How to Safely Trade Cryptocurrencies
Cryptocurrency has gone a long way from a geek thing to the protagonist of headlines in mainstream media, which took it less than ten years to accomplish. Blockchain technology that underlies cryptocurrencies has gone even farther and now finds use cases far beyond financial transactions.
This all has drawn much attention to cryptocurrency trading. The recent bitcoin price rally was some sort of an eye opener to those who had been agnostic about whether it is a gateway to the world of tomorrow or yet another Ponzi scheme. The majestic downfall that bitcoin took in just a few hours following the rally had scared lots of people away and caused them to panic sell their cryptoassets. However, it all can make an impression only on complete cryptocurrency rookies, while more seasoned traders and investors keep calm and just buy more when their preferred asset gets cheaper. God knows how many times they have already seen it.
Such a price rollercoaster may inflate one’s investment by the score or turn it into senseless dust over just a few hours or even less. Exchanges that render trading services are abundant, and sometimes the exchange rates they offer may differ by thousands of dollars. Some exchanges just blow up, and it takes a great deal of experience or some inside intel to foresee such a collapse in advance.
Effectively, it all makes cryptotrading a very attractive yet an equally risky affair. Here are some ground rules a rookie might find quite useful.
How to Invest
First, one has to choose what to invest in. There are lots of people offering advice in this regard, and sometimes their recommendations prove to be useful. However, professional traders insist that nobody should invest their money into something basing solely on someone else’s words.
“Just a brief look at CoinMarketCap might give one an idea of how many cryptocurrencies there are. Furthermore, the number is likely to keep increasing. Some of them are well-established projects with a dedicated community, some others are just tokens for someone’s ICO, some others are just new projects that lack publicity for now, and finally, there are lots of short-living scam coins. It takes some expertise to tell one from another,” says Svetlana Geller, founder and CEO of cryptocurrency exchange Livecoin.
“One cannot rely on rumors they’ve heard somewhere online. Any responsible trader has to make a narrow research into what they’re about to invest in.”
Professional traders agree with that. An inexperienced trader might not tell an advertising feature from a profound analysis at times. In any case, investment shall be preceded by studying the chosen coin, as well as its potential and technical nuances. This measure, when taken seriously, may keep a newbie trader from losing all their money.
How Much to Invest
Another question that most professional traders have heard from their less experienced peers is about how much should they invest in a coin.
While this question might sound a bit provocative, there is an answer known to most pros.
“When it comes to the amount of investment, the rule of thumb is plain and simple; invest just as much as you can afford to lose,” says Svetlana Geller. “It efficiently protects you from all hard ramifications if your investment fails, but, on the other hand, if the coin you’ve chosen starts climbing upwards, you can multiply your money quite fast.”
This rule is not exclusive to cryptotrading and originates from traditional exchanges. When applied wisely, it has never let anybody down.
Exchanges and Wallets
When a rookie approaches the cryptoindustry, they may hear a lot about wallets and exchanges. Most of the offerings in this regard have both fans and haters, and each party may explain why they love or hate a given service.
Still, there are different ways of dealing with cryptocurrency once you’ve bought it.
The most secure way to do that, and everyone agrees with it, is keeping it offline on what is known as “cold wallet.” In fact, it is a thoroughly secured flash drive that keeps your cryptocurrency protected from unauthorized access using different methods varying from cryptographic passwords to biometric identification.
This, however, works only if you’re a long-term investor, and therefore, have no plans to use the cryptocurrency on a daily basis. If you have plans of accessing it more often, the better choice is to use a “hot wallet,” which is an online counterpart of cold wallets. The risk here, however, lies with the fact that it is way easier to hack into one’s wallet if it is online.
For that reason, most experts advise to use both methods at once with a lesser ‘operational’ amount stored in the hot wallet.
Cryptocurrency exchanges offer storage services as well. Each of them also offers some additional security measures like two-factor identification to make one’s operations with money less risky.
This method, however, is less safe than it may seem.
“Perceived safety and objective safety are two completely different beasts. Perceived safety can be reached by numerous account protection mechanisms. But in reality, this will mostly just hinder the account owner’s user experience. I believe google authenticator with just one IP in its whitelist (the VPN you use to access the exchange) will be enough. With this sort of protection, in place, your account will only be hacked if the perpetrator has full access to your PC and smartphone, which should be hard enough for an Internet-based criminal. You can slap ten more protections on top of that but none will be nearly as effective,” Svetlana Geller says.
While exchanges have a great share of liability over their customers’ money, it is the customers who bear the most of responsibility in this regard.
“Always use unique passwords, protect your email with multi-factor authentication and so on, you know the drill. Ninety per cent of all hacks are conducted via accessing your email and changing email in your account or attempting to recover your password. Also mind your smartphone, especially if it’s Android with google authenticator installed. Ideally, you should buy a cheap smartphone specifically to be used for your financial activities and restrict your Google authenticator for exchanges to it. These two simple tricks will almost completely safeguard your assets from hacker attacks.”
But even with all those measures in place, there still is danger of an exchange that one stores their money at collapsing.
How to Tell an Exchange Is About to Go Down
The safest way of keeping your investment from going down with an exchange is just to keep it away from any exchange. Still, it is not always practical to send currency back and forth all the time as it would entail transaction fees adding up, and would eventually comprise a significant amount. For that reason, many people keep some operational amounts at exchanges.
Again, there are some commonplace rules one should heed.
It would be unwise to keep all the assets at the same place, be it a wallet or an exchange. Diversifying one’s portfolio can hedge them against risks related to exchange rate changes and technical problems with online services.
Still, there are some signs suggesting that an exchange is not alright.
“There hardly is an exchange in the world that had never experienced technical difficulties. Sometimes they just fall victims of multiple DDoS attacks,” Svetlana Geller says. “However, if technical difficulties occur too frequently, this might be a disturbing sign. This involves not just accessibility of an exchange’s website but also withdrawal halts.”
The community has become way more cautious about online exchanges after the epic failure of Mt.Gox back in 2014 whose customers have lost thousands of millions of dollars in its collapse. This urged everyone to place stricter demands to any other exchange. Still, it is a commonplace to put trust in exchanges that are well-known and reputable.
“Number of users, daily trade volumes, and other open data are a great identifier of whether an exchange is reliable,” says Geller. “However, a thorough research of customers’ feedback could also prove useful.”
Even though bitcoin as well as most altcoins are promoted as trustless, the trust in question is purely technical. When it comes to human actions, the only real substantiation for an investment is whether the potential investor trusts the coin they’re about to invest in, the exchange they’re going to convert it, and the wallet they use.
The trick of successful traders is that this trust has to be well-justified.