Cryptocurrency trading has gained immense popularity over the last few years and many people have been able to trade their way to a sizeable fortune.
However, it does not always have a fairytale ending and many have also lost large amounts of money by taking on to much risk or misjudging the market.
Here’s everything you need to know to set up your crypto portfolio, choosing a trading strategy that works for you, and making your first trade.
Warning! Investing in digital assets is highly risky and speculative. A qualified professional should always be consulted before making any financial decisions. Buying and trading cryptocurrencies should be considered a high-risk activity. Please do your own diligence before making any investment decisions. The Frontline is not accountable, directly or indirectly, for any damage or loss incurred, alleged or otherwise, in connection to the use or reliance of any content you read on the site.
Risk analysis
Trading cryptocurrency is high-risk compared to buying stocks. This is because the market is a lot more volatile and can see large fluctuations at a moments notice.
Additionally while traditional share trading has open and close times or trades in different time-zones, the cryptocurrency market is always-on and trading occurs 24 hours a day, every day.
While large changes in the price of a stock can cause a stock exchange to halt trading, crypto trading can’t be halted. As long as the blockchains is powered by computers around the world – traders are able to buy and sell cryptocurrency.
Never invest or trade any money you cannot afford to lose – and ensure that you have built up a large enough emergency fund, of at least 6 times your monthly expenses before venturing into crypto trading.
Next determine how much you can afford to trade and the amount of risk you’d be prepared to take on.
To do this, set an ideal amount of money you would like to make from trading crypto and work back from there how much you would need to trade and the average profit per day you’d need to hit that target.
Once you’ve set yourself a realistic target, the next step is to ensure your assets are always secure, because worse than losing your money on a trade is logging into an exchange and seeing your assets are longer there as a result of a security breach or an error on a platform.
Security
Choosing an exchange with the highest security measures and processes will allow you to sleep peacefully at night knowing that your assets are safe.
Most traders make use of of cold wallets, also known as hard wallets, to store their crypto assets when they are not trading. Cold wallets are physical devices where you can store your crypto on. The most popular being Ledger and Trezor wallets.
Many exchanges have suffered large hacks and have even stopped trading, and in the aftermath many traders have lost a lot of money.
Exchanges
Next, you need to choose a trading platform. Binance is a no-brainer. Currently the largest crypto exchange by trading volume and has everything you need from advanced trading interfaces to margin trading where you can leverage your trades and make even higher returns, albeit more risky.
To avoid being overwhelmed with all these advanced features, it is a great idea to start on exchange that is easy to naviga, secure and has a South African payment gateway where you can easily deposit and withdraw your funds.
We recommend Luno or VALR, with the latter even paying you to be a market maker. Need more options? Check out our post on the best crypto exchanges in South Africa.
Portfolio
Next, it’s a good idea to set up a portfolio for yourself where you can track your trades as well as monitor your crypto holdings. If you’re good at excel or Google sheets and have the time, then that is the perfect place to track of everything.
Alternatively, there are many portfolio tools on the market – most of which are free while some others have features for more experienced traders or large funds. Coinstats is our favourite.
Trading strategies
Hodl
The first crypto trading ad the most simplest is to hodl. “Hold on for Dear Life”. This involves buying a cryptocurrency and holding it until it increases in value then selling it for a profit. You’re betting on the future price of the cryptocurrency.
Scalping
Scalping or day trading is the first real hands-on trading strategy which involves smalls trades, usually on a daily basis, buying and selling cryptocurrency or speculating on a cryptocurrency’s future price compared in relation to another.
This strategy requires lots of research and may involve many losses. The goal is to take more profits than losses over the long term with the difference being a good return on your initial investment.
Swing trading
Swing trading is similar to scalping except that you stay in trades for longer, like a day to a week, or even longer. If you are considering swing trading you may require more capital to start with, especially if you’ll be margin trading as small balances can deplete quickly.
Arbitrage
With Arbitrage, traders make profits by buying cryptocurrency at a lower price on one exchange and selling it for a higher price on another exchange and pocketing the difference.
Prices of cryptocurrencies can often times fetch different prices on different exchanges and although this is less so the case these days there can still be some great arbitrage opportunities if you look closely enough.
Tax implications
Cryptocurrency is seen as a financial vehicle in South Africa and as such is considered a taxable asset class. It is important to keep records of your trades especially profits and losses as you are taxed on your profits.
According to SARs, a crypto asset is deemed a digital representation of value that is not issued or controlled by a central bank and can be transferred, traded and stored electronically. All tax payers need to declare crypto assets’ gains or losses as part of their taxable income.
Keeping afloat
Crypto is a fast moving industry with new projects regularly being released or existing ones being updated.
Combined with a large market cap, it is important to follow the leading news publishers in this space as well as the top voices in the industry so you’re always in the know.
While exchange platforms allow you to set price alerts or even stop orders, trading crypto is risky and the market is well known to be extremally volatile.
As such we recommend subscribing to reputable news outlets’ news letters and following the thought leaders on social media, especially Twitter.
Just don’t get caught up in the hype or succumb to the pressure to buy into scams or pump and dump schemes.
Trading crypto in South Africa comes down to having a solid strategy which you can rely on, not taking on high-risk trades, keeping your assets secure, following the industry and staying up-to-date with market news as well as becoming accustomed with record keeping and managing your finances while also keeping in mind taxes on your crypto profits.