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How to Safely Invest in Cryptocurrency: 6 Things to Know Before Trading

Aug 27, 2021
byNDAX Labs

Cryptocurrencies are again making headlines in Canada and throughout the world as they gain wider adoption due to their soaring prices and overall market cap.

The 2017 proliferation in the adoption and use of cryptos was driven mostly by retail investors’ fear of missing out on that crypto rally. Now four years later, things have changed dramatically. The adoption and interest in cryptocurrencies this year are driven by research-backed multi-million and billion-dollar investments made by institutional investors and retail players.

If you are one of the many people who have stepped into the crypto world and are confused about what advice you should take and how you should trade, this article will serve as a crypto investing guide for first-time investors as well as benefit seasoned investors from more familiar traditional asset classes. Without delving much into the technicalities, this guide will walk you through the very basic yet critical things you must learn to start trading crypto responsibly.

Trading Precautions You Must Take

The smartest crypto traders are those most aware of the risks involved in trading. This is why you must know some of the basic precautions before you dip your feet in the digital asset market and go for a swim in what are often wild, volatile price swings.

Here are the top precautions you need to take while trading cryptocurrencies.

DYOR—Do Your Own Research

Crypto is known for its absurd abbreviations, and DYOR is one of the most commonly used. It is also the most critical as it tells you to do your own research before investing in or trading cryptocurrencies.

The market is growing, and there’s an extreme amount of hype about cryptocurrencies everywhere on the internet. So, you’re likely to find a gazillion of unsolicited advice from self-proclaimed crypto prophets. But should you take it?

No, not without doing your own research. While we wouldn’t say that all investment advice on the internet is fake or biased, a lot are. Be vigilant of who’s ‘shilling’ coins to benefit their own portfolios, and who’s sharing authentic information.

Simply put, always DYOR.

Invest What You Can Afford to Lose

Even with the slowly increasing stability of the crypto markets, volatility is still the name of the game. Price swings of large magnitudes are not as common a sight as they once were, but there are days when prices of cryptocurrencies depreciate or appreciate by over 10% or 20% or even more. The latter is actually what every trader wishes to experience. It’s the former we all dread.

This calls for extra precaution while investing in cryptocurrencies. So, before you’ve completely understood the markets and made peace with its wild swings, you should only invest what you can afford to lose. That means don’t gamble on your emergency savings, downpayment for a house, and ensure you can maintain your lifestyle and cover those monthly bills.

Don’t Fall for FUD (Fear, Uncertainty, Doubt)

Emotions and psychology play a significant role in driving markets, cryptos or otherwise. And usually, beginners do not understand market sentiments and succumb to the volatility. They then make trading decisions based on their emotions of fear, uncertainty, and doubt, a.k.a. FUD.

You must practice controlling your emotional urges of buying and selling when trading in the crypto markets. Once you can do that, you’ll make more decisions based on your research, analysis, and understanding of the market than your emotions.

Stay Updated

The cryptocurrency industry is significantly small compared to traditional stock markets. So, any piece of good or bad news can tremendously shift market momentum.

To make sure you leverage on the good news and prevent losses due to bad ones, you must make it a habit to stay on top of the latest crypto and blockchain industry updates.

For example, the price of Bitcoin shot up considerably the day Tesla invested $1.5 billion into Bitcoin. Now, if you were a trader staying up to date with the latest news, you’d know exactly how big an impact Elon Musk and his companies can have on the crypto space. On the flip side, when China announced its crackdown on bitcion mining last May, the price crashed.

Similarly, the price of XRP fell significantly on the day SEC filed charges against Ripple.

Whether you use daily crypto market and business news to make buy or sell decisions, or go in with a long-term HODL mindset, in which case, celebrity hype tweets or a sudden pullback will have less of an impact on your portfolio value in the long run, it’s always good practice to know what’s happening in the crypto world.

This knowledge will help keep you two steps ahead and also help uncover new investment opportunities.

Understanding the Technical World of Trading

The fact is, there will never be enough of what you can know about trading. It’s an ocean of information, and the deeper you dive, the more you’ll find to learn. But we can always get off to a humble start by learning the basics of trading.

This includes understanding what all those trading charts, candlestick patterns, and even the order books from your favourite trading platforms are telling you. More on those below.

Learn Crypto Trading Vocabulary

It doesn't take one to be an astrologer to guess that once you start trading, you will read through hundreds of articles and watch hours of tutorials to research and plan your trades. To ensure that you grasp what you read and watch, you must understand the most common crypto trading vocabulary.

Let’s take a look at some of the most important terms:

  • Liquidity: The liquidity of a cryptocurrency is directly proportional to the total volume of buy and sell orders placed for that asset. It is defined as the ease with which one can buy or sell assets without posing a major impact on its price.

  • Market Depth: The market depth of a cryptocurrency is decided by considering the total volume of buy and sell orders. It is then used to calculate the extent to which the market can handle a large size order without largely impacting a cryptocurrency's price.

  • Market Spread: It is the difference between the lowest ask price and the highest bid price. Market spread denotes how easy or difficult it would be to execute a trade at the desired price. The smaller the spread between the ask and bid prices, the easier it is to execute a trade. When the market spread is large, the possibility of trade execution is significantly lower.

  • Order Types: There are various types of buy and sell orders you can place when trading cryptocurrencies. Some of the most common ones include Market Order (MKT), Limit Orders (LMT), and Stop-Loss Orders (STP). Each of these orders has specific purposes, and you should learn about them before starting to trade cryptos.

  • Risk Reward Ratio (RRR): RRR is the amount of risk you are willing to take in order to book the desired profit while trading cryptocurrencies.

    For example, if you’re buying a cryptocurrency for $100 and aim to sell at $110, you’re looking at a 10% profit. While strategizing, traders also consider the amount of loss they can handle in case their trade goes unexpectedly. So, if you choose to take a risk of $5 and sell in case the price falls to $95 to prevent further losses, the percentage loss would be 5%.

    This means, your RRR is 1:2, or, for every $2 you want to make, you’re willing to risk $1.

  • Slippage: Slippage is the difference between the price at which you expected to buy or sell your cryptocurrencies and the amount at which it is bought or sold. This usually occurs when there’s high market volatility and you execute Market orders.

    For example, you place an order to buy 0.1 Bitcoin at market price when it was selling at $54,000 per BTC. However, by the time you place your order, the market price goes up to $57,000 and your order is executed. That difference in the expected and actual buying prices is called slippage.

  • Orderbook: Orderbook is the online register that lists all buy and sell orders of a cryptocurrency and is used to calculate liquidity, market spread, market depth, and other market factors. A major part of trading depends on being able to read orderbooks. It has two sides: one lists all the buy orders, and the other lists all the sell orders placed by traders. You should learn to read the orderbook as it helps you identify several opportunities in crypto trading.

These are only the tip of the iceberg. As you dive deeper, you will find many more trading words and phrases to explore to be a proficient trader.

Learn to Conduct Market Analysis

If you want to trade and be good at it, there’s more to do than just buy low and sell high. You must learn how to read candlestick charts — the red and green bars you regularly see on crypto exchanges. Furthermore, you must know how to use various types of price indicators to create a trading strategy.

To start with price indicators, you can explore the three most commonly used indicators — Relative Strength Index (RSI), Exponential Moving Average (EMA), and Moving Average Convergence Divergence (MACD).

You must also note that there are two different types of market analysis: technical analysis and fundamental analysis. The former is mostly used for short-term trades and the latter for long-term investment. The best option is to know the basics of both before you start trading cryptos.

But as we said, there’s always more to trading than anyone can possibly absorb. So, keep learning and exploring until you find what helps you most in strategizing your trades.

Closing Thoughts

Cryptocurrency trading is all the hype these days. If you’re planning to test the waters, we cannot be happier for you. But we’d also want you to be a smart trader who understands the fundamentals of trading and makes informed trading decisions rather than emotional ones. We hope that this article has guided you in the right direction to start your crypto trading journey.

If you are a Canadian interested in trading cryptocurrency, you can buy or sell your favorite digital assets on NDAX — Canada’s most advanced crypto trading platform. NDAX allows you to buy cryptocurrencies using the Canadian dollar and provides a highly secure trading environment. Enjoy the best trading experience, sign up now.