How To Trade Cryptocurrency

All you need to trade cryptocurrency is a connection to the internet, a computer or smartphone and some money that you are willing to say goodbye to.

If you’re considering trading cryptocurrency, this guide will tell you what you need to know.

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, usually in the form of a website or mobile app, where buyers and sellers meet to trade cryptocurrencies. If you are looking for the best crypto exchange for Australians, you can find our list for 2023 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 an identity check that’ll involve entering some key information about yourself, providing a government-issued ID and 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 steps are part of know-your-customer (KYC) process which regulated exchanges must complete in order to keep you safe, as well as stay compliant.

Exchanges are obliged to follow strict KYC 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. The information is also shared with the Australian Tax Office (ATO) so they can be aware of taxpayers who trade cryptocurrencies.

Once approved, you’ll need to deposit some traditional ‘fiat’ currency, such as Australian dollars, with which to buy cryptocurrencies.

While many tokens can be bought for fractions of a cent, exchanges typically set minimum deposits‚ which means you might have to pay in, for example, $10—even if you only want to spend 6 cents on a single Dogecoin.

You’re ready to start trading after you’ve passed the identification checks and met the minimum deposit requirements.

Cryptocurrency is like a form of digital money. It is a way of making payments from person to person without any organisation or institution in the middle to facilitate it. For example, if you want to pay a dog groomer, you’d either need to use cash produced and distributed by the Royal Australian Mint or a bank transfer facilitated by the payer and payees’ banks.

If, however, your dog groomer accepted Bitcoin, you could pay from your digital wallet to theirs almost instantly without any fees to a middleman, even if your dog groomer lived half-way across the world.

With cryptocurrency, the infrastructure which makes payment possible is decentralised—no single person, group or interest controls it. It all works using blockchain technology. Blockchains are immutable digital ledgers maintained by volunteers, governed by communities of ordinary people and distributed to anyone who wants to get involved.

Volunteers offer their time and effort to run specialised computers in exchange for the chance to earn cryptocurrency, and encryption technology makes it practically impossible to cheat the system. When you carry out a transaction with cryptocurrency, volunteers around the globe make a record of it in their copy of the relevant ledger. When a certain number of transactions are recorded, a block of those transactions is added to a long chain of previous blocks representing the chronological history of transactions in that currency.

To add a block to the blockchain, you first need to validate it. To do this, you must either correctly guess a 64-character, alphanumeric string with trillions of possible combinations or stake your own cryptocurrency for the opportunity.

If you’re lucky enough to be chosen—either because your computer rig was powerful enough to make the correct guess (or the closest guess within a 10-time limit) or you staked enough of your assets to tip the odds in your favour—you’ll need a 51% majority of the volunteers to agree yours is an accurate record of the transaction.

If you tried to claim there was more cryptocurrency in an account than there actually was, the majority would reject it. In order to cheat the system, you’d have to control at least 51% of the votes on the network. In either case, the cost would be prohibitive for any of the larger blockchains, like Bitcoin or Ethereum.

When your block is added to the blockchain, you’re rewarded with a small amount of a given cryptocurrency. There are no cryptocurrency coins or notes, there are only records of transactions keeping track of who owns which assets.

Cryptocurrencies can be used to pay for goods and services, traded for other cryptocurrencies, or held onto for speculative purposes.

Within your chosen crypto exchange, you’ll be able to check 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.

Day trading is such a short-term strategy that it prevents investors from riding out price dips that might correct themselves over longer periods. Unfortunately, most individuals who try their hand at day trading find the crypto market is a cruel mistress and moves against them more often than not.

Swing Trading

Swing traders, on the other hand, 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 smaller, day-to-day changes.

Position Trading

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

Position trading also has the benefit of building a portfolio over time, starting with a small investment and increasing it over time. The trade off is that investors must be confident enough in their chosen investments to ride out any turmoil in the market that appears on a day-to-day basis.

Countless factors can affect a cryptocurrency’s price, but supply, demand and sentiment are useful indicators 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, in 2024, 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) earlier in the year. 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% at the time.

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 (AUD) 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 0.00022 BTC, or 100 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 who accept it. This ranges from a small number of merchants to a tiny number, depending on the currency. Tesla, for example, accepts Bitcoin, for example, but don’t expect to pay your local grocery store with crypto.

You can choose to sell your crypto for fiat currency or trade it for another cryptocurrency. The buying process is much the same as buying a cryptocurrency with Aussie dollars, you just pay with a cryptocurrency instead. For example, 100 DOGE might buy you 0.00022 worth of Bitcoin. Again, transaction fees may apply.

All of this assumes you want to trade manually, and make your own decisions about what to buy and when to make trades. There are platforms that can automate the process, with bots that will buy and sell on your behalf when certain trading conditions are met. It’s worth mentioning that eToro has a ‘CopyPortfolios’ feature that lets you mimic successful investor trades automatically.

If your goal is to make a profit from trading cryptocurrency, you’ll need to choose an asset(s) you believe is likely to appreciate in value.

However, cryptocurrency is infamously volatile and unpredictable, making it extremely difficult to back a winner. Bitcoin has risen in value by over 80% since the start of the year , but is still down by around 50% from its November 2021 peak.

Traders tend to follow crypto news feeds, watch out for forthcoming technological developments, pay attention to regulatory developments, study crypto exchange data and simply watch price trends over time to decide which assets to buy.

Securing your digital assets is a vital component to trading crypto. This is done with a ‘crypto wallet’, which stores ‘keys’ not physical coins. There are two keys: a private key (like a password) to unlock your wallet, and a public key (like a bank account number) to receive coins.

There are several types of wallets:

• Hardware Wallets: These are physical devices that securely store private keys offline.
• Software Wallets: Applications downloaded on a device. They can be online (web wallets), mobile (on your phone), or desktop (on your computer).
• Custodial Wallets: These will appear similar to software wallets, however, your keys (and thus, your crypto) are stored with a third-party custodian.

A key principle is “Not your keys, not your coins,” emphasising the need to control your keys. A ‘non-custodial’ wallet (you control the keys) is safer than a ‘custodial’ wallet (a provider controls your keys). Although custodial wallets may be user-friendly, they carry a risk of asset loss if the provider is compromised or goes bankrupt. You can find our list of the best crypto wallets for Australians in 2023 here.

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, largely unregulated in Australia.

Digital asset markets remain the wild west of the investment world. Few regulatory bodies around the world can keep up with the ever-evolving world of crypto, and therefore, there remains a significant risk of losing any money you invest. It is extremely important to note that not all cryptocurrencies are created equal, and while ‘blue-chip’ crypto assets like Bitcoin and Ethereum have performed well since their inception, it doesn’t mean that any other cryptocurrencies will follow the same path.

The ease of creating a new crypto project anonymously has also made the digital asset market rife with scams, so don’t fall victim to investing any schemes or projects that sound too good to be true. More often than not, you’ll be left with nothing if you do fall into their trap—as sadly many Australians have already done.

The advantages and disadvantages of trading cryptocurrencies are almost completely subjective, and depend entirely on how you feel about crypto as a concept.

Enthusiasts often argue crypto can serve as a hedge against inflation, that it’s faster and cheaper than centralised fiat currencies, that it’s free of interference from vested interests and that it’s private.

Detractors say cryptocurrencies are volatile, unpredictable and lack real-world utility. Environmentally minded critics say certain cryptocurrency systems are unsustainable because of the huge amounts of energy they use.

Without regulation, some people also fear investors are exposed to rogue traders, scams, platform collapse and other risks. Some say the relative privacy of cryptocurrency, coupled with a lack of regulation, makes it a haven for fraudsters, money launderers and criminals. You can read more about the Federal Government’s plans to regulate crypto in our guide to the future of crypto in Australia.

As with anything, there is always to two sides to the coin and it is up to you to make the decision as to whether trading cryptocurrency is the right step for you to reach your own financial and investment goals.

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.