In the last six months, Bitcoin prices are down 15% but are more than 40% off their all-time highs, set in November. Similarly, Ether (the traded governance token for the Ethereum blockchain) is off 25% in the last six months and 46% from the ATH. With major crypto assets fully in a bear market, now’s a good time to learn how to start trading cryptocurrency in case the bottom is in.
The first step is setting up a wallet.
Your First Crypto Trade: Wallets
Broadly speaking, wallets come in two flavors: custodial and non-custodial. A custodial wallet is a way to hold crypto assets with an intermediary that has the private keys to the wallet. You’ll use their software or application to set up an account, which you’ll then fund to buy crypto. Custodial wallets are simpler to use than non-custodial wallets. In fact, if you’ve used the popular money-transfer application Venmo, you may already have access to a custodial wallet.
A custodial wallet gives you exposure to crypto investing in a more familiar way that’s more like setting up an account on any other website. You’ll potentially have access to customer service and are less susceptible to some of the more common phishing scams that threaten crypto holders. In exchange, you’re subject to the same anti-money laundering (AML) and “know your client” (KYC) guidelines that all U.S. financial institutions are subject to.
A Coinbase account (not to be confused with Coinbase Wallet) is a popular custodial wallet and a good place to start with your first crypto trade due to the number of different tokens available to investors.
With a non-custodial wallet, on the other hand, there is no intermediary holding your private keys. That means that there’s no intermediary that could be hacked, no centralized failure point; you become your own crypto bank.
Non-custodial wallets can be either software applications (like MetaMask, Coinbase Wallet or Trust Wallet) or physical hardware devices (like Ledger or Trezor). In both instances you are the only person in control of the assets. When you establish a non-custodial wallet, you’ll receive a “seed phrase,” which is a 12-, 18-, or 24-word phrase that allows you to recover the wallet after it’s created.
Think of your seed phrase as the master password to the wallet, which stores the private keys for any crypto asset it supports. If someone gets your seed phrase, they can simply “recover” your wallet and are now in control of your crypto. Which brings us to…
It’s important to remember that the crypto you hold isn’t “in” your wallet, it’s recorded on a decentralized blockchain. Your private keys (and by extension your seed phrase) tell the blockchain whether or not you have authority to move the crypto elsewhere.
With a software wallet your private keys are stored on the corresponding software, which is convenient for transactions (and why it’s often referred to as a “hot” wallet) but creates a security risk. A hardware wallet (or “cold” wallet), on the other hand, doesn’t store your keys on your computer. It makes it less convenient to transact, but makes you less susceptible to hacking, phishing or malware.
If someone is able to access your seed phrase, they can bypass any other security that’s in place, hardware or software. As a general rule, you should write down your seed phrase (in the order it’s presented to you) and save it in a safe physical location. The only time you should use it is if you need to recover your wallet. Don’t type it in emails, don’t enter it into websites, don’t show it to others.
If you’re just making your first crypto trade and decide to use a non-custodial wallet and are not making huge investments, you can probably save your seed phrase on a piece of paper in a hidden location or small safe, jewelry box, etc. That piece of paper is worth whatever amount you have invested. Treat it accordingly.
Large crypto investors will use specialty services to engrave portions of their seed phrase on steel plates and keep them separately in multiple bank safety deposit boxes, sometimes more than one copy just for redundancy!
If you’re just getting started investing a small amount of money, that’s probably overkill.
Funding Your First Crypto Trade and Fees
Funding your first crypto trade will vary by the exchange you use. A Coinbase custodial account will have options to fund with credit cards, bank transfers, wires, etc., and will have deposit and withdrawal limits as well. With Venmo you can use your Venmo balance.
The fees you’ll pay will vary by platform as well. Coinbase has transaction fees, as well as price differences between buyers and sellers; think of it like the bid-ask spread. It’s also important to remember that any transaction recorded to a blockchain has to pay the computers that validate transactions. So even something as seemingly simple as transferring crypto from one wallet to another will have a fee.
How to Start Trading Cryptocurrency
You’ve set up a wallet, secured your seed phrase, deposited a little money and are ready to trade. So you know how to start trading cryptocurrency. Now what? Now you need to pick a crypto and buy it. BTC and ETH are the “blue-chip” cryptos, with more established history and use cases. Buying a little bit of a blue chip is a good place to start. Many crypto traders use the same technical analysis skills that stock traders use, so using technical analysis can help you identify trends and entry/exit points.
After that, you can start exploring other tokens, DeFi earning opportunities (decentralized finance, such as peer-to-peer lending or earning interest), and specialty tokens that have specific governance use cases. Even with increasing awareness and adoption, crypto is still brand new territory in technology and finance, so you should manage your risks and position size accordingly.
What else do you want to know about how to start trading cryptocurrency? Or have you already made your first trade and have any extra tips? Leave a note in the comments below.