Cryptocurrency has taken the world by surprise in the last ten years. Even financial markets have now opened up to cryptocurrencies’ immense opportunities and practical reality. It is almost impossible in today’s age for anyone to remain oblivious to cryptocurrency. While many have already taken the plunge into the crypto world, quite a few are still desperately stuck on the fence for lack of genuine information. They are not entirely wrong because crypto is a whole new complicated world of finance. Cryptocurrencies are the new financial market instruments, and individuals must have sufficient (if not expert-level) knowledge to deal, trade, and invest in them. Depending on the nature of transactions, it can also involve significant risks and large setbacks if anyone lacks general awareness. Unlike traditional financial markets, crypto markets are slightly different. Crypto markets are largely unregulated, and so they run the risk of fraud. This starter pack will give an excellent introduction to the world of Cryptocurrencies.
Chapter 1. Understanding Cryptocurrencies
History of Crypto
Cryptocurrency (or just Crypto) started as an alternative to traditional currencies. The value of traditional currencies is strongly controlled by governments, their power, and local geopolitical situations. Therefore a currency like, e.g., US Dollar, always had a sizeable dominating influence on the rest of the global currencies. The central bank had complete control and authority over currencies even within a country. Complete authoritative control is not a democratic situation. Many schools of thought felt the need for an alternate decentralized currency system. An unregulated financial system was the need of the time that could stand the test of time and was immune to any manipulation by any individual, entity, or group. With this idea in mind, Nick Sabzo designed BitGold in 1998, but the idea and product proved too early for mass-market adoption. Customers and the market were just not mature enough to accept it. However, the project served as a pathway for other projects to follow suit and design products on similar design principles. By 2005, with the advent of powerful computing and mobile devices, the future of digital currency was inevitably near. The year 2008 saw the launch of Bitcoin by Satoshi Nakamoto, one of the most popular and trusted cryptocurrencies of all time. Also, by 2008, PayPal was already ten years old, and everyone was now open to the viability of an alternative banking and financial system. The time had come for starting a new world order in financial markets. Bitcoin has become the Gold Standard for crypto product design, accuracy, security, safety, and trust.
What is Cryptocurrency?
Cryptocurrency or simply crypto is simply a digital currency that can be used to transact just like traditional currency. You can trade it to buy goods and services in daily life. Cryptocurrency can exist in the form of coins and tokens. This is just like the way we use Coupons and Vouchers which hold a value in traditional currency. Just that everything in crypto is only in a digital format and a highly secured digital network that is impossible to manipulate. Crypto has not been printed like paper money as it’s against the principle of a truly digital currency. Today, there are thousands of cryptocurrencies that you can trade-in and most of them are absolutely safe. They are also publicly traded in crypto exchanges just like a stock exchange. Crypto exchanges only trade in cryptocurrencies. To give you an insight, the market capitalization (or value) of all cryptocurrencies as of April 2021 was 2.2 trillion US Dollars. To give you a perspective, the US economy is around 20 trillion US Dollars. So Crypto is a real, large, and well-established medium of financial trade. Cryptocurrencies are by no means small or a side business started just for some random fun. Crypto is a serious business with large businesses like Tesla as investors and a lot of countries willing to adopt it. Crypto is the future and it’s only a matter of time before everyone adapts to it, if not every country.
How does Crypto work and why is it secure?
Did anyone think governments would print billions of dollar bills in a multi-trillion dollar economy? No. Right? Well, traditionally, banks stored all currency equivalent in bank accounts in an accounting or digital format, while very little physical printed cash existed. Since 2010 private digital wallets have followed the same trend and enabled the storage of Government-issued paper money in their digital equivalents. The Crypto world follows the very same fundamental fiscal rules and principles. The difference lies in how crypto operates. Money is stored in a digital form (wallet or exchange account) in the form of the Cryptocurrency of your choice. All information about the currency and its transactions is stored in an open-source public distributed ledger called a blockchain. The blockchain contains blocks of information about individual transactions. Transactions from person A to person B are broadcast to a network of communication nodes that run the crypto software. All these transactions are via distributed computing and without requiring central oversight. Therefore, records are not just 100% accurate but also open to all, eliminating any chances of manipulation.
Why use crypto when there is already digital (national) currency around?
As we said, the country’s central bank tightly controls all official currency. With the central bank and the country governing the currency, many taxes and infrastructural overheads exist. Not many would agree with the idea of paying taxes for everything. Taxes can often be a considerable component preventing efficient trade and commerce, especially between internal markets and global economies. E.g., sending money from one bank to another or country to another will involve a lot of taxes and additional charges. PayPal and other companies came to the rescue a few years back, but today, their charges have increased considerably. With Crypto, anyone can send and receive almost the exact amount of money with some charges but zero taxes. Also, in a global economy, anyone can hire employees, consultants, and companies around the globe and pay them quickly with Crypto. All peer-to-peer crypto payments are safe, predefined, and instant.
Finally, crypto is also a trading market where, just like stocks, mutual funds, indices, gold, and commodities. Cryptocurrencies can be traded in the same manner as traditional stock markets. All the above reasons contributed to people switching to crypto. Crypto is by no means a complete switch from traditional markets, at least not now. However, it provides a proven, time-tested, viable solution and a much cheaper alternative to existing banking systems.
Why are there so many cryptocurrencies around?
Well, just because anyone can! That is the power of true financial democracy in the currency world. However, not all cryptocurrencies receive mass adoption and survive. Dogecoin was largely unknown, and its creators had given up on the coin’s success until Elon Musk adopted it. Elon Musk almost singlehandedly led it from near-zero levels to more than a 1000% increase in valuation at its peak. So while there can be thousands of cryptocurrencies around, only a handful like Bitcoin, Ethereum, Tether, Doge, and a few more are the most commonly used ones. Like in a financial system, anyone has to be wise when choosing the bank, mutual fund, stocks, and indices. Incorrectly managed ones can shut down, and people will lose money. Yes, even Cryptocurrency is prone to such “system failures,.” Until anyone sticks to the most commonly used ones, they may lose money. Surprisingly, anyone can design and launch their own Cryptocurrency too! Many people have already done it, and anyone can try their hand. We are sure things suddenly got very interesting at this moment. So follow along!
Why are countries not openly adopting cryptocurrencies if it’s so nice?
No country prefers a loss of tax revenue. Taxes are the only form of revenue for any government, and they bank on increasing taxes yearly to run the country. There are trillions of traditional transactions around the globe, with a tax attached to every transaction. Does anyone think any government would be happy discounting taxes? Imagine buying a car, computer, or appliance from a dealer and paying zero taxes. Zero taxes would easily discount the item by 5-15%. Loss of crucial tax revenue is the primary reason governments disapprove of crypto. Crypto defies all odds of the central bank and enables any two parties (individuals or companies) to transact with the bare minimum expenses directly.
The secondary and often mistaken one is that of money laundering. Crypto is a unique platform where anyone can transact with anyone without knowing them in person or even knowing their real identity. All anyone needs to know to send or receive money is their crypto address which is a bunch of characters. Therefore, tracking what is happening and where the money is going is impossible. While it does give a sense of security and hides personal details, it can be used for illegal activities like money laundering. However, even the traditional financial systems are equally vulnerable to money laundering. Money can be routed from anywhere to anywhere, leaving no traces. No fiscal system is perfect. So while cryptocurrencies are highly secure, they run a risk of money laundering, which is a cause of concern for the central bank, but not any individual.
Not limited to financial transactions, anyone can trade in cryptocurrencies like a regular stock exchange where the crypto coins are listed. Unlike traditional stock exchanges, crypto exchanges work 24 hours, so individuals can trade anytime or at night. The best part is that there are almost zero taxes to be paid in such trades. While individuals are against paying any tax because it is an online revenue from a source outside the country’s boundaries, the central bank is keen to bring all such transactions into the tax bracket. The earnings can be considered tax-free until they are reported to the tax authorities.
Chapter 2. Getting Started with Cryptocurrency
Investing in cryptocurrencies
Investing in cryptocurrency is as simple as investing and trading in traditional stock markets. The basic flowchart for investing is as simple as below:
Select a Crypto exchange à Open a Crypto Account à Deposit Money à Choose a Cryptocurrency à Buy and trade in Cryptocurrency
Step 1 – Selecting a Crypto Exchange: Individuals can use some top exchanges like Binance, Coinbase, and more to open an account and buy the cryptocurrencies of their choice. The best part is that they can open an account in any crypto exchange around the globe. It is best to go with exchanges that operate in the home country so that individuals can benefit from local help and support. Also, check the country’s rules and regulations before investing in crypto to stay on the right side of the law. Some top and most popular crypto exchanges are Binance, Huobi Global, Coinbase Exchange, Kraken, Bitfinex, and KuCoin. All of them are highly reputed and completely safe crypto exchanges. These exchanges host and permit trading in most cryptocurrencies and are more than sufficient for a beginner investor or trader. All these crypto exchanges will meet all the trading requirements. These crypto exchanges deal in all the most popular cryptocurrencies. Please find a list of all the crypto exchanges and their rankings in the link below.
Step 2 – Opening a Crypto Account on the Exchange: Individuals and entities must create an account with a crypto exchange to start. Like opening bank accounts, individuals must submit a few documents and complete the account verification process. Try to open an account with any of the top 10 exchanges we shared above. Also, select one with a local presence in the home country. The time for account verification can take from a few hours to a few days depending on the exchange and home country. The country-wise list of crypto exchanges can be searched on the link below:
Step 3 – Depositing Money in Crypto Exchange: Once the exchange verifies the account, money can be transferred to it and start trading. Money can be deposited using one of the two methods:
- Banks and Wallet transfers: Use the bank or any conventional digital wallet to transfer money into the crypto exchange account. Bank transfer is a simple process, just like the way anyone would transfer money to anyone’s digital wallet using a bank.
- Peer-to-Peer transfer (P2P): P2P gives you the option to buy cryptocurrencies directly from other sellers on your exchange. The sellers are other account holders on the same exchange who can securely sell the cryptocurrency. Individuals can transfer the money to them when buying, and sellers will transfer the pre-determined amount of cryptocurrency to the buyer’s exchange account. Depending on the size of the exchange, there can be a few hundred to thousands of buyers and sellers. Peer-to-peer transfer is a secure and trusted way to buy crypto.
Once the transaction is successful, the value will reflect in the individual exchange wallet in the form of units of the cryptocurrency purchased. It is possible to see the amount fluctuate slightly because the value of cryptocurrency varies in real-time.
All crypto can be safely held in the crypto exchange wallets. Almost all traders store their money and cryptocurrencies in exchange wallets. Exchange wallets with the top crypto exchanges are highly safe and secure. However, cryptocurrencies can also be stored in unique Hardware Wallets. Hardware wallets provide more security and are typically used by investors carrying thousands of dollars of cryptocurrencies. Hardware Wallets are out of the scope of the discussion for now.
When depositing money, while individuals will pay in a traditional currency like US Dollar, the exchange will permit to store it only in the form of some cryptocurrency. In short, individuals will have to buy some form of cryptocurrency as the exchange will not permit storage in US Dollars or any other traditional currency. Depositing money into a crypto account brings us to the next step.
Step 4 – Choosing a Cryptocurrency: Cryptocurrencies are measured in units called Coins and are generally classified as either Bitcoins or Altcoins. While attempting to create coins after Bitcoin, other coins were launched, collectively termed “Altcoins.” Litecoin, Bitcoin Cash, XRP, Ethereum, and Bat are the most popular altcoins in the crypto world. Choose a cryptocurrency of your choice. Then use the Bank Transfer or P2P method to buy cryptocurrency on the exchange. You can transfer one cryptocurrency into another as well.
As of 2021, more than 4000 cryptocurrencies are in existence, and the list keeps expanding. Apart from the top 40-50 coins, the other cryptocurrencies keep little or no following and negligible trading volumes. We advise you to stick to the top 40-50 coins for good returns. You can find the list of cryptocurrencies by their ranking in the link below:
Please Note: We have shared the list of secured and trusted exchanges. We would advise individuals to work with the list of exchanges and coins we mention so that the investment is safe. With more knowledge, investments can be shifted to other exchanges and cryptocurrencies that look promising.
Types of cryptocurrencies
- Fiat currency: Fiat currency is defined as one that does not have any intrinsic value and is not pegged against some commodity like gold. They are just treated as a medium of exchange. Well-known examples of fiat currency in the real world are US Dollar, Pound Sterling, and Euro. Some examples of fiat currencies in the crypto world include Bitcoin, Bitcoin Cash, Litecoin, and more.
- Stablecoins: Unlike fiat currency, stablecoins are tied to assets like, e.g., US Dollar. Tether (so named because it “tethers” itself to the value of the US Dollar) is one stablecoin whose value is tied to US Dollar. Binance USD or BUSD is similarly tethered to the US dollar value. There are more than 30 stablecoins. The benefit of stablecoins is that the value of money will remain constant, whereas, in other currencies, the value will fluctuate by as much as 15-20% on normal days and even 30% on volatile days.
- Utility Tokens: Tokens are special cryptocurrency units that hold value simply because they deliver power and function on the crypto network. They are not currency and hold some monetary value because they have a “utility” in the blockchain network. A few tokens are:
- XRP – Belongs to the Ethereum blockchain network and is used for computational power
- XRP – Belongs to the Ripple blockchain network and enables digital asset transfers
- EOS – Belongs to the EOS blockchain network and is used to perform tasks
How to convert money to cryptocurrencies?
For example, it is the same way anyone would convert US Dollars to Euros through a bank when transferring money. Globally, the value of every traditional currency is pegged in global financial markets and varies slightly in value every minute. When converting currencies, the value of respective currencies is considered at the time of conversion.
The same principle is used in the conversion of cryptocurrencies. While traditional currency is very stable, digital currencies can be highly volatile depending on the investment. Money can be kept in USDT, pegged to the US Dollar, whose value closely follows that of the US Dollar. So the money is relatively safer.
Cryptocurrencies are known by their name but denoted by their abbreviation on exchanges. Most popular abbreviations are BTC-Bitcoin, Bitcoin Cash-BCHEthereum-ETC, Litecoin-LTC, Polkadot-DOT, Cardano-ADA, Tether-USDT, Binance Coin-BNB, and more.
How to convert one cryptocurrency to another?
Several times a situation will arise where a particular cryptocurrency is purchased but has to be traded in another. Such a situation happens due to new trading opportunities or investments identified in some promising cryptocurrency. E.g., all value is held in Bitcoin, but the investment is needed in Dogecoin. Every exchange gives an option to convert one cryptocurrency into another. Just follow the steps outlined below:
- Select the token to convert,
- Enter the number of tokens to convert.
- Choose the final token to be converted.
- The software will preview a quote showing the conversion rate and the number of tokens received in the new crypto coins.
- If satisfied, proceed with the conversion.
The term token is used interchangeably with cryptocurrency coins. Conversion is instant, and you can view the change in the Wallet status.
Chapter 3. Trading in Cryptocurrencies
You can use the various trading techniques to Buy and Sell crypto on the exchange market using one of the methods shared below. Trading techniques are different, and it is up to the individual to select and stick to one of them.
- Spot Trading
In spot trading, the coins or tokens are traded, and the transaction has immediate delivery. When we speak of “Delivery,” it means exchanging coins or tokens for cash. This distinction is necessary to identify it as a transaction completed “on the spot” immediately. As all the Spot trades are settled immediately, the current market price of the coin or token is often defined as the Spot Price. Spot also means exchanging one crypto for another.
The term “Spot” may seem unnecessary in itself but is essential as not all trades and markets are closed in cash instantly. E.g., let us consider the Futures markets. The coins or tokens are delivered in futures. The exact date is when the futures contract expires. So unless we define the Spot market and its trades differently, it is difficult to identify them separately among all other types of trades. Spot trades can be completed in 3 ways:
- Limit Orders: You can set a “Limit” or the price you want to buy crypto. E.g., the current price of Bitcoin is 35,000 US Dollars, but you want your trade to be effected only when the price of Bitcoin is equal to 33,500 US Dollars. Apart from the price, the number of Bitcoins to be purchased must also be specified. Once the order is placed, the order will only be executed when the price of Bitcoin equals 33,500 US Dollars.
- Market Order: Market orders allow you to buy the crypto at the real-time market price of the crypto at that particular instant. Once you place the order, it will be executed at the instantaneous price of that crypto.
- Stop Limit Orders: A stop-limit order consists of a stop price (that activates the limit order) and a limit price order which sets the price limit for the order to execute. Once the stop price triggers, the limit order will be automatically placed. Until the stop price triggers, there will be no activity in your account. E.g., you have purchased BTC at a price of 33,500 US Dollars presuming the price will go up from there, but if the price now falls below the purchase price, you would suffer a loss. To avoid the loss, you will set a Stop Limit order for, e.g., 33455 as the Stop price and 33,450 as the limit price. So if the Bitcoin price falls, the order will be triggered at 33,455USd and will be executed at 33,450 USD. While both stop and limit prices can be the same, this is not ideal. The orders are more effective when there is a small difference between them, so there is some time for the Limit order to be activated. Such a method increases the probability of your limit order getting filled after the stop limit is triggered.
Orders can be canceled or modified before execution.
- Margin Trading
Margin trading is extremely risky and can cause significant losses. It is advised to only start margin trading after getting considerable experience and expertise in Spot Trading.
With Margin trading, you can borrow funds to perform leverage trading.
- Open a Margin Account: Open a margin account in your exchange to enable you to do margin trading. Ensure you read the complete literature about margin trading rules for your exchange.
- Transfer Collateral: Use the Margin account to transfer the collateral from your Spot wallet to your Margin wallet.
- Auto-borrow trade: When setting up an order, you will need to borrow a margin to enable you to trade above your collateral limit. Usually, you will receive three times the collateral amount to trade. You can place buy orders based on the margin limit you received.
- Auto-repay trade: The margin received has to be returned, so once you sell the crypto, you would be left with an amount ideally more than the amount you invested. You can return the margin amount and keep the profit.
E.g., you have 10,000 USDT, and the price of 1 Bitcoin is 10,000 USDT. When you deposit 10,000USDT as collateral for margin, suppose you get 3x the amount for margin trading which is 30,000 USDT. You then purchase 3 Bitcoins at the rate of 10,000 USDT per Bitcoin and sell them later for 11,000 USDT each. When you autopay the margin, you will return the 20,000USDT received as margin, but you will keep the 3,000 USDT profit.
Margin trading can result in hefty profits or heavy losses. Margin trading gives more significant margin trading positions. Apart from this, another benefit of margin trading is that it can be used for portfolio diversification. Using margin trading, you can open several small positions with relatively small amounts of money as an investment.
- Advanced trading options
Several other advanced trading alternatives can be utilized besides spot and margin trading. These are Derivative trading and Options and Futures trading. However, they would be complicated for a beginner to learn and master. We advise beginners to only practice Spot trading for a few weeks to months and move to Margin trading or other advanced trading methods once they have enough experience. Advanced options are complicated and carry considerable risk.
Other Trading Information
- Trading Fees and Taxes: Each exchange will have a different fee structure for trading and converting cryptocurrencies. The details of the fee structure will be available with the crypto exchange. Usually, the fees are far lesser than the traditional stock markets, but it is essential to understand the charges. Some exchanges may levy taxes from the local government. However, this is subject to local jurisdiction. If anyone uses the top 10 exchanges we have listed earlier in the article, there will be a small fee component and zero taxes.
- Trading History and Reports: All exchanges provide ready and instant reports of all activity on accounts, like trades, conversions, and wallet transactions. All trades and activity on the account can be tracked and reports downloaded.
- Reports are essential for analyzing trading performance and keeping track of profits and losses. Ideally, reports must be studied daily after the trading session and match the numbers with the trades executed.
- Trading Tips: The basic idea is to buy low and sell high. However, predicting this in a market that is active 24 hours can be challenging for a newcomer. The best way will be to identify the lowest price for the last week for that particular coin and enter the market at that range.
- The candlestick chart and its chart pattern: A candlestick chart is the most common and widely used graphical representation of the price of crypto within a given timeframe. A candlestick chart is denoted by candlesticks colored red and green. Red indicates a fall in price, and Green represents a price increase. Each candlestick represents the same amount of time, which can be manually changed from 1 minute to 1 month and even 1 Year. E.g., a 5-minute chart shows candlesticks, each representing price activity in those 5 minutes. If the price in the current 5-minute timeframe goes lower than the previous candlestick, its color will change to Red and vice versa. While a 5-minute chart will indicate real-time activity, users can switch to the 1-day chart to check the daily activity. Any candlestick includes four data points which are Open, High, Low, and Close values corresponding to the price of the crypto. They are also known as the OHLC values. The Open and Close values indicate the first and last recorded price for crypto within the selected time duration (e.g., 5-minute). The Low and High values record the lowest price and the highest recorded price for the crypto during the time duration of the candle.
Trading Strategies and Tips
Well, crypto is a wild world if people are not informed enough or initially stray from using only the top cryptocurrencies. As a rule, stick to the top cryptocurrencies for all transactions. At the same time, users can use the new or largely unknown cryptocurrencies to trade, just like the stock market. Not everything unknown is terrible. Ethereum and Doge, two of the most prominent cryptocurrencies after Bitcoin, jumped more than 1000% in value in a few weeks in 2021. Can anyone imagine traditional stock markets giving such high returns? So, if users are keen on trading, there are quite a few parameters they must stick to before any investments. We have listed them below:
- Day Trading or Short term trades: Investors can invest some amount at a predefined level and time for short-term trades. They can exit the position after gaining sufficient profit. Usually, day trades involve entering and exiting trades on the same day, i.e., 24 hours for crypto trade.
- Swing trading or Long-term trades: Swing trading also involves buying crypto when it dips substantially, and investors are sure its price will bounce back, giving a healthy profit in return over the next few days. The time horizon for such an investment can be a couple of days to a few months.
- Position trading: Position trading is an even long-term strategy that is the most commonly used in traditional stock markets. If investors feel the crypto price will increase over time, they can invest in it. If investors are confident about a particular currency’s growth and can hold it for a long time, they must opt for Position trading. Bitcoin owners have been holding the coins for almost 7-10 years, and look at the value it has returned to them.
- Scalping: If investors see a price chart, they will observe that the price graph moves somewhat over time. The price will oscillate between a fixed price band for a few minutes before it shifts higher or lower. Scalpers aim to earn from these small price fluctuations in the market price, which happen all the time. These traders enter and exit positions in a matter of minutes to take advantage of the price fluctuations. They undertake several trades in a day to generate profits.
We advise users to study and understand trading in more depth. This article is more of an introductory perspective on cryptocurrencies.
Important Trading Tips
We have listed a few golden trading principles below. Thorough research online and detailed study are required to understand these concepts thoroughly.
- Buy at dips. Analyze all the past lows to understand what an excellent time to enter or invest is. If using the Shorting (Sell high-Buy Low) concept, traders have to do the opposite and Sell first at a higher level when the market is at its peak.
- Average the position. Do not invest all the money in a single position. Instead, buy in short intervals.
- Study markets and charts. Markets, coins, and exchanges can be different. So take time to take a look and understand how they work. Learn to read charts and patterns like MACD, RFI, Bollinger Bands, and more.
- Always use stop loss for every trade position to ensure trades do not lose a lot if markets dip beyond expectations.
Besides the above, research the companies and the crypto they are launching. Read reviews and track news to stay updated in the crypto world. Things change so fast in the crypto world that every minute matters. The best part of crypto markets is that while traditional markets work a fixed duration and Monday to Friday, crypto works 24X7 and 365 days a year. So the opportunities to earn are endless. People have made millions through crypto.
Crypto is a superb and better alternative to traditional currency for all practical purposes. Moreover, it is as easy as replacing the US Dollar with Bitcoin; everything else remains the same. There is a lot to write and share about crypto, and we do not want to overload beginners with too much information. However, we feel this is an excellent start to the crypto trading journey; anyone can make substantial progress from here. Keep learning online as there is substantial information available. Everyone needs time, patience, and lots of research. Cheers, and we wish everyone successful trades!