What is crypto?
Cryptocurrency is a type of digital asset. Amongst its many uses, it can be used as a means of exchange between two parties. A key feature of cryptocurrency is that it is stored on a decentralised network known as the blockchain. The blockchain holds a record of transactions made in cryptocurrencies such as Bitcoin, and stores these records as a digital ledger across various computers in a peer-to-peer network.
Due to the decentralised nature of the blockchain, where the crypto is transferred to, how much, and when, is transparent and permissionless: no third-party can block a transfer, confiscate it, or reveal the personal identity of the parties. Well-known examples of cryptocurrency include Bitcoin, Ethereum, Litecoin, and XRP. In addition to being accepted by various merchants for the purchase of goods and services, it has also become a store of wealth that is traded on various exchanges around the world.
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How is cryptocurrency different from shares?
Cryptocurrency differs from shares for several key reasons:
- Cryptocurrency is a decentralised asset, while shares are derived from centralised, commercial companies.
- Cryptocurrency experiences higher volatility than most shares: big swings are common in both directions.
- Cryptocurrencies are not only investment instruments; they are often used as a means of exchange between two parties, i.e. paying a restaurant bill using Bitcoin, whereas shares are only used for investment purposes (to receive dividends or to sell when the share price rises).
- Companies issue shares in order to raise funds for their business operations. The value of a share is tied to company performance. Some cryptocurrencies contain a finite number of tokens, the value of which increases or decreases according to the market’s demand for those tokens. Demand can increase or decrease based on the token’s utility, i.e. ERC-20 as a standard in blockchain projects has received widespread adoption, boosting Ethereum’s price along the way.
- Some companies issue dividends to their shareholders (but not all), which is a regular form of payment to investors. In the crypto world, some cryptocurrencies issue staking rewards for holding the tokens for a certain period of time.
How to trade crypto?
In order to trade crypto, you will need an account with an exchange such as BTC Markets, eToro, or Luno. Similar to the sign-up process for other financial products and services, all you need to do is supply your details (including proof of identity), and to connect your bank account for deposits and withdrawals. Once you are on the exchange, you can buy and sell crypto much the same way as you buy stocks. Depending on the platform’s features, you can set Take Profit and Stop Loss, setup recurring transactions to automate your investing, or open a Self-Managed Super Fund account. Depending on your needs, it is best to shop around the various exchanges to find the right fit for you.
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Crypto trading approaches
While investing in general sees a wide range of styles and theories, the two most prominent crypto trading methods are:
Long-term trading: Some Investors take a long-term view with cryptocurrency investing (just like when trading stocks). This involves buying and holding crypto for a prolonged period of time regardless of market fluctuations affecting the price. Investors undertaking long-term trading tend to take the view that in the long-term, their investments will increase in value despite periodic downturns in price.
Day Trading: Due to the fluctuations in market prices, some investors choose to keep a close eye on their portfolios. They sell multiple times per day as prices rise, before buying back during their fall (known as the dip), or purchasing other cryptocurrencies they think are undervalued. Day trading doesn’t technically have to occur within a 24-hour period. It’s common for people to employ this strategy over a matter of days or even weeks, depending on the market conditions.
What is dollar-cost averaging, and why do crypto investors do it?
A popular strategy among crypto investors is dollar-cost averaging (DCA). DCA is an investment strategy that aims to reduce the impact of volatility by buying small amounts at regular intervals, despite the price, instead of investing a lump sum in one go. If you’re new to crypto or don’t want to spend time on market analysis, DCA can save you trying to time the market to buy at the best price. Even if you are looking to invest over the long-term crypto investors you can use this strategy to even out their purchase prices, take advantage of market dips and eliminate emotion-driven investment decisions.
Cover image source: Tatyana Soares