How to choose one of the 6,000+ cryptocurrencies to trade
Cryptocurrency trading has surged in popularity recently with daily volumes rising to a record $68bn and bitcoin (BTC) hitting an all-time high of £48,699. Traders who previously focused on forex and stocks are now starting to invest in crypto, and for good reason considering the long-term potential of blockchain and digital currencies.
However, selecting a cryptocurrency to trade can be challenging for a first-time investor due to the vast number of options available. There are now more than 6,000 cryptocurrencies, each with their own unique characteristics, features and functions. This is a far cry from 2009 when bitcoin launched and was the only currency.
Before looking at what differentiates each cryptocurrency, it is useful to understand what they share in common. Cryptocurrencies have been hailed as the currency of the future as they are all created and distributed via blockchain, a decentralised ledger, rather than being issued by a central authority such as the Bank of England for the British pound (GBP).
Crypto offers high levels of security and transparency through encryption and has transaction records that are public and unchangeable. Traders use a digital wallet to conduct trades with each other directly and to manage their assets. The peer-to-peer review system is free of third-party involvement, which is one of the reasons why crypto has grown in popularity.
Like stocks and forex, traders buy and sell crypto to make a profit, but the factors that can affect the market are different. Interest rate changes and job reports are not relevant. Crypto traders instead analyse the demand and supply of currencies, regulation and competing currencies. News developments about cryptocurrencies also influence prices.
What makes each cryptocurrency different?
Bitcoin was the very first cryptocurrency and remains the most popular by far, both in terms of volume and price. Bitcoin’s main features are the foundations for all cryptocurrencies, such as peer-to-peer verification and the use of cryptography. The cryptocurrencies that came after bitcoin have looked to address some of the issues with bitcoin or to offer alternative functions.
Ethereum (ETH), for example, was not created to support a new currency like bitcoin, but instead to make it easier for two peers to agree to a “smart contract”. These specific use cases are common for cryptocurrencies. Ripple (XRP) is a payment solution that aims to reduce the time and costs of cross-border, low-value transactions for larger financial institutions.
Meanwhile, bitcoin cash (BCH) highlights how differences in opinion can lead to new cryptocurrencies being made. Some developers were unhappy with the longer transaction times of original bitcoin and opted to create bitcoin cash to increase the speed.
Litecoin (LTC) is another option for traders seeking an alternative to bitcoin. The currency’s founder, Charlie Lee says Litecoin is processed four times faster than bitcoin. He adds: “I think litecoin is targeted more towards payments, faster transactions and lower fees.”
Other currencies have become part of popular culture. Dogecoin (DOGE) was initially created as a “joke” aimed at the high volatility and speculation on crypto when currencies first started becoming popular. It now has a market cap of $85bn despite its relatively simple feature set of being low priced and offering unlimited supply.
How do I choose which crypto to trade?
Trading cryptocurrency is as simple as selecting a broker, opening a brokerage account and buying and selling your currency of choice. If you want to find out whether you should trade cryptocurrency, or opt for another asset-type like stocks, getting advice from a leading financial consultant can help. Reading up on forex and crypto trading before you start your investment journey is recommended.
Selecting a cryptocurrency to buy into doesn’t have to be hard either. Research and analysis are your main tools for finding a currency that is right for your investment needs. Factors you should be considering include the technology behind the currency and how it will perform against other currencies, the price history of the currency and its current value, its supply and demand, and its credibility and reputation.
While it may be best for a new investor to focus on popular cryptocurrencies like bitcoin to begin with, don’t discount new and emerging currencies. The main thing is to learn how the broader market works and to then build a trading plan based around risk management and fundamental analysis. After selecting a trading platform and creating an account, you can then open your first position on a particular currency, monitor it and close it at the right time. The crypto market operates round the clock, so you will have ample opportunity to make profitable trades.