How to Invest in Cryptocurrency: A Step by Step Guide
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How to Invest in Cryptocurrency
Interest in cryptoassets like Bitcoin, Ethereum, and XRP has grown by leaps and bounds in the past few years. It’s easy to understand why. Crypto could completely change the financial services industry and is a big step forward in financial technology.
Want to know more about cryptoassets and how to buy and sell them? This guide is a great place to start learning about crypto. In this guide, we’ll show you how to use eToro to trade cryptoassets and walk you through the basics of cryptoassets.
Summary: How to Invest in Cryptocurrency
What does the term cryptoassets mean?
In order to invest in Cryptocurrency, we first need to define what that means. Cryptoassets are digital assets that are protected by cryptography and can be moved, stored, and traded electronically.
All cryptoassets are based on distributed ledger technology, which is what makes them unique (DLT). A distributed ledger is a computerised database of transactions that runs on a network of computers and doesn’t have a central administrator or a central place to store data.
The database is said to be “decentralised” because all of its information is stored across the network. With a distributed ledger, every transaction that happens on the network is written down in more than one place at once. This means that it is safer than a “centralised” ledger, where all the information is kept in one place.
The most well-known DLT is blockchain. Many popular cryptoassets are based on this technology. Blockchain puts transactions into “blocks” that are linked together, and cryptography is used to keep all transactions safe and make sure they are real. Every piece of information about a transaction is public and can be seen by anyone. This makes it very hard for someone to make a fake transaction.
Most of the time, cryptoassets can be put into three main groups:
- Cryptocurrencies are digital currencies that are designed to work as a medium of exchange. They are sometimes called “payment tokens” or “exchange tokens.” Cryptocurrencies are like regular currencies in some ways, but they are different in that they are not usually issued by a central authority. This means that, in theory, the government can’t mess with them or try to control them. Bitcoin, Bitcoin Cash, and Litecoin are all well-known examples of cryptocurrencies.
- Utility tokens are tokens that give the owner the right to use a function, product, or service that the token’s creator offers. When you buy a utility token, you get some kind of benefit that you can describe. Ethereum and XRP are two well-known examples of utility tokens.
- Security tokens are digital assets that represent legal ownership rights in real-world assets like stocks, commodities, or real estate. Security tokens are made to be investments, and they have many of the same features as other financial instruments.
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Trading and investing in cryptocurrency and cryptoassets
The prices of cryptoassets tend to change a lot. It’s not uncommon for the price of a cryptoasset to go up or down by 20% in a single day. This means that the asset class can give traders and investors a lot of chances to make money.
You need an account with a trading platform that gives you access to the crypto markets if you want to trade cryptoassets.
eToro’s platform is easy to use and gives traders the choice of buying cryptoassets outright or trading cryptoasset price movements via Contracts For Difference (CFDs) (CFDs).
Why buy and sell cryptoassets?
Trading cryptoassets has a number of benefits. Some of the main advantages include:
Volatility
Cryptoassets like Bitcoin, Ethereum, and XRP tend to be much more volatile than traditional assets like stocks, bonds, and real estate. Consider Bitcoin. Its price usually goes up or down by 5% in a day. Due to this high level of volatility, traders always have a lot of chances to make money. And with eToro, you can trade in both directions, which means that you can make money when prices go up or down.
Leveraged exposure
When trading cryptoassets with CFDs, you can use “leverage” to trade more money than you have in your account. This could help you because it could make your gains bigger. On the other hand, trading with leverage can also make your losses bigger, so it’s important to know the risks.
All cryptoassets on eToro have a leverage of x2, which means you can trade $2,000 with a $1,000 deposit.
Low minimum investments: you can start trading cryptoassets with just a small amount of money.
Market opening times
One of the best things about trading cryptoassets is that the market is open 24 hours a day, 7 days a week. This means that you can trade at any time, on your own schedule.
Low transaction fees
Most of the time, the fees for trading cryptoassets are low. On eToro, the only fees you pay are “spreads,” which are the difference between the price you buy and the price you sell an asset for, and small overnight fees on CFD positions. CFD positions that are still open the next day cost a small fee based on how much the position is worth. This is basically a payment of interest to cover the cost of the overnight leverage you use.
Your capital is at risk. Other fees apply.
What are the major cryptoassets
There are literally thousands of different cryptoassets available to traders and investors today.
Here’s a look at some of the most well-known cryptoassets.
Bitcoin (BTC)
Bitcoin (BTC) is without a doubt the most well-known cryptocurrency. Bitcoin is a decentralised digital currency that was started in 2009 by a person who used the name Satoshi Nakamoto. It is based on blockchain technology. On the global peer-to-peer Bitcoin network, it can be sent from one user to another without the need for middlemen like banks.
Bitcoin was designed to be an alternative to traditional ‘fiat’ currencies such as the US Dollar and the Euro. It is not run by a government or central authority, so it can’t be manipulated in the same way that traditional currencies can. All Bitcoin transactions are recorded on the blockchain ledger and must be verified, which makes them traceable and highly secure.
Bitcoin was the first cryptocurrency to be released, and it is still the largest cryptocurrency in terms of market capitalization.
Ethereum (ETH)
Ethereum \sLaunched in 2015, Ethereum (ETH) is a programmable blockchain technology that enables decentralised blockchain-related applications to be built and run without any downtime, fraud, or interference from a third party.
Ethereum could be a very disruptive technology because it makes it possible to write smart contracts into the code on the blockchain. It can be used to keep track of things like bank transactions, legal contracts, and property deeds. This means that it can be used in a lot of different fields, such as finance, law, and real estate.
When people talk about trading Ethereum, they are really talking about trading “Ether,” which is a tradable token made to fuel the Ethereum ecosystem.
Bitcoin Cash (BCH)
Bitcoin Cash (BCH) is a digital currency that was made when Bitcoin split in two (called a “hard fork”) in December 2017. When a single cryptoasset splits into two, this is called a “hard fork.” It happens when people on the cryptoasset network disagree, usually about how to improve the software that runs the network. In this case, they didn’t agree on whether or not to make the block size bigger.
Like Bitcoin, Bitcoin Cash can be sent from one person to another without banks or other middlemen. Bitcoin Cash, on the other hand, is better than Bitcoin because it is faster and has lower processing fees.
Litecoin \sLitecoin (LTC)
Litecoin \sLitecoin (LTC) is a cryptocurrency that was set up in 2011 by Charlie Lee, a former Google employee. It was also made when Bitcoin went through a hard fork.
Litecoin is a peer-to-peer cryptocurrency, just like Bitcoin. But there are some important changes. Litecoin can, for example, handle transactions up to four times faster than Bitcoin.
People often say that Litecoin is the “silver to Bitcoin’s gold.”
Ripple (XRP)
XRP: XRP is the token of Ripple, which is a payments company that makes it easy to send money around the world.
Ripple was created as an international payment system designed to help banks and financial institutions move large amounts of money around the world. It lets institutions transfer any currency quickly and cheaply across the network. With this direct-to-bank settlement, there are no middlemen like banks or currency exchanges.
Unlike most cryptoassets, XRP doesn’t use Blockchain to reach a consensus on transactions across the whole network. Instead, an iterative consensus process is used, in which a number of independent servers constantly compare their transaction records. This makes it faster than Bitcoin, but it also makes it easier for hackers to break into.
Why do cryptoasset prices go up and down?
As with most financial assets, cryptoasset prices are driven by supply and demand. If more people want a certain cryptoasset, its price will go up, but if there are too many of it, its price will go down.
There are many things that can change how supply and demand work. Here are some of the most important ones:
- Changes in the economy: Changes in the economy that affect traditional asset classes like stocks, bonds, and cash can affect how much people want to buy cryptoassets. For example, if investors think that governments will devalue fiat currencies like the US Dollar in the future, they might turn to cryptocurrencies to protect themselves.
- Coverage in the media: There are many websites that only cover news about cryptoassets, and news about a certain cryptoasset can affect supply and demand on the crypto market. Positive news, like the fact that more people are using a certain cryptoasset, can make more people want to buy it. On the other hand, bad news, like hearing that a crypto exchange was hacked, can bring down demand.
- Government regulation: Governments all over the world are becoming more and more interested in regulating cryptoassets, and changes in crypto regulation can affect both supply and demand. For example, when China said at the beginning of 2018 that it would block all websites related to trading cryptocurrencies, demand for Bitcoin and other cryptocurrencies dropped by a lot. This caused their prices to drop sharply.
- Investor sentiment: The cryptocurrency market tends to be very emotional, and emotions like fear and greed can have a big effect on the supply and demand of cryptocurrencies. When the price of a cryptocurrency goes up, investors tend to get greedy, which drives up demand even more. On the other hand, when prices are going down, investors tend to be afraid, which leads to an oversupply. Bitcoin at the end of 2017 and the beginning of 2018 is a great example of this. Late in 2017, when Bitcoin’s price was going up quickly, investors were mostly driven by greed. This led to more people wanting to buy. But when the price of Bitcoin started going down, greed was replaced by fear. This resulted in excess supply of the cryptocurrency, which pushed prices down.
Your capital is at risk. Other fees apply.
How to trade in cryptocurrency
On eToro, you can trade cryptoassets in two main ways:
You can buy and sell cryptoassets outright, which means you buy the underlying asset. You can trade cryptoasset price changes through Contracts for Difference (CFDs). CFDs are financial instruments that let traders and investors make money from the price changes of a security without owning the security itself.
Here’s how these two ways of doing things work.
Buying the asset itself
To buy the underlying asset, you have to trade traditional currency (like US dollars) for cryptoasset tokens (coins) like Bitcoin, Litecoin, or XRP.
When you buy a cryptoasset this way, eToro purchases the tokens on your behalf and registers them in a segregated account under your name.
If the cryptoasset’s price goes up while you own it, you’ll make money. But if the price goes down, you’ll lose money.
The biggest benefit of this method is that you own the cryptocurrency outright. This means that you own the tokens and can use them however you want. You can put the tokens in a wallet, trade them for other digital assets, send them to other people, or use them to pay for goods and services.
For example, if you use this method to buy $1,000 worth of Bitcoin, you can spend it at stores that accept BTC.
You can move your cryptoassets to the eToro Wallet when you buy the underlying asset on eToro. This is a multi-crypto, secure digital wallet that is easy to use. The eToro Wallet not only lets you store your cryptoassets safely, but it also lets you send and receive cryptoassets from and to other wallets and change one cryptoasset into another.
What is a crypto wallet? A crypto wallet is a piece of software that lets users send and receive digital currency and keep track of how much digital currency they have. If you want to pay for things with Bitcoin or another cryptocurrency, you will need a digital wallet.
CFDs let you trade in cryptoassets
When you trade a cryptoasset via a CFD you’re effectively betting on the future price movement of the asset, without owning the asset itself.
For instance, if you buy $1,000 worth of Bitcoin CFDs, you will make money if the price of Bitcoin goes up, but you won’t own any BTC tokens. CFDs are a good way to trade crypto for two main reasons.
First, you can trade both up and down with CFDs. This means that you could make money if the price goes up or down. If you think the price of a cryptoasset will go up, you would enter a BUY CFD trade. This is also known as “going long.” But if you think the price of a cryptoasset will go down, you would enter a SELL CFD trade. This is also called “going short.”
Secondly, with CFDs you can use leverage to boost your exposure. For example, with x2 leverage you can control $1,000 with just $500. This means there’s a chance of making more money (but also the potential for higher losses).
The problem with trading CFDs is that you don’t actually own any crypto tokens. This means that you can’t move them to a wallet or pay for things with them.
Buying the underlying asset vs trading CFDs: which is the best approach?
Both ways of trading in crypto have the potential to make a lot of money. Which approach is best for you will depend on what you want to achieve and how willing you are to take risks.
Underlying Asset Investment is best if:
- Plan to hold the cryptoasset for an extended period of time
- only want to make money when prices go up.
- Want to transfer the cryptoasset to a wallet or use it to pay for goods and services
- Are willing to pay the full amount of the trade right away
- You don’t want to use leverage to make your risk bigger.
CFD trading might be the best way to go if:
- Want to do business in both ways?
- Want to use leverage to get more attention?
- Don’t care if they own the underlying asset.
- Don’t want to trade your money for cryptocurrencies
- Not interested in making a crypto wallet
Your capital is at risk. Other fees apply.
Trading in cryptoassets has some risks
Crypto trading is like any other form of investing or trading in that it comes with risks.
Two of the biggest things to watch out for when trading in crypto are:
Volatility
Volatility risk is the risk that comes with the prices of cryptoassets going up and down. The prices of cryptoassets can change a lot, which can be a good thing if you want to trade them, but it can also be a risk. When prices go in the wrong direction, traders can lose a lot of money. If you don’t have enough money in your account to cover any possible losses, your positions may be closed for you.
Leverage risk
Leverage is a powerful tool that can help you make more money when you trade, but it can also make your losses bigger when you trade. If a large amount of leverage is used to trade, even a relatively small price movement in the wrong direction can result in substantial losses. It’s important to be aware that losses can exceed the amount invested.
Crypto risk management strategies
Focusing on risk management can help you trade cryptoassets with less risk.
Three risk management strategies that can help reduce risk include:
- Figuring out your optimal position size: Before you start trading cryptoassets, you should figure out your optimal position size for each trade. As a general rule, you shouldn’t risk more than 2% of your total capital on any one trade. If you trade more than 2% per trade, you could lose a lot of money and find it hard to get it back.
- Putting in place stop losses when trading CFDs: Stop losses are a key part of a solid risk management strategy because they help to limit trading losses by closing out losing positions before they grow into big losses.
- Diversifying your portfolio: a portfolio that contains a wide range of assets will have a lower level of risk than a portfolio that simply focuses on one asset such as Bitcoin. You can lower the risk of your portfolio as a whole by spreading it out across different types of assets, like stocks, ETFs, commodities, and crypto.
How to Invest in Cryptocurrency: Conclusion
Cryptoassets are digital assets that are protected by cryptography and can be moved, stored, and traded electronically. Distributed ledger technology is one of the things that makes cryptoassets unique (DLT).
The most well-known DLT is blockchain. It puts transactions into “blocks” that are linked together, and it uses cryptography to keep all transactions safe and make sure they are correct.
There are three main types of cryptoassets: cryptocurrencies, utility tokens, and security tokens.
There are many good things about trading in crypto. The crypto market is very volatile, which gives you a lot of trading opportunities. You can also trade around the clock and use leverage to get more exposure.
Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and XRP are five of the most well-known cryptoassets. All of these cryptoassets can be traded on eToro.
Supply and demand have an effect on the prices of cryptoassets. Supply and demand can be affected by many things, such as how the economy is doing, what the news is saying about crypto regulation, and how investors feel.
On eToro, you can either buy cryptoassets outright or trade the price changes of cryptoassets using CFDs.
The Smart Portfolios on eToro are another way to invest in cryptoassets.
When trading cryptoassets, the main risks are volatility risk and leverage risk. Putting more attention on risk management can help reduce risk.
Your capital is at risk. Other fees apply.
How to Invest in Cryptocurrency on eToro
How to place a cryptoasset trade on eToro
Time to open a trade: 2 minutes
