When Bitcoin reached an all-time high in late 2017, it dominated the headlines, ensuring even the least tech-savvy people heard about cryptocurrency markets. Boasting a total market capitalization of $1 trillion to $2 trillion, digital currencies have been called everything from “evil” to the “next Internet.” With all the hype, you may be curious about what they are and how to invest in them; but first, you need to know how to buy and trade digital currency.
In this article:
Cryptocurrency Markets | Dig Deep and Understand How They Work
How to Buy Digital Currency
Participating in the cryptocurrency markets is the easy part. To buy digital assets, you simply need to go to one of the exchanges. Coinbase is one of the most popular, although you may want to check out Poloniex, CEX, Bittrex, Bitfinex, Binance, Local Bitcoin, Kraken, and GDAX. Once on an exchange, you can purchase coins using your bank or credit card.
Although digital currency transactions should keep your identity secure, you have to verify yourself before using one of these exchanges. If you want to stay completely incognito, you need to be one of the cryptocurrency miners. Mining is an extremely complicated process that requires the right hardware and a lot of tech-savvy.
The majority of the most popular digital currencies, such as Bitcoin, Litecoin, Dash, and Steller, are available in these exchanges. If you want to buy one of the thousands of less popular altcoins, you may need to find another exchange.
Typically, smaller exchanges focused on altcoins do not accept credit cards, so here is what you need to do:
- Buy Bitcoin or another popular currency on a big exchange.
- Find out the exchange of your desired altcoin.
- Go to that exchange and find the deposit address.
- Return to the wallet where you purchased the Bitcoin.
- Enter the deposit address from the other exchange.
- Check the other exchange to received the Bitcoin.
- Trade the Bitcoin for your desired alt currency.
When you are ready to sell Bitcoin, complete the process in reverse: trade the altcoins for Bitcoin and trade the Bitcoin for your fiat currency. Once you have purchased your digital currency, you can store it on the site. Or, for greater safety, you should move it to your wallet.
How to Store Digital Currency
Your wallet is where you store the keys or codes associated with your cryptocurrency markets. You can track your balance and complete crypto transactions with your wallet, which falls into the following categories:
- Online Wallet — Sometimes called a hot wallet, an online wallet stores your keys on the Internet. Many digital currency exchanges such as Coinbase have these built-in wallets. The risk with these is they may be susceptible to hacking.
- Mobile Wallet — These wallets are apps on your smartphone. Another term for them is cold wallets, since they reside offline. They are immune to hacking but are at risk if someone breaks into your phone.
- Desktop Wallet — This option is essentially the same as a mobile wallet, but it exists on your desktop. If your desktop breaks down, the wallet will be gone.
- Hardware Device Wallet — This cold wallet stores your digital keys in a device such as an external hard drive. The USB-drive-style Ledger wallet falls under this category.
- Paper — A paper wallet is not the same as just writing your keys down on a piece of paper. Instead, you need to generate the wallet online and then print it out, using a tool such as MyEtherWallet. Paper tends to be the most complicated type of wallet, but it is arguably the safest option.
Investing in Digital Currency Markets
Now that you know the basics of buying and storing digital currency, the next step is to learn how to invest.
On a basic level, investing in virtual currency is just like making any other type of investment. When trading cryptocurrencies such as Bitcoin, you buy and sell the coins in the hopes of making a profit.
To help you decide if you should invest in a certain currency, you may want to download some trading apps such as Blockfolio or CoinCap. With apps like these, you can check the market cap of various currencies and track their price fluctuations.
Keep the following elements in mind as well:
- Transaction Processing Speed — Faster tends to be better, but if you anticipate a currency’s transaction process is likely to speed up, you may want to buy it now even if the current processing speed is low.
- Current Supply — As explained below, supply is a huge factor when it comes to the value of the digital currency, so you should consider the current supply levels and how they are likely to change. If there is a finite amount of a certain currency, that may help to boost its value.
- Real-World Applications for the Currency —If there are practical applications for a currency such as Bitcoin, it is likely to become more popular.
- Investor Involvement — When big investors get involved with a currency, that can signal legitimacy.
- Founder’s Background — It is essential to consider this when determining if a currency is trustworthy or not.
Factors That Affect Digital Currency Markets
The price fluctuations of digital currency boils down to supply and demand. You can learn a lot about supply just by looking at the market cap of various digital currencies.
For instance, at the time of this article’s publication, Bitcoin and Ethereum make up the majority of the market. However, there are thousands of altcoins that exist in varying supplies as well.
On top of that, you need to consider changes to the supply levels. Consider how a particular digital currency is mined or created and estimate how the influx of new coins is going to affect the total supply.
There is a variety of elements that can affect the demand for a particular digital currency. Once a currency is listed on an exchange, it becomes easier to buy, and that alone tends to boost demand.
Similarly, if the software associated with a certain virtual currency is upgraded, that can also make the currency more desirable to buyers, which subsequently boosts demand.
Additionally, if there is a lot of hype or media around a certain digital currency, that can raise its value. For instance, early investors in DogeCoin (which has almost no real life application) made the investment because they knew this cryptocurrency is going into space. They believe that when this happens it will create hype, increase demand, and raise the value of their coins.
Beyond that, there are also shifts in the cryptocurrency markets that can affect the overall value. Consumer confidence generally increases when wallets improve their security, which then increases demand.
When governments recognize the legitimacy of digital currencies or ease their cryptocurrency regulation, that also increases overall demand, just as laws against digital currencies can lower demand.
From a tax perspective, you are required to report any money you earn on the cryptocurrency markets as capital gains, but you may be able to access tax-deferred gains by investing in crypto within a retirement account such as an individual retirement account (IRA). To learn more about investing, explore other articles on this site.
Have you tried investing in the cryptocurrency markets? Share your experience below.