The Beginners Guide To Cryptocurrencies

 

 Introduction

Cryptocurrency has taken the world by surprise in the last 10 years. Even financial markets have opened up to the practical reality of cryptocurrencies. It’s almost impossible in today’s age for anyone to remain oblivious of cryptocurrency. While many have already taken the plunge in the crypto world, quite a few are desperately stuck on the fence for lack of genuine information. They are not entirely wrong because crypto is a whole new complicated world. Cryptocurrencies are serious financial market instruments and you 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 amount to large setbacks if you lack general awareness. Unlike traditional financial markets, crypto markets are slightly different. This is the exact reason why we brought to you this starter pack to the world of Cryptocurrencies. We will give you just the right dose of information to get you started.

 

Chapter 1. Understanding Cryptocurrencies

History of Crypto 

Cryptocurrency (or just Crypto) started as an alternative for traditional currencies. The value of traditional currencies was strongly controlled by governments, the power they wielded, and local geopolitical situations. Therefore a currency like e.g. US Dollar always had a large dominating influence on the rest of the global currencies. Even within a country, the central bank had complete control and authority over currencies. Not particularly a democratic situation, many schools of thought felt the need for an alternate decentralized currency system. A system that could stand the test of time and could be immune to manipulation by any individual or entity. 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 was just not matured 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 close. The year 2008 saw the launch of Bitcoin by Satoshi Nakamoto, one of the most popular and trusted cryptocurrencies of all time. Bitcoin has become the defining Gold Standard for crypto product design, accuracy, security, safety, and trust factor. Also, by 2008, PayPal was already 10 years old and everyone was now open to the viability of an alternative banking and financial system. The time had indeed come for the start of new world order in financial markets.

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 you 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 actually existed. Since 2010 private digital wallets followed the same trend and enabled 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 Cryptocurrency you select. 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, thereby eliminating any chances of manipulation.

 

Why use crypto when there is already digital (national) currency around? 

Like we said, all official currency is tightly controlled by the country’s central bank. With the central bank and the country governing the currency, there exist a lot of taxes and infrastructural overheads. Not many would agree with the thought of paying taxes for everything. Many times, taxes can be a huge component preventing efficient trade and commerce especially between internal markets and global economies. Like e.g. sending money from one bank to another or country to another will involve a lot of taxes and additional charges. PayPal and such other companies came to the rescue a few years back, but today even their charges have gone up. With Crypto, you can send and receive almost the exact amount of money with some charges but zero taxes. Also, in a global economy, you can now hire employees, consultants, and companies around the globe and pay them easily 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 exactly the same manner as traditional stock markets. All these reasons contributed to people using crypto. Crypto is by no means a complete switch from traditional markets, at least not now. But it provides a proven, time-tested, viable solution and much cheaper alternative to existing banking systems.

 

Why are there so many cryptocurrencies around? 

Well, just because you can! That’s the power of true financial democracy in the currency world. But not all cryptocurrencies receive mass adoption and survive. Dogecoin was largely unknown and its creators had given up on the coin’s success until it was adopted by Elon Musk who led it from near-zero levels to more than a 1000% increase in valuation today. 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. Just like in a financial system, you have to be wise when choosing your bank, mutual fund, stocks, and indices that you invest in, as the incorrectly managed ones, can shut down and losing your money. Yes, even Cryptocurrency is prone to such “system failures” and unless you stick to the most commonly used ones, you may lose your money.

Surprisingly, you can design and launch your own Cryptocurrency too! A lot of people have already done it and you can try your hand at it. Am sure things suddenly got very interesting for you. Follow along!

 

Why are countries not openly adopting cryptocurrencies if it’s so nice? 

Well, to put it straight, no country prefers a loss of tax revenue. Taxes are the sole form of revenue for any government and they bank on increasing taxes every year to run the country. There are trillions of traditional transactions daily around the globe, every transaction having some tax attached to it. Do you think any government would be happy discounting taxes? Imagine buying a car, computer, or appliances from a dealer paying zero taxes. This would easily discount the item by 5-15%. This is the primary reason why governments are disapproving of crypto. Crypto defies all odds of the central bank and enables any two parties (individuals or companies) to transact with bare minimum expenses.

The secondary and often mistaken one is that of money laundering. Crypto is a unique platform where you can transact with anyone without knowing them in person or even knowing their real identity. All that you need to know to send or receive money is their crypto address which is a bunch of characters. Therefore, it’s impossible to track what’s happening and where the money is going. While it does give a sense of security and hides personal details, it can be used for illegal activities like money laundering. But even the traditional systems are equally vulnerable. Money can be routed from anywhere to anywhere. No fiscal system is perfect. So while cryptocurrencies are highly secure, they do run a risk of money laundering, which is a cause of concern for the central bank, but not you as an individual.

Not limited to just financial transactions, you can also trade in cryptocurrencies like a regular stock exchange where the crypto coins are listed. Unlike traditional stock exchanges, crypto exchanges work 24 hours, so you can trade any time of the day or night to earn money. The best part is, 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 that’s outside the countries boundaries, the central bank is keen to bring them all into the tax bracket. The earnings can be considered tax-free until you report them to your tax authority.

 

 

 

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: You can use some of the top exchanges like Binance, Coinbase, and more to open an account and buy cryptocurrencies of your choice. The best part is you can open an account in any crypto exchange around the globe. However, do check for the exchanges that operate in your country so that you can benefit from the local help and support. Also, do check the rules and regulations of your country before you indulge in crypto. Some of the 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. They will meet all your trading requirements, unless you are trading in a cryptocurrency that is not listed in any of these exchanges. You can find a list of all the crypto exchanges and their rankings in the link below.

https://coinmarketcap.com/rankings/exchanges/

Step 2 – Opening a Crypto Account on the Exchange: You need to create an account with a crypto exchange to get started. Similar to opening bank accounts, you will need to submit a few documents and complete the account verification process. We would advise you to open an account with anyone of the top 10 exchanges listed above or with the best exchange listed in your country. The time for account verification can take from a few hours to a few days depending on the exchange and your country. The list of crypto exchanges in your country can be searched on the link below:

https://blockspot.io/exchange/

Step 3 – Depositing Money in Crypto Exchange: Once your account is verified by the exchange, you will be able to transfer money to it and start trading. You can deposit money using one of the two methods:

  • Banks and Wallet transfers: Use your bank or any conventional digital wallet to transfer money into your crypto exchange account. This is a simple process just like the way you would transfer money to your digital wallet from your 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 you the cryptocurrency. You can transfer the money to them when you are buying and they will transfer the pre-determined amount of cryptocurrency to your exchange account. Depending on the size of the exchange and the popularity of the cryptocurrency you want to buy, there will be hundreds of sellers. This is a secured and trusted way to buy crypto.

Once the transaction is successful, the value will reflect in your exchange wallet in the form of units of the cryptocurrency you purchased. Also, you will see the amount fluctuate slightly because value of cryptocurrency varies in real time.

All crypto can be safely held in your crypto exchange wallets. Almost all the traders store their money and cryptocurrencies in the exchange wallets. Exchange wallets with the top crypto exchanges are highly safe and secure. However, you also have the option to transfer your money to special Hardware Wallets where you can store them even more securely and carry them with you. Hardware wallets provide more security and are typically used by investors who carrying cryptocurrencies worth millions. Hardware Wallets are out of the scope of the discussion for now.

When depositing money, while you will pay in a traditional currency like US Dollar, but the exchange will permit you to store it only in the form of some cryptocurrency. In short, you will have to buy some form of cryptocurrency as the exchange will not permit storage in US Dollars or any other traditional currency. This 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 which were collectively termed as “Altcoins”. Litecoin, Bitcoin Cash, XRP, Ethereum and Bat are the most popular altcoins in the crypto world. Choose a cryptocurrency which you want to buy and invest in. Then use the Bank Transfer or P2P method to buy cryptocurrency on the exchange.

 

As of 2021, there are more than 4000 cryptocurrencies in existence and the list keeps on expanding. Apart from the top 40-50 coins, rest of the cryptocurrencies have 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:

https://coinmarketcap.com/

Please Note: We would advise you to initially keep to the list of exchanges and coins we mention so that your investment is safe. As you gain more knowledge, you can shift your investments to other cryptocurrencies that look promising to you.

 

 

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, stable coins are tied to some assets like e.g. US Dollar. Tether (so named because it “tethers” itself to the value of the US Dollar) is one stable coin whose value is tied to US Dollar. Binance USD or BUSD is similarly tethered to the value of the US Dollar. There are more than 30 stable coins. The benefit of stable coins lies in the fact that the value of your 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 a value simply because they deliver power and do functions on the crypto network. They are not currency and hold some monetary value just because they have a “utility” in the blockchain network. A few tokens are:
    • XRP – Belongs to the Ethereum blockchain network and 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?

Well, as an example, it’s the same way you 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 conversion of cryptocurrencies. While traditional currency is very stable, digital currencies can be highly volatile depending on which you choose to invest in. You can choose to keep your money in USDT which is pegged to the US Dollar and its value closely follows that of the US Dollar. So your money is safe.

Crypto currencies 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 you would come across a situation where you would have purchased a particular cryptocurrency but want to trade in another. This happens due to some new trading opportunities that you have identified or you want to invest in some promising cryptocurrency. E.g. you hold all your value in Bitcoin but want to invest in Doge coin. Every exchange gives you and option to convert your cryptocurrency into another. Just follow the steps outlined below:

  1. Select the token you want to convert,
  2. Enter the amount of token you want to convert.
  3. Choose the token you want to convert it to.
  4. The software will preview a quote showing the conversion rate and the number of tokens you will be receiving in the new crypto coins.
  5. If you are satisfied, proceed with the conversion.

The term token is used interchangeably with cryptocurrency coins. Conversion is instant and you will be able to view the change in your 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.

  1. 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 the coins or tokens for cash. This distinction is necessary to identify it as a transaction that’s completed “on the spot” and 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 simply means exchanging one crypto for another.

The term “Spot” may seem unnecessary in itself but is important as not all trades and markets are closed in cash instantly. E.g. let’s consider the Futures markets. In Futures the coins or tokens are delivered in future.  The exact date is when the futures contract expires. So unless we define Spot market and its trades differently, it’s difficult to identify them separately among all other types of trades. Spot trades can be completed in 3 ways:

  1. Limit Orders: You can set a “Limit” or the price at which you want to buy a 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 quantity of Bitcoins you intend to purchase must also be specified. Once the order is placed, your order will only be executed when the price of Bitcoin equals to 33,500 US Dollars.
  2. 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.
  3. 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 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 an ideal situation. The orders are more effective when there is a small difference between them so that there is some time for the Limit order to be activated. Such method increases the probability of your limit order getting filled after the stop-limit is triggered.

You can cancel or modify any of the above orders at any time before they are executed.

  1. Margin Trading

This option is extremely risky and we would advise you only start margin trading after getting considerable experience and expertise in Spot Trading.

With Margin trading you can borrow funds to perform leverage trading.

  1. 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.
  2. Transfer Collateral: Use the Margin account to transfer the collateral from your Spot wallet to your Margin wallet.
  3. 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 3 times the collateral amount to trade. You can place buy orders based on the margin limit you received.
  4. Auto-repay trade: 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 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 auto pay the margin, you will return the 20,000USDT received as margin, but you will keep the 3,000 USDT profit.

This is an extremely risky method of trading as it can result in heavy profits or heavy losses. The benefit of margin trading is due to the fact that it can give much higher profits due to the greater margin trading positions. Apart from this, another benefit of margin trading is that it can be used for portfolio diversification. By using margin trading, you can open several small positions with relatively small amounts of money as investment.

  1. Advanced trading options

Apart from Spot and Margin trading, there are several other advanced trading alternatives that you can utilize. These are Derivative trading and Options and Futures trading. However, they would be complicated for a beginner to learn and understand. However, you must know about them. We would advise beginners to only practise Spot trading for a few weeks to months and move to Margin trading or other forms of advanced trading 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 as well as converting cryptocurrencies. So you will have to check the details with your crypto exchange. Usually the fees are far lesser than the traditional stock markets, but it will still help you to understand the charges. Some exchanges may levy taxes from the local government, however this is subject to local jurisdiction. If you stick to 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 your account like trades, conversions and wallet transactions. You can track all trades and activity on your account and download reports. Reports are essential for analysis of your trading performance and keep a track of your profits and losses. Ideally you must study them once a day after your trading session and match the numbers with the trades you have done.
  • Trading Tips: The basic trading idea is to buy high and sell low. However predicting this in a market that is active 24 hours can be a challenge 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 commonly and widely used graphical representation of the price of a crypto within a given timeframe. A candlestick chart is denoted by candlesticks colored red and green. Red indicating a fall in price and Green representing increase in price. Each candlestick represents the same amount of time, and the amount of time can be manually changed from 1 minute to 1 month and even 1 Year as well. E.g. a 5-minute chart shows candlesticks, each of which represent price activity in those 5 minutes. If the price in 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, you can use the 1-day chart to check the daily activity, and so on. 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. While the Open and Close values indicate the first and last recorded price for crypto within the given time duration selected (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

Trading Strategies

Well, crypto is a wild world if you are not informed enough or stray away from using only the top cryptocurrencies initially. As a rule of thumb, stick to the top cryptocurrencies for all transactions. While you can use the new or largely unknown cryptocurrencies to trade just like the stock market. Not everything unknown is bad. Ethereum and Doge, two of the most prominent cryptocurrencies after Bitcoin, jumped more than a 1000% percent in value in a few weeks in 2021. Can you imagine traditional stock markets giving you such returns? So, if you are keen on trading, there are quite a few parameters that you must you before you back or invest in them. We have listed them below:

  • Day Trading or Short term trades: For short-term trades, you can invest some amount at a predefined level and time. You can exit the position after you have gained sufficient profit. Usually day trades involve entering and exiting trades the same day, i.e. 24 hours for a crypto trade.
  • Swing trading or Long-term trades: Swing trading also involved buying a crypto when it dips substantially and you are sure that its price will bounce back giving you a healthy profit in return over the next few days. The time horizon for the investment can be a couple of day to a couple of months.
  • Position trading: Position trading is an even long term strategy and the most commonly used one in traditional stock markets. If you believe the price of a crypto will increase over time, you can invest in it. If you are confident about the growth of a particular currency, and you can hold it for a long time, you must opt for Position trading. Bitcoin owners have been holding the coins it for almost 7-10 years and look at the value that it has returned them.
  • Scalping: If you see a price chart, you will see that the price graph moves in a somewhat oscillatory fashion 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 than hours 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. You will need to research online and study for a week or more to understand these concepts thoroughly.

  1. Buy at dips. Analyse all the past lows to understand what a good time to enter or invest is. This is for normal trades. If you are using the Shorting (Sell high-Buy Low) concept, you have to do the opposite and Sell first at a higher level when the market is at its peak.
  2. Average your position. Do not invest all your money in a single position. Rather buy in short intervals.
  3. Study markets and charts. Markets, coins, and exchanges can be different. So take your time to take a look and understand how they work. Learn to read charts and chart patterns like MACD, RFI, and Bollinger Bands, etc.
  4. Always use stop loss for every trade position to ensure you do not lose a lot if markets dip beyond expectations.

Besides the above, do a lot of research into 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 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.

 

Summary

For all practical purposes, Crypto is a superb and better alternative to traditional currency. And it’s 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 you with a lot of information. However, we feel this a good start to your crypto world journey and you can make substantial progress. Keep learning online as there is substantial information available. You just need time, patience, and lots of research. Cheers and wish you successful trades!

 

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