Cryptocurrency is a popular investment choice for those looking to break away from traditional investment options like stocks or forex. In this article we review the things I wish I knew when I started trading and investing in cryptocurrency.
Start Small and Study
Don’t invest until you are familiar with trading strategies, market movements and risks associated with cryptocurrency assets. Some say it takes 10,000 hours to master a new skill. In general it takes at least a year to get comfortable and competent with a basic trading and investment strategy, but you can compress that timeline by studying more. At a minimum you need to understand:
- how to read candlestick charts
- basic chart patterns
- support and resistance levels
- how to use exchanges to execute trades
- how to use crypto wallets
- the difference between spot and margin trading
- basic risk management
- a basic understanding of what cryptocurrency is
Get The Right Tools
To start, you need a proper chart to monitor price action. TradingView has a very functional free tier, and is considered the best general purpose chart in the industry: www.tradingview.com.
You can also use “paper” trading tools to simulate real trading. These let you practice your trading strategy using fake money. Most exchanges have a testnet or simulated exchange, here is a link to Bybit’s: https://testnet.bybit.com/.
Do Your Research
Before investing, it is important to research and understand what you are investing in. Research the history of the project, and monitor current news and events that could affect its price.
For new traders it is recommended to only trade coins and tokens in the top 20, as they are more likely to have healthy liquidity and unlikely to “rug” or see their team steal funds from investors. You can reference the top cryptocurrencies at www.coinmarketcap.com.
Make a Plan
It is important to have a plan when trading cryptocurrency. This means having a clear idea of what you want to achieve and how you plan on achieving it.
Every trade you undertake should have price targets planned for entry, profit target, and stop-loss. Without a plan, it is easy to make impulsive decisions that could lead to losses. And if the market invalidates your plan, its okay to wait for your next entry. Do not chase candles or force a trade.
Be Patient and Control Your Emotions
Patience is among the most important traits of a successful trader or investor. If you approach crypto trading as a “get rich quick” opportunity, you are better off buying a lottery ticket.
Trading crypto often requires us to ignore our emotions or instinct. A common emotion new traders encounter is the “fear of missing out,” often referred to as “FOMO.” When traders see a big green candle or the market sentiment flips bullish, traders will feel a rush of FOMO – they don’t want to miss out on potential gains so they rush into a position, only for the price to drop soon after. Many traders end their short-lived crypto adventures in a series of poorly planned FOMO trades.
Remember that at it’s core – any speculative market, whether its stocks, crypto, or something else – is cyclical. Its a never-ending cycle of greed and fear that pushes markets up or down. So much of the market is driven by those emotions that oftentimes you can be profitable by simply taking the opposite position.
As a measure of market sentiment, greed and fear is actually a data point that can be measured via social media, on-chain data and other markers. You can view current and historical greed and fear data here: www.alternative.me/crypto/fear-and-greed-index/
Expect Volatility, Respect the Macro
News, macroeconomic events or various crypto-specific events can produce volatility in the market. When volatility is high, its nearly impossible to trade safely. Many traders will not trade certain days and times due to this. Cryptocurrencies are far more volatile than stocks, forex or other markets.
Pay close attention to the U.S. macroeconomic news and events, since that drives global financial cycles. Also monitor geopolitical events like elections or war, which can have outsized impacts on the economic climate and sentiment.
TradingView allows you to display upcoming macroeconomic events on your timeline; you can also use the Trading Economics website for free: https://tradingeconomics.com/calendar . Major events to monitor include:
- Federal Open Market Committee (FOMC)
- FOMC Meeting Minutes
- Consumer Price Index (CPI)
- Purchasing Managers Index (PMI)
- Unemployment Rate
- Producer Price Index (PPI)
Use Adequate Risk Management
Risk management is arguably the #1 way to succeed as a trader. Your goal is to maximize profits and minimize losses. The best way for new traders to do this is to set a stop-loss order when you open a position.
Stop-loss orders are a type of order used by traders to limit their loss or lock in a profit on an existing position. For example – You buy some crypto because you expect it to go up. When you buy it, you also set a stop-loss order just below where you bought in case the price unexpectedly drops below your entry. If the stop-loss price is reached, the order will trigger and sell your position immediately. This limits your risk to the downside. Many traders risk no more than 1% of their capital on a trade.
Diversify Your Investment
When investing in cryptocurrency, it is important to split your investment across different coins and tokens. This is doubly important if you are buying to hold longer than a few days.
This will limit your losses if the price of one currency plummets. New investors should have their highest allocation in the top projects, typically Bitcoin and Ethereum, because they are less volatile and more trusted than other cryptocurrencies.
Have Realistic Expectations
It is important to have realistic expectations when trading cryptocurrency. Do not expect to become a millionaire overnight!
Successful trading takes time, patience, and research. The most successful cryptocurrency traders and investors are those who studied, traded and invested through several cycles, meaning 3-5 years at a minimum. Fast money is risky money.
This extra time also allows you to mature as a trader and determine your preferred strategy. There is not a singular “best” strategy to trading, and you will likely try a few different strategies before settling on one.
Use Reputable Exchanges
There are many cryptocurrency exchanges available to investors in 2023. It is important to use a reputable exchange known for its security and reliability.
Being a new asset class, cryptocurrency exchanges sometimes go bankrupt and customers often lose their money. This rarely a risk in more traditional sectors like stocks or banks.
Research and understand terms like centralized exchange (CEX), decentralized exchange (DEX), and cryptocurrency self-custody. The safest option for investors is to use decentralized exchanges and self custody your cryptocurrency, but this requires a little bit of study to ensure you do it correctly.
Store Your Cryptocurrency Safely
When you own cryptocurrency, it is accessed via cryptocurrency wallets. There are two ways to do this – by allowing third parties to hold your crypto, or to take ownership of it yourself, also known as self-custody.
The phrase commonly used by cryptocurrency traders is “Not your keys, not your crypto.” That means if you don’t control the wallet your cryptocurrency is stored in, you don’t technically own it. When the FTX exchange went bankrupt, millions of customers kept funds on their exchange. It turns out FTX lost billions of dollars in customers funds due to mismanagement, and many traders lost all of their investment.
Self-custody of your cryptocurrency is the safest way to protect your investment. Hardware wallets are a better option than software wallets, but both are a great way to take ownership of your coins and tokens.
For software wallets, the market leader is Metamask www.metamask.io. Metamask is available on PC as an extension, or on iOS and Android phones as a mobile app.
For hardware wallets, try Ledger www.ledger.com. Only buy a hardware wallet directly from the manufacturer, do not buy used ones.
To be extra safe- have at least two wallets. The first crypto wallet never connects to websites, exchanges or anything else. The second wallet is the one you connect to websites and can transfer funds to it as-needed.
Be Prepared for Losses
Like all investments, there is a near 100% chance of losing money on some of your trades. It is important to be emotionally prepared for this possibility and not invest more than you can afford to lose.
Many traders and investors never realize a profit long term. Some even lose nearly all of their starting capital, either due to poor trading strategies, hackers or scammers. Trading in cryptocurrencies requires a mental fortitude and resilience, you can’t let emotions drive your trading. Have a plan and stick to it.
Mr. Papi is a community analyst and writer. If you enjoyed this, you can follow him on Twitter for market commentary on crypto, NFTs, DeFi, AI and more at www.twitter.com/1MrPapi