Essential Things to Consider When Exchanging Cryptocurrencies
If you are planning to venture into the world of cryptocurrencies, paying close attention to the forces at play will help you make the most out of your investments, ensure safe and secure transactions, and avoid unfavorable decisions.
Here are some of the essential things to consider when exchanging cryptocurrencies.
Timing is everything, especially for investors. However, given the volatility of the cryptocurrency market, it can be tough to determine the right time to enter the market to maximize returns.
Below are some great tips to keep in mind when timing when to buy or sell cryptocurrencies:
- Don’t buy in during the peak of a bubble, or when it’s crashing. As the old saying goes, never catch a falling knife. The best time to purchase cryptocurrency is usually when the price is stable at a comparatively low level.
- Keep in mind that crypto bubbles are not the same as the typical financial bubbles. Some of the sharp upswings or drops in the price of a coin may just be daily volatility.
- Take some time to just watch. Don’t buy in just because the price dropped since there might be another dip within the same day. Research, analyze, and only buy when you’re sure that the timing is right.
- The absolute best time to buy cryptocurrency is during a golden cross. However, a golden cross is notoriously difficult to predict, even in traditional financial markets. Your best option is to gradually enter the market once you observe the initial dip after a cross.
Just remember that the rule of thumb for investing or trading in cryptocurrencies is to never sell too early. Hold your position until it’s no longer advantageous to do so. With the continuing rise of the cryptocurrency market, a long-term outlook is ideal to maximize your profits.
Essentially, the coin’s market cap will determine the value of the units that are circulating in the market. It is calculated by multiplying the current market price with the total number of circulating supply. The circulating supply is used instead of the total supply, because some coins are not available on the public market. Since they’re not accessible for trading, they won’t count towards determining the price of the coin.
If you are buying or selling cryptocurrencies, one of your top considerations will most likely be its price. Don’t make the mistake of buying a coin just because its price is low or affordable. Your decision to buy should not be based on what you can afford, but on the coin’s market cap. The higher the coin’s market cap, the more viable it is as an investment asset.
Cryptocurrency transactions often take place on an exchange, which serves as an intermediary between a buyer and seller. No matter what kind of transaction or investment you are planning to make, it’s crucial to find an exchange that is legit and can satisfy your needs. Check out this comparison table from Crypto Head to find the right exchange for you.
The following guidelines will help you make an informed decision on which exchange to choose:
- Choose a secure exchange to ensure that your money is safe. Some examples of good security policies and practices are cold storage, two-factor authentication, email encryption and verification, and auditing programs.
- Some of the biggest exchanges only offer a handful of cryptocurrencies such as Bitcoin or Ethereum. If you are interested in other coins, choose an exchange that offers them.
- The exchange should have high liquidity, which refers to the ease of buying and selling cryptocurrencies. An exchange that is highly liquid means that transactions are completed faster and help you avoid extreme price volatility. It’s also a good idea to check whether the exchange offers a locked-in pricing mechanism, which guarantees a specific price at the time you initiate the transaction, and not when it settles.
- The exchange should also have a responsive customer service. If you run into any issues, having someone from the exchange to help you out immediately will save you a lot of time and anxiety.
Remember that choosing the right exchange is a crucial step when using cryptocurrencies. You want to know that your money is in safe hands and that you are protected from unscrupulous agents that are taking advantage of undiscerning traders and investors.
Transaction and Trading Fees
Each exchange features different fee structures. If you are planning to make frequent trades, bulk purchases, or do transactions that involve large amounts of money, you need to look into the exchange’s fee structure to prevent surprises later on.
Some of the common fees that exchanges charge based on user behavior are the following:
- Trading fees are the primary revenue source for exchanges. These are usually charged on crypto-crypto trades as well as for fiat-crypto trades.
- Deposit and withdrawal fees vary depending on the platform, the type of transaction (fiat or crypto), and your location. Most exchanges don’t charge a deposit fee since they want their users to fund their accounts. Withdrawals also tend to be more expensive than deposits.
- Interest, borrowing, or liquidation fees are charged on margin trading. Some exchanges allow users to borrow additional funds in order to increase their position or leverage. The fees charged depend on the amount borrowed on margin and, in certain cases, whether or not your position is liquidated.
Some exchanges offer discounted fees. Others only charge fees for certain types of transactions, like sales, while leaving other types, such as purchase, free from fees. Remember that even a marginal difference in fees can cause a significant cut into your profits.
Regulations and Taxes
More and more countries and governments are imposing rules and taxes to regulate cryptocurrencies. Before you start using cryptocurrencies, it’s a good idea to research your country’s current laws and tax requirements.
Some governments allow cryptocurrency investments, as with ICOs, but don’t allow their use as currencies. Most countries consider cryptocurrencies as VAT exempt. Others impose a capital gains tax on your earnings. These are just some of the many regulations and tax rules that exist today. Do some research or ask a consultant to help you out so that you know exactly what you are liable for.
Thorough research and analysis will help you make informed decisions when using cryptocurrencies for everyday transactions, as an investment, or for trading. Armed with the right information, you can stay ahead of the curve and be prepared for any extreme market changes.