The recent bull run has attracted many people to the world of crypto trading. The short-term appreciation of crypto is unlike most other asset classes and while it is true that crypto has made people insanely rich in a short amount of time, there are also people who have lost their life savings.
1. Define your goals and comfort level.
Firstly you need to ask yourself some questions like, Are you a trader looking for quick gains, or are you comfortable taking a long-term position on a project? Secondly, it is important to understand the inherent risk involved in trading in a volatile space like crypto.
2. Comparison of traditional financial markets vs crypto markets.
At first, entering a totally new market can seem a daunting and overwhelming task. Despite the differences, some aspects of crypto trading will be familiar to people who already trade in traditional markets.
The table below contains a list of the major similarities and differences so that people are not overwhelmed and realize that it is not rocket science.
|Features||Traditional Markets||Crypto Markets|
|Trades are digital and don’t require a physical market. ||Yes , Securities are traded in digital/dematerialized form.||Yes, crypto is digital good.|
|Trades happen on exchanges.||Yes||Yes|
|The first step is to transfer funds to an exchange/platform or broker of your choice before you start trading.||Yes||Yes|
|Bid and Ask system. Multiple order types like limit and market order.||Yes||Yes|
|The price is determined based on recent trades and updated in real-time.||Yes||Yes|
|Clear regulation and established customer protection norms||Yes||No. Governments are still working to create clear norms. Regulatory uncertainty ,is a problem in this market.|
|Established disclosure Norms of entities being traded||Yes||No , Cryptos are new instrument and there is no general consensus regarding this.|
|Central Database||Yes||Both centralized and decentralized exchanges. The trader/user can chose .|
Where do I start?
The first step is selecting an exchange where you can acquire the crypto of your choice.
Consider the following factors while selecting an exchange.
Due to geographical restrictions on exchanges, you need to make sure that you can transfer funds and trade on your exchange legally. You should ask for clarification and read the exchange’s policy carefully before you deposit funds.
The exchange should allow you to do the following:
- Allow you to transfer funds from your bank account to the exchange (similar to when you trade in stock markets and transfer funds to your trading account).
- Once you have deposited the money into your exchange trading account, The exchange will allow you to purchase crypto and provide you an exchange wallet to store your crypto.
- As an alternative to a bank transfer, the exchange allows you to buy crypto with a credit or debit card.
Is it SAFU ?
Exchanges are not immune to hacks and security threats. It would help if you asked yourself one crucial question,
“Will I get my money back if the exchange gets hacked ?”.
SAFU stands, the Secure Asset Fund for Users is an emergency insurance fund. Such a contingency fund should be present in any exchange that you decide to trade.
Evaluating exchange integrity
Here are some basic data points that you should research in order to evaluate the quality of the exchange you are considering:
- How large are the trading volumes on the exchange?
- The security mechanisms like two-factor authentication
- Contingency fund
- Customer service
At the end of the article, you’ll find resources to get information regarding exchanges and various other crypto data points.
Next, it is really important for you to get familiar with how wallets and encryption works. Crypto assets are transferred directly between parties using crypto wallets, unlike regular fund transfers where we rely upon banks.
What are crypto wallets ?
Crypto wallets are private key-protected wallets that can hold your balances and allow you to transfer them. Each wallet has a public address, you can think of this as your bank account number.
You send and receive crypto assets using the public address (also known as the public key); secondly, each wallet has a private key, like a password to access your wallet and authorize transactions.
Each crypto-asset requires its own wallet to send and receive transactions as they are on different blockchains.
Exchanges also give you a wallet so that you can deposit and send crypto assets to or from the exchange. Most centralized exchanges do not share the private key of your exchange wallet.
Security is an integral part of any exchange’s reputation but remember that since they control the private key of your exchange wallet, they control your asset as long as the asset is still in the exchange wallet.
“Not your keys . Not Your crypto”.
Luckily crypto allows you to keep your assets completely in your control. here are some of the wallet options that you can use if you do not want 3rd party control of your assets.
Types of wallets
There are many wallet applications that allow you to send and receive multiple cryptocurrencies in a single app making it easier for you to manage multiple cryptocurrencies. Such wallets can be desktop/mobile apps or simply browser plugins.
Such wallets are considered hot wallets and since they are connected to the internet, they are considered less secure but more convenient for everyday use.
There are hardware wallets that allow you to store your crypto offline and are considered one of the safer options. They come in the form of specialized hardware and look like USB devices.
The advantage of such wallets is that you can take them offline once you are done with your transaction.
Offline Paper Wallets:
Paper wallets are essentially printouts of your private/public key combination.
They are kept permanently offline and considered very secure assuming that wherever you store them is safe.
The good thing about crypto is that it allows you to keep your assets in your own custody as long as you keep your private/public key pair safe.
Depending on the amount and your safety requirements, you can choose various wallet options. They all have varying degrees of security.
Which crypto to buy ?
When evaluating a project, firstly, remember that this an industry where tons of projects are popping up every day, secondly tons of bogus projects also popping up along with the genuine ones.
We need to filter the gem’s from the trash, thirdly and most importantly, do no get carried away by the hype.
Framework for evaluation
- Assess the value proposition: long-term and its impact on the medium and short term?
- Risk: Supply and demand which applies to any asset
- White papers: This is a document that all crypto projects publish in order to explain the theoretical and technical concepts of their projects. White papers offer a good insight into the project.
- GitHub activity: Github activity can reveal a lot about the project. Branches’, commits, and programming languages can indicate the team’s expertise vs. team execution. GitHub can get an idea regarding code quality and consistency, and potential scalability as the project grows.
- Addressable market and userbase
- Competition – blockchain-based and traditional
- Token demand/supply economics are sustainable for the project needs and investor returns.
- Chain data and wallet activity can help you analyze the transaction volume, the liveness, and most importantly token holding patterns(If large holders control the supply) patterns of a blockchain.
The research you do will be directly proportional to your success in crypto. Do not fall for the hype and stay prudent.
Important resources for research and evaluation
These resources can give you good indicators regarding volume, exchanges, and history. They can give you links to telegram groups and other social platforms that these projects use.
Join our crypto trading chanell and get in touch with a vibrant community.
I hope this article can give you a starting point in your crypto journey .