Cryptocurrency Trading - What Is It And Here's What Investors Should Know
Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via an exchange.
James K.Apr 10, 2023122 Shares1653 Views
Cryptocurrency tradingis important. Once you've decided to purchase Bitcoin, Ethereum, or another cryptocurrency, you'll need to open an account on a cryptocurrency trading platform in order to exchange your US dollars (or other currency) for digital assets.
Some, such as Coinbase, have been around since the early days of Bitcoin, when there was far less regulation over how cryptocurrency was bought, sold, and traded.
Others, such as Robinhood and PayPal, are better known for other services and have only recently begun to allow customers to trade cryptocurrency within their existing accounts.
Here's what you need to know about why selecting the right cryptocurrency trading is important, as well as the details experts recommend considering before making your decision.
How to Trade Cryptocurrency for Beginners - Learn Crypto Trading
Taking a financial position on the price direction of individual cryptocurrencies against the dollar (in crypto/dollar pairs) or against another crypto(via crypto to crypto pairs) is what cryptocurrency trading entails.
CFDs (contracts for difference) are a popular way to trade cryptocurrencies because they provide greater flexibility, leverage, and the ability to take both short and long positions.
Due to state or national regulations, your location may prevent you from buying and selling cryptocurrency on certain exchanges.
Some countries, such as China, have outright prohibited citizens from using cryptocurrency exchanges.
There is a lot of regulatory uncertainty surrounding cryptocurrency in the United States, and some states have implemented their own regulations.
For example, New York requires exchanges to obtain a BitLicense before operating within the state, and only licensed companies are permitted to offer certain approved coins.
Most other states do not have as stringent regulations as New York, but many do regulate in some way or are working to do so.
According to the National Conference of State Legislatures, 31 states have pending legislation on digital currencies in their 2021 legislative sessions.
On a website or within the terms of service, you can frequently find information about an exchange's geographic limitations, as well as related accessibility factors, such as national currencies accepted.
Cryptocurrency is not backed by any central institution, and your cryptocurrency holdings are not as safe as bank deposits or traditional investments.
Some exchanges, such as Coinbase and Gemini, keep any balances in the United States.
Dollars you keep in FDIC-insured bank accounts. However, FDIC insurance does not cover cryptocurrency balances.
Some exchanges have insurance policies in place to protect the digital currencies users hold within the exchange from hacking or fraud.
Coinbase, for example, has a $255 million insurance policy.
Account holders would be protected if Coinbase's reserves were hacked and any amount of cryptocurrency up to $255 million was stolen.
Others, such as Kraken, rely on their security practices rather than insurance policies to protect their clients.
Whether you intend to keep your crypto holdings in an exchange or only have them there for a short time before transferring them to your own wallet, the security of the exchange should be a top priority.
Examine how much of the exchange's assets are kept offline, in hard storage, for example.
Storage is a contentious issue among cryptocurrency enthusiasts.
Many people believe in the adage "not your keys, not your coins," which states that you should keep the public and private keys associated with your crypto holdings in your possession rather than leaving them in the custody of the exchange.
However, as a beginner, an exchange that allows you to keep your cryptocurrency in your online account may be a good option.
After you've learned more about storage options and increased your holdings, you may decide to keep your cryptocurrency in your own wallet.
However, Ross cautions against using exchanges that only allow you to store on their platform, such as PayPal.
Robinhood recently announced that it will develop a cryptocurrency wallet so you can transfer your coins off-platform.
As if taxes weren't complicated enough, reporting cryptocurrency can add an additional layer of complication to your tax return.
As the tax situation surrounding crypto assets evolves, it will be critical for people to ensure that their personal tax situation is also up to date, Ross says.
Any cryptocurrency trades you make must be reported as capital gains on your tax return. That means you'll need to understand the value of your cryptocurrency when you buy it in US dollars, as well as the value when you sell it.
Cryptocurrency held on an exchange or in a wallet is not FDIC-insured like bank money.
Make sure you trade and store your cryptocurrency on a platform with strong security measures, such as keeping a significant portion of your holdings in cold storage and requiring two-factor authentication for users.