How To Trade Cryptocurrency

All you need to trade cryptocurrency is a connection to the internet, a computer or smartphone and an amount of money to invest that you're comfortable losing.

If you're thinking about getting into trading cryptocurrency, this guide will tell you everything you need to know.

The UK financial regulator, the Financial Conduct Authority, has issued repeated warnings about the risk of investing in cryptocurrency. If you buy cryptocurrency, you should be prepared to lose all your money.

Assuming you already understand how cryptocurrencies work (and if you don't, here's a primer), you first need to choose a platform on which to trade.

A crypto exchange is a platform, be it a website or mobile app, where buyers and sellers meet to trade in cryptocurrencies. We regularly update our list of the best crypto exchanges to help would-be investors choose one - you can find it here.

Once you've weighed up the features, fees and feel of the various exchanges and then chosen one, you'll need to create an account.

Typically, creating an account with a crypto exchange involves a brief identity check that'll involve entering some key information about yourself and, increasingly, passing some biometric checks.

This usually means uploading a photo or short video of your face, or looking into the lens of your webcam or smartphone camera while following a series of prompts. These things are designed to verify you are who you claim to be, and that you're present during the application.

Exchanges are obliged to follow strict 'Know Your Customer' regulations designed to tackle money laundering and fraud. These checks are in place to weed out people using your image to open a fraudulent account.

Notice that the regulations apply across all financial markets. Cryptocurrency trading itself is otherwise not regulated in the UK and you will have no protection if something goes wrong.

Once approved, you'll need to deposit some traditional 'fiat' currency, such as sterling. with which to buy cryptocurrencies.

While many tokens can be bought for fractions of a penny, exchanges typically set minimum deposits - which means you might have to pay in, for example, £10 - even if you only want to spend 6p on Dogecoin.

After you've passed the identification checks and met the minimum deposit requirements, you're ready to start trading.

Within your chosen crypto exchange, you'll be able to check current prices for a range of tokens, and see how they've been performing over the past hours, days, weeks, months and even years.

Exchanges will generally show you the tokens that are trending upwards and downwards in price, new tokens, popular tokens and so forth. You can use all of this information to decide which coins to buy and sell.

When you buy a cryptocurrency, somebody is selling it - you're both just using the exchange as an intermediary. When there are more buyers than sellers, the price of a token tends to rise - and vice versa.

How and when you choose to buy depends on your approach to investing, what you hope to gain and how much you tolerate risk.

Some people are day traders, buying and selling tokens within the same day to take advantage of movements in the market. This offers the potential for quick returns and mitigates risks of big price drops from one day to the next.

On the other hand, day trading is such a short-term strategy that it prevents investors from riding out price dips that might correct themselves over longer periods.

Swing traders hold coins for longer periods of time, monitoring prices of assets over a period of weeks to determine the best assets to buy, sell and hold.

Observing price movements over longer periods can help traders to make more informed decisions, but potentially requires more discipline and the ability to not act impulsively on changes.

Position trading takes a long-term view on crypto investing. Position traders buy coins in anticipation they'll make gains over the longer term, and are less concerned with day-to-day volatility.

Position trading also has the benefit of being able to build a portfolio over time, starting with a small investment and increasing it over time. The trade off is that investors cannot make quick returns.

There are countless factors that can affect the price of a cryptocurrency, but supply, demand and sentiment are useful bellwethers for predicting trends.

When demand is met with sufficient supply, or more supply than is needed, prices tend to remain flat or fall. In crypto, supply is determined by how coins are mined.

For example, next year the amount of Bitcoin given to miners who successfully add a block to the blockchain will halve from 6.25 BTC to around 3.125 BTC.

This drastic slowdown in the rate of new Bitcoin issuance could, in theory, push prices up as supply becomes constrained. However, if demand were to drop significantly, the supply squeeze would be insignificant.

Demand is the other side of the coin. When more people are interested in buying something, the more those who can afford it are willing to pay for its relative scarcity. If, for example, a major public figure were to say they believed a coin would become very valuable, their support could pique interest and lead demand to outstrip supply, pushing prices up.

On the other hand, if a coin begins to be seen as less valuable - perhaps if there were rumours of liquidity issues behind the scenes - demand would fall and sellers would need to accept lower prices in order to get rid of their coins, hence prices fall.

Such a scenario hinges on sentiment, that is to say public perception of value can have a direct effect on value.

When Ethereum went from using a Proof of Work consensus mechanism to a Proof of Stake mechanism last year, it was predicted that the environmental benefits of the change would make it more sustainable, making it a safer and more valuable investment.

Similarly, crypto prices rose after the collapse of Silicon Valley Bank (SVB) last month. Both SVB and Signature, another US bank that failed, were used by crypto companies like Avalanche and Ripple for payments between cryptocurrencies and fiat currencies.

The intervention by US authorities to protect SVB deposits appeared to have inspired confidence in the market, and major tokens' prices rallied by as much as 14%.

Monitoring the news for changes in these three factors can help to predict how prices might change, but countless external factors are also at play.

Once you've chosen a currency to invest in, you'll need to navigate to the relevant page within your exchange and select buy.

You'll then need to input the amount of fiat (sterling) currency you want to spend before being shown how much of the cryptocurrency you've chosen it'll buy you. For example, £10 might buy you 0.00043 BTC, or 16.36 DOGE.

If transaction fees are included (they often are), you'll get fractionally less of your chosen currency than you'd get with straight fiat to crypto conversion - this is because the exchange is taking a small cut of the money you're paying out to the seller of the cryptocurrency.

After this, your account will be credited with your newly bought crypto for you to hold, sell or spend with merchants which accept it. This ranges from a small number of merchants to a tiny number, depending on the currency.

Tesla accepts Bitcoin, for example, but don't expect to pay for your Tesco shop with Tether (USDT).

You can choose to sell your crypto for fiat currency, or you can trade it for another cryptocurrency. The buying process is much the same as buying a cryptocurrency with Sterling, you just pay with a cryptocurrency instead. For example, 16 DOGE might buy you 0.000042 worth of Ethereum. Again, transaction fees may apply.

All of this assumes you want to trade manually - making your own decisions about what to buy and when to make trades. There are platforms which can automate the process, with bots that will buy and sell on your behalf when certain trading conditions are met.

eToro even has a CopyPortfolios feature which allows you to automatically mimic the trades of successful investors.

To make trades with your crypto assets, you need to provide your public and private keys. You can't authorise a trade without these long alphanumeric strings, the latter of which should be known to you alone.

Your keys need to be stored in a secure wallet to prevent their unauthorised use. Most, if not all, crypto exchanges offer a free wallet in which to store your keys.

These 'hot' wallets live online, which makes them vulnerable to hackers. On the other hand, they're convenient and come with support from the provider via account recovery if you were to, for example, forget your crypto exchange password.

You can store your keys offline to keep them at arms' length from hackers, but you'll have to pay for a USB device and you won't get third party support if you lose your device or forget your passwords for it. Plus, the protection from hackers is weakened once you plug your 'cold' wallet into a web-connected computer.

Whatever you decide to trade in, wherever you choose to do it and whenever you buy or sell, you should be aware that crypto is extremely volatile and, for the time being, unregulated.

This means you'll get no support from the government if you're scammed or lose money because an exchange or token collapses.

The government is currently consulting on bringing the crypto market into regulation, which would force providers to play by the same rules as traditional financial services companies or else lose their trading licences. This would offer consumers much greater protection if implemented.

Either way, the Financial Conduct Authority (FCA) has taken great pains to remind would-be investors they should be prepared to lose all of the money they put into crypto.