Ethereum, Litecoin, etc, 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.
TIP: Coinbase accepts some non-US currencies as payment, but options may be limited. See Payment Methods on Coinbase.com for more information.
Important notes for trading with Coinbase:
- Today you can use USDC (a stable coin) in place of the dollar on Coinbase in some instances. On some trading pairs you have to use USDC, on others you can’t. Try buying USDC with your bank account and then swapping between USDC and USD as needed. The benefit of buying USDC and USD on Coinbase is that it has no fees (as opposed to buying cryptos directly through Coinbase.Com, which can result in fees and premiums).
- Coinbase/Coinbase Pro will want more personal information than you’ll feel comfortable giving them; there is no way around this. The more information you give them, ID, Bank account, credit card, etc., the higher your limit and the less restricted your account will be. Don’t let this scare you off from becoming a cryptocurrency investor. Every other exchange user went through this process; you have to also. Since you have to trust someone, Coinbase/Coinbase Pro is a good bet.
- I strongly suggest you use a bank account, and likewise strongly suggest you don’t use a debit or credit card. The fees are lower with a bank account and rather high without one.
- When you sign in with your bank account, you’ll need to input your bank account login. Again, that may feel shady, but is part of 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; fees decrease as trading increases. Other exchanges have better rates (like Coinbase Pro 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 the 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. <— This is really important, take the time to set up some form of 2-factor authentication.
- To 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 limits are usually lower on a credit card. TIP: I almost always deposit USD in my wallet as opposed to buying coins directly from Coinbase via my bank account when using Coinbase to buy (I do this on-the-go sometimes). You can also wire money if you need the funds to be in the wallet faster. On that note, I almost always then use Coinbase Pro to buy/sell coins when I’m on a desktop (then use Coinbase as my wallet and mobile app).
- You don’t have to buy a whole coin. You can buy fractions of coins. Bitcoins are expensive currently in 2019, so consider buying fractions of a coin to start if you don’t have a big bankroll. It has historically been a mistake to buy only ETH and LTC because BTC costs more. You should consider which one is most likely to increase in and retain value. Buying all three in equal dollar amounts, and ignoring how many of each coin that amounts to, is one way to avoid making the wrong choice based on price tag per coin.
- In general, all crypto transactions are final. 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 $10,000 $14,000 – $20,000, $10,000, $3,000 (whatever the current price is).
- 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.
- Set alerts. Alerts can help you decide when to buy or sell.
- There is a feature that lets you buy incrementally over time. Averaging into a position on a weekly basis is a time-honored conservative move that Coinbase will automate for you.
- 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, or your account gets hacked, there is nothing you can do about it (which is one reason why you want to have 2-factor authentication set-up).
In other words, trading cryptocurrency is simple to start, but there are some essential 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 logical place to start).
NOTE: Once you have Coinbase down, try moving onto Coinbase Pro. It’s, in overly simple terms, like a better version of Coinbase with lower fees. Coinbase operates both platforms, and both use the same logins. Coinbase Pro is the preferred exchange of many Bitcoin traders in the U.S. It caters to both pros and novices. After you master that, then consider exchanges like Bittrex and Binance.