What is Crypto Trading? How Does it Work?
Before the advent of digital currency— like crypto, conventional currencies dominated the world of finance. However, since the inception of Bitcoin in 2009, cryptocurrency has become a popular and fast-rising alternate means of payment and trade. Many investors and businesses around the globe have adopted crypto because of its many advantages.
If you want to start crypto trading, it would be best for you to understand cryptocurrency and all that relates to it. This article will give you a step-by-step guide on how to trade cryptocurrencies. Also, we will explore cryptocurrency legality, taxation, and regulation in the US.
Start trading cryptocurrencies right now with Coinbase!What is Cryptocurrency Trading?
Cryptocurrency trading involves speculating on price movements of digital assets like Bitcoin, Ethereum and other coins. At its core, crypto trading entails buying cryptos at one price and selling them at a higher price to turn a profit.
Traders analyze factors like technical levels, market sentiment, and project fundamentals to predict when crypto prices may rise or fall. They then utilize trading platforms to execute buy and sell orders with the goal of generating profits from short and medium-term price fluctuations.
Crypto trading utilizes leverage and derivatives like futures contracts and options to amplify potential gains (and losses).
The crypto markets operate 24/7, offer high liquidity, and serve a global user base. This makes them highly appealing for traders looking for trading opportunities at all hours. The ability to go both long and short also makes it possible to profit from rising as well as falling crypto prices.
Technical analysis and speculation drive much of the short-term trading activity we see in the crypto markets. Traders look at indicators like moving averages, support/resistance levels, and trading volumes to predict price movements. Overall, crypto trading provides an exciting way for traders to potentially profit from the volatility of digital currencies.
Crypto Trading Pros and Cons
👍 Pros
•High volatility provides opportunities for profit. Cryptocurrencies are notorious for sharp price swings, allowing traders to capitalize on both uptrends and downtrends.
•24/7 markets. The crypto markets operate around the clock, 365 days a year, meaning traders can react to news and price movements at any time.
•Leverage trading. Many platforms offer leverage up to 100x, which can magnify profits (as well as losses).
•Low barriers to entry. Getting started trading cryptocurrencies is easy and accessible to anyone with internet access.
•Decentralized. Cryptocurrencies operate without central banks or government oversight.
👎 Cons
•Highly volatile and risky. The same volatility that creates opportunities can also lead to quick losses.
•Still largely unregulated. Lack of regulation leaves traders vulnerable to issues like exchanges halting trading or even going bankrupt.
•Susceptible to manipulation. Low market cap cryptos are vulnerable to price manipulation schemes.
•Complex tax implications. Varying crypto tax laws can complicate filing taxes on trading gains and losses.
•Security risks. Hackers and scammers target crypto traders and exchanges. Being careful with storage of coins is critical.
Is Crypto Trading Legit? Is it Regulated?
The legitimacy of crypto trading depends on the kind of country. While some countries accept and adopt cryptocurrencies, others prohibit their use. Cryptocurrency is still a new invention. So, government authorities and regulatory agencies worldwide are working to understand its nature. The decentralization of crypto may pose some legal risks to crypto users. Thus, it would be wise to confirm the legitimacy of crypto trading in your country before you start trading.
In the US, cryptocurrency is not a legal tender. But crypto exchanges and trade are legal and accepted. Cryptocurrency is a legal form of investment in the US. The Financial Crimes Enforcement Network (FinCEN) and Internal Revenue Service (IRS) recognize cryptocurrency as a digital value that can substitute currency and be used as a medium of exchange.
Crypto exchanges are listed under the Bank Secrecy Act (BSA). Practically, this means that cryptocurrency service providers must conduct an AML/CFT program, acquire an FinCEN license, keep and submit crypto records to the authorities.
To control crypto-related criminal activities, the US Treasury has shown an urgent need for crypto regulations. It's FSOC working group function to investigate the congested cryptocurrency marketplace.
The US Securities and Exchange Commission (SEC) sees cryptocurrencies as securities. Thus, they have implemented securities laws to digital wallets to regulate exchanges.
The Justice Department joins forces with the SEC and other agencies over future cryptocurrency regulations to protect crypto users and intensify crypto regulatory supervision. Although setbacks like the Covid-19 pandemic hampered the implementation of some regulatory processes, US lawmakers remain keen to regulate cryptocurrencies.
To further oversight crypto trading, the SEC has limited certain types of trading - especially high-margin trading in crypto futures. For this reason, some exchanges operating in the United States (such as Binance) function in separate offices with a limited number of trading instruments.
Is Crypto Trading Taxable?
As a crypto user, you must pay taxes when you trade. The IRS categorizes cryptocurrencies as property, not currencies. So, investors are subject to capital gains tax laws when reporting crypto activities.
Short-term gains tax is for assets you hold in less than a year; they are taxed as ordinary income. While long-term gains tax is for assets, you hold for more than a year. The minimum taxable rate and long-term gains (taxed at 0%, 15%, or 20%) are based on your income and filing status. Exchanges and brokers use the 1099-B tax form from the IRS to record and report gains and losses in a tax year.
How Can I Trade Crypto?
In general, there are three different platforms to trade cryptocurrency:
Crypto Exchanges
Crypto exchanges are likened to a digital marketplace where crypto traders can buy, sell and convert cryptocurrencies. When deciding on the best cryptocurrency exchange to use, look out for their pricing, withdrawal options, and security. Examples of crypto exchanges are Coinbase, Binance, and Crypto.com.
Regulated US Brokers
A broker is an individual or firm that functions as a financial middleman between people who want to exchange goods or services and money. The broker may become a direct seller by buying lots of cryptocurrencies to sell on its platform.
CFD Brokers
A contract for differences (CFD) is an advanced crypto trading strategy that may be complex for beginners. It is a contract between a trader and a CFD broker to exchange the difference in the value of a financial asset like cryptocurrency during the time of the trade.
How to Start Trading Crypto - A Step by Step Guide
Below is a four-step process on how to start trading crypto:
Step 1. Choose a US-Regulated Crypto Trading Platform
The first step to trading crypto is to decide on a reliable crypto trading platform and open an account. Some of the best crypto trading platforms are eToro, Coinbase, Binance, and Gemini. These platforms offer a good variety of altcoins and are easy to use.
Create an account by providing basic identification information like name, date of birth, and email address.
Step 2. Start with minimal investment
The next thing to do is to fund your newly created account. Bank deposits by wire transfers and debit cards are one good way to fund your account. You can start trading with as little as $100. Remember that you should invest with capital that you are willing to lose. This is because you may not be able to tell the outcome of your first trade. This is why you need a trading strategy.
Step 3. Test Your Strategy
When you decide on the coin you want to trade with, you need to develop and test your strategy. This strategy will rely on the crypto knowledge that you have amassed. As a beginner, try low-activity trend strategies that use low leverage and some trades. Keep in mind that managing risks is a skill that is important in trading.
Step 4. Learn, Learn, Learn
You should learn how the cryptocurrency market works and its terms before starting crypto trading. This is because the crypto market differs from other financial markets, and you may lose your capital.
As a beginner, you need to learn trading strategies. It would be best to have a mentor or financial advisor to guide you through this process.
Best Crypto Trading Platforms in the US
Coinbase - Best crypto exchange
Coinbase is one of the most popular cryptocurrency exchanges in the United States and one of the world's biggest trading platforms. Coinbase was initially established in 2012 as a Bitcoin platform. But now, the exchange serves as a brokerage trade portal and provides access to over a hundred different types of crypto coins for users.
We rank Coinbase as the best cryptocurrency exchange for beginners. This is because of its easy-to-use interface for users. Coinbase is available in app version for Android and IOS users to access the crypto market on the go.
Coinbase offers Coinbase Pro with more features but with the same fee structure. For every transaction in Coinbase, there is a 0.5% spread fee required. Coinbase transaction fees depend on your region, product feature, and payment method. For flat, prices range from $0.99 to $2.99, while card transaction fees range from $1.49 to $3.99. Passive earnings in Coinbase come from crypto rewards.
Coinbase provides crypto education through Coinbase Earn. Beginners can learn how to trade crypto through the Coinbase Earn platform before investing in crypto.
Coinbase is registered as a Money Service Business with FinCEN and licensed to carry out monetary transactions in most US regions.
Photo: Coinbase platform
eToro - best for copy trading
eToro is an excellent trading platform for financial products, including fiat, stocks, indices, ETFs, crypto, and commodities. At first, eToro was developed as a forex graphics-intensive program, but it has adapted to accommodate crypto trading. Since its inception in 2007, eToro has millions of users spread throughout the US and the globe. As a crypto exchange, eToro supports over 15 cryptocurrencies.
Photo: eToro platform
eToro provides a mobile wallet and has a user-friendly app version for Android and IOS users. Among the many eToro features, the ease of copy trading is the most unique. This helps beginners increase their chances of high returns by mirroring the moves of seasoned traders.
eToro Trading School provides access to many courses and webinars to educate beginners.
EToro has no fixed trading fee. Transaction fees range from $0.70 to $5, depending on the type of cryptocurrency you're trading. eToro brokerage services are regulated by FinCEN and follow all SEC regulations.
Interactive Brokers - best crypto broker
Found in 1978, Interactive Brokers is the largest and most trusted US-based discount broker. It has a reputation for keeping records and reporting financial assets, thus is recognized as a safe trade platform. Also, Interactive Brokers is well regulated and has acquired many licenses from local and global regulators.
Photo: Interactive Brokers platform
Interactive Brokers is a well-known extensive trading platform that offers a wide range of financial securities like crypto at affordable prices. It also enables you to purchase crypto futures rather than acquiring the currency directly. With Interactive brokers, you can gain access to many research tools and over 120 financial markets globally. Beginners can begin trading crypto at a $1 minimum cost and no spread fees. Also, Interactive brokers charge 0.12% to 0.18% of crypto trade value.
IG - best CFD trading platform for crypto
Set up in 1974, IG is a digital trading platform best known for publicly trading forex, crypto, and CFDs. It is regarded as a safe broker for financial securities, especially CFDs. Furthermore, IG gives access to derivatives, including options and futures trading in the US together with its forex and CFD.
IG is regulated in top-tier jurisdictions, including the National Future Association (NFA) and Financial Conduct Authorities (FCA). CFDs are the only means to trade cryptocurrencies through IG.
Photo: IG platform
IG charges a commission fee for every trade, ranging from $0.02 on EFTs and CFD stocks. The minimum fee is $10. Also, IG has remarkable education tools such as courses and webinars to guide beginners to trading. Also, it has a feature-rich mobile app that is easy to use by beginners.
How Much Can I Earn?
When trading crypto, there isn't any fixed amount of returns. With the right strategy, patience, and investment, you can earn a lot in the long run. The crypto market conditions are a significant factor that influences the price of cryptocurrencies and the amount of earnings you will get. When the market is booming, it's easier to make money. When it's dumping, it can be difficult.
So, understanding the market is a must to include in the trading strategy you employ.
FAQs
Can you get rich by crypto trading?
Yes, if you play your cards right. Crypto trading is a high-risk venture - especially day trading, where you buy and sell cryptocurrencies in a short time for short-term returns. This may cause you to lose your capital. But you may also get high returns in a short period if you implement a good trading strategy.
Alternatively, "hodling" your cryptocurrency can serve as a long-term investment, as the value of coins is expected to increase with time. But the crypto market is speculative with high volatility. So, understanding crypto and a good trading strategy cannot be overemphasized.
How do you trade cryptocurrency for beginners?
As a beginner, It would be best to begin trading crypto after researching the crypto market, crypto platforms, and trading strategies.
Start by choosing a reliable crypto trading platform - whether a crypto exchange or a regulated broker.
Create and fund your account with the least amount you can spare. You can choose Bitcoin, Ethereum, or any of the altcoins available./p>
Then, proceed to implement the trading strategy you've learned.
What is the best way to trade cryptocurrency?
You can buy a cryptocurrency in exchange, hold it in your digital wallet, and expect the price to increase in value so you can sell. Alternatively, you can expect the price to be reduced so you can buy more coins.
On the other hand, you can use CFDs and speculate on the prices of cryptocurrencies. As a starter, you can seek guidance from a financial advisor or mentor on effective strategies to get returns from your crypto investment.
How much does it cost to start crypto trading?
Unlike stocks, you can start trading crypto with as little as $100. Experts suggest that beginners start crypto trading with the small cash you can lose. This is because of the high volatility of the crypto market, and beginners are more likely to lose capital on the first trial.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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3
Cryptocurrency
Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks, typically based on blockchain technology.
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4
Crypto trading
Crypto trading involves the buying and selling of cryptocurrencies, such as Bitcoin, Ethereum, or other digital assets, with the aim of making a profit from price fluctuations.
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5
CFD
CFD is a contract between an investor/trader and seller that demonstrates that the trader will need to pay the price difference between the current value of the asset and its value at the time of contract to the seller.
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Team that worked on the article
Mikhail Vnuchkov joined Traders Union as an author in 2020. He began his professional career as a journalist-observer at a small online financial publication, where he covered global economic events and discussed their impact on the segment of financial investment, including investor income. With five years of experience in finance, Mikhail joined Traders Union team, where he is in charge of forming the pool of latest news for traders, who trade stocks, cryptocurrencies, Forex instruments and fixed income.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).