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Trading involves the process of buying and selling assets on financial markets, such as stocks, currencies, bonds, and commodities, as opposed to buying and holding which would fall into the investing category. Achieving success in this field requires a trader to consistently generate profits over longer periods. Below we break down more about trading. 

What is trading?

Trading is the practice of buying and selling financial instruments with the intention to make a profit. These instruments come in many forms, from stocks and bonds to cryptocurrencies, with each asset having its own unique value that can rise or fall at any given time. Trading revolves around capitalizing on the price fluctuations of financial markets to sell at a higher price.

These financial assets will trade within certain markets, for example, currencies are traded on the forex market while stock trading involves buying stock on the stock market. The stock market is made up of plenty of stock exchanges around the world, from the Hong Kong Stock Exchange to the New York Stock Exchange. There are over 17,000 financial assets that one can trade across various markets, which we'll touch on below. 

With soaring inflation rates across the globe, many have turned to investing as a means to more effectively reach their financial goals. 

How does trading work?

Trading involves entering a market by buying an asset. When the market prices increase, you can sell the asset for a profit, while if the market prices decline, you can either sell your asset and make a loss, or hold onto it until the market improves. 

Market prices are typically influenced by supply and demand. Demand will drive prices up as more people are looking to buy the asset and are willing to pay higher prices. When there are more sellers than buyers the demand decreases and the prices will go down. 

The two most popular options for trading involve buying and selling assets through an exchange or OTC (over the counter). OTC trading involves two parties (traders and brokers) agreeing on a price to buy and sell the asset.

An exchange on the other hand will determine the prices for you and sell them in a more structured sense. Some investors will use a brokerage account to manage their investments through an exchange. 

Whether you are trading stocks or dabbling in forex trading, the process of buying and selling remains consistent.

Types of assets one can trade

As mentioned above there are plenty of financial assets available to trade. Below we break down the most popular options, with a brief explanation of what they are.

Stock trading

Stock, also referred to as equity, is a share in a company that provides the holder with factual ownership in the company it represents. Trading stocks is a popular online trading option that involves the process of buying and selling stocks.

Forex

Forex stands for foreign exchange and involves the trade of two different fiat currencies. Currency trading is done in pairs, where buying one indicates that you expect it to increase. 

Bonds

A bond is a form of security in which the issuer (typically a company or government) owes money to the holder and has an obligation, according to its conditions, to repay both the interest as well as principal at the agreed-upon date.

ETFs

ETFs or exchange-traded funds are investment instruments that track the price of underlying assets. These are baskets of shares, bonds, or commodities, potentially lowering one's risk and exposure. 

Cryptocurrencies

Cryptocurrencies are digital assets that can be traded on exchanges or peer-to-peer marketplaces. Cryptocurrencies are decentralized meaning that they are not controlled by financial institutions or governments. They are known to have short-term price fluctuations.

Index Funds

Indices measure the performance of a group of stocks as opposed to trading individual stocks. Different indices track different groups of shares which can be categorized by location, industry, sector, or entire stock exchange. 

Commodities

Commodities are raw goods typically broken down into four categories: metal, energy, livestock and meat, and agricultural. These are traded on various markets, typically through futures contracts. A trader will generally not get involved with the physical purchasing of the goods.

Stock market vs forex market

Investing in stock trading and investing in the foreign exchange (forex) market are two distinct forms of trading. Both provide investors with profit opportunities, but there are key differences between the two markets.

The stock market is a collection of exchanges where publicly traded company stocks, bonds, and other securities are bought and sold. On the stock exchange, buyers and sellers come together to negotiate prices. The foreign currency market, or Forex trading, is an electronic over-the-counter financial trading market made up of banks, brokers, institutions, and individual traders. It trades in currency pairs, such as US Dollar/Euro or Japanese Yen/US Dollar.

Though both investing channels offer potential profit, there are differences between the two. Stock trading requires a large sum of capital to start trading, while Forex often requires much less. In addition, stock trading deals in smaller amounts than Forex trading and has higher commissions and fees associated with it.

The stock price is also subject to strong volatility and can change quickly. On the other hand, Forex trading is a 24-hour market and trades in large amounts with much less volatility.

It's important to understand the differences between the two markets before deciding which one is right for you. If you're looking for long-term investments that require less capital, then stocks may be the best choice. But if you're looking for a more liquid market with a higher profit potential, then Forex trading might be the better option.

4 different ways to trade

Trading isn't a "one size fits all" solution; there are various methods of trading the markets that you can adopt, with some being simpler than others. If you want to identify which approach is right for you, take some time to read these guides on the major types of trading and build trading strategies that make financial sense to you and your personal finance goals.

1. Day Trading

Those familiar with the stock market are likely acquainted with day trading, a term used to define active trading. Day traders buy and sell assets within one business day– hence its name – in an effort to capitalize on short-term fluctuations for profit. When stock trading no positions are held overnight. 

Day trading allows traders to immediately take advantage of market volatility, offering a fast-paced method of trading. The downside, however, is that it requires more time, knowledge, and attention and will likely incur more transaction fees for each trade executed.

2. Position Trading

For some, position trading is merely a buy-and-hold tactic and not considered active trading. Position traders rely upon long-term charts (from daily to monthly) in tandem with additional methods to recognize the market's current direction. This kind of endeavor usually lasts anywhere from several days up to weeks or even months depending on the trend's duration.

These traders aim to capitalize on the ups and downs of market fluctuation by seeking out successive higher or lower highs. Instead of attempting to accurately predict prices, they aim to identify which direction the trend is headed to ride it as an opportunity for growth. Thus, trend traders look at trends rather than levels when making their decisions.

Traders that follow current trends usually enter the market after it has been established and quickly exit when a trend breaks. During times of high volatility, this trading strategy can be difficult to execute properly.

To successfully engage in position trading, one will need a strong understanding of technical analysis as well as patience. 

3. Swing Trading

When the trend shifts, swing traders tend to jump into action. Often when one trend ends there is an inherent level of price movement as a new pattern starts to emerge. During this period, swing traders will take advantage and buy or sell depending on which direction they anticipate the market may go in next.

Typically these swings are held for longer than just a day but are still shorter-term compared with trend trading that can last weeks or even months at a time. Swing traders typically use technical analysis or fundamental calculations.

Swing-trading algorithms are created to determine when it is opportune for investors to purchase or sell an asset. Without needing to precisely predict the peak or fall of various price movements, swing trading aims to rather identify whether the market is moving either up or down.

Range bound or sideways markets can pose a great danger as they provide no potential gains for swing traders. Requiring less time and attention to day trading, swing trading has a higher potential for larger returns, as well as larger losses. 

4. Scalping

Active traders frequently use scalping as a speedy method to capitalize on bid-ask spreads that differ from the norm. These discrepancies arise due to temporary differences in supply and demand, enabling savvy investors to benefit from them swiftly.

Scalpers don't look for big profits from large price movements or execute high volumes of trades. Instead, they strive to benefit from small moves that happen frequently and at manageable trading amounts. As the level of gain per trade is limited, scalpers search for liquid markets so their transactions can be made more often.

In contrast with swing traders who favor volatile markets where there are quick shifts in values, scalpers lean towards quiet trading conditions that aren't susceptible to abrupt changes in prices.

Scalping does not require strong technical understanding and generally holds less risk due to using less volatile assets. This style of trading does however require high upfront capital and can be very time-consuming. 

Trading vs investing 

Trading and investing are two distinct strategies with different objectives. Trading involves buying low and selling high or selling high and then buying low, usually in a short to medium-term timeframe. This strategy allows traders to make money without taking ownership of the assets they buy or sell. 

On the other hand, investors take possession of their assets for an extended period so that they can benefit from their long-term growth potential, which may result in higher returns than trading activity does over time.

Investors can also receive dividends from trading shares if granted by the company as well as having shareholder voting rights. 

In conclusion

Trading is the buying and selling of financial instruments such as stocks, bonds, mutual funds, currencies, commodities, derivatives, and other assets in order to benefit from price movements. It involves analyzing markets and making decisions based on fundamental and technical analysis.

Here we discuss what dividends are and how they work so you can make informed decisions when investing in dividend paying stocks. As a company, regular dividend payments create an incentive for shareholders to remain invested and keep the business growing, while for investors a dividend payment can increase the overall ROI and provide additional income streams. Learn the difference between stock dividends and cash dividends below.

What is a dividend?

Dividends are a way for companies to share their profits with shareholders. When a company earns profits, it can choose to distribute those profits back to its shareholders in the form of dividends. Dividend payments are typically made in cash and are usually paid out every quarter or semi-annually. Dividend paying companies can also choose to pay stock dividends, which is essentially dividend income paid out in shares.

By investing in dividend paying stocks, investors have the potential to earn regular income from their investments as well as benefit from capital appreciation when stock prices rise.

Dividend paying stock and the stock exchange

Investors in the stock market can earn returns in two ways, one is through an increase in the stock price from when they purchased it, and the other is through dividends. A company can decide whether they pay out dividends or not, and it's worth noting that not every company on the stock market does pay out dividends. The ones that do are typically mature ones. 

Companies might instead decide to use the profits to reinvest in the company, hire new employees, or expand their business. Start-ups and newer companies are more likely to take this approach as their goals are more aligned with growth. 

These payments are made in cash and generally occur at regular intervals, be it quarterly or annually. The amount per share, and when and how often dividends are paid out are determined by the company's board of directors.

Why a company might pay dividends 

When a company is profitable, it might do one of these three things with its profits:

• pay off debt
• chase a growth opportunity by reinvesting the money into the business
• pay dividends to their shareholders, attracting new ones and rewarding current ones

Companies pay dividends to reward their shareholders, generating a steady income stream, and increasing the overall value of their stock. Additionally, dividend payments can be used to attract new investors and signal financial strength. Only profitable companies will pay out dividends, and typically ones without significant debt. 

Stocks that pay dividends

Whether a company pays dividends is directly related to its goals and priorities. As mentioned above, younger companies typically use profits to reinvest in the business as the current goal is growth, while more mature, established companies opt to reward (and attract) shareholders. 

Growth stocks

Companies looking to capitalize on growth opportunities might make the wiser move by reinvesting their earnings instead of offering dividends to shareholders. 

Let's use retail as an example. If a company has just released a new product, it'd likely benefit more from hiring additional salespeople who can promote it than partaking in payouts for investors. In doing so, this allows the business to seek out maximum returns and drive the stock price up instead of giving away potential gains prematurely.

Mature stocks

As companies reach their peak and shift to a sustaining stage, they are more likely to prioritize dividend payments for shareholders over investing any additional funds into growth. 

Ultimately, leaders must determine what is best for the company's shareholders depending on its size and age: paying dividends, funding development opportunities, or debt reduction. The ideal choice depends heavily upon the organization’s state of expansion as well as other considerations.

Mutual funds and ETFs

Investors in mutual funds and exchange-traded funds can also tap into dividend income provided that the stocks pay dividends. These are typically paid out on an annual basis, however, this will be determined by the shareholder's brokerage account.

Timeline of dividend payouts

Whether a company pays out dividends at regular intervals or on a once-off basis, below are several dates to note with regard to the when and how of these payments. From the declaration date to the ex-dividend date to the payment date, these all play an important role for investors looking to benefit from dividend yield.

• The Declaration Date

When the Board of Directors announces the value, record date, and payment date for the upcoming dividend.

• Ex-Dividend Date

The ex-dividend date is the final date by which you can buy the stock and earn dividends. If you purchase stock after the ex-dividend date you are not liable to receive dividends. Stock purchases can sometimes take two days to clear so ensure that you do so at the right time. 

• Record Date

The date that you need to be an official shareholder in order to receive dividends. If your stock purchase is not settled by this date you are not liable for the payouts. The record date is typically one date after the ex-dividend date.

• Payment Date

When payments are made to all registered shareholders (as of the record date). Depending on the preferences specified in your brokerage account, the dividend could either be credited to you as cash (cash dividends) or reinvested back into the issuing business, distributed as stock dividends. 

How dividend payments can affect the share price

Due to dividends being paid out by profitable businesses, when a business does pay out dividends this sends a signal to the market that the business is doing well and could drive the stock price up. However, it could have the opposite effect too, driving the price down when there is no dividend payout. 

• when dividends drive the stock price up

Dividends can be a celebration of a company's profits and act as rewards to shareholders for investing in the company. This makes the stock more attractive to investors looking to earn passive income and will ultimately drive the price up. 

• when dividends drive the stock price down 

Companies generally pay dividends only when they are assured that the rate of return can be sustained, thanks to reliable profits. Therefore, if a company announces any reduction in this rate of dividend payment, it is likely because their business is encountering certain difficulties, sending out a negative signal instead.

In conclusion: what is a dividend payment?

A dividend is a payment that companies make to their shareholders, usually in the form of cash or stock. It's a type of reward for investors who have held onto the company's shares for a certain period of time. Usually companies pay dividends on a quarterly basis, often based on a portion of the company’s profits.

Because dividends are usually paid in cash, they can be a great source of income for investors. This extra income comes with less risk than other types of investing, which makes them attractive to many people who are looking for reliable returns on their investments. Dividend stocks also tend to outperform the overall stock market.

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Public and private keys are integral to the use of cryptocurrencies. They not only allow people to send and receive cryptocurrencies but also to maintain the security and ownership of the funds. Private and public keys are generated when one creates a digital wallet.

What is a private key?

Every cryptocurrency wallet consists of a public key and a private key. Anyone can deposit cryptocurrency into a public address (public key), but no one except the owner of the corresponding private key can remove funds from that same account.

A private key, also known as a secret key, is a random string of numbers and/or letters used to protect one's cryptocurrency wallet and receive crypto transactions, similar to a pin code for a bank account. Private keys prove ownership of one's wallet address, protect it from unauthorized access and theft, and are used to sign transactions on the blockchain. 

Private keys are used in conjunction with an algorithm to encrypt or decrypt data. The holder of the private key should be the only one who knows it, as this secrecy is what gives the private key its power. The golden rule is to keep your private key safe.

Private key vs public key

Public and private keys are mathematically linked to each other and relevant to only one blockchain wallet. A public key can be compared to your traditional bank account while the private key is akin to the pin code to access this account. 

Users would share the public key with anyone looking to transfer funds to their crypto wallet, however, under no circumstances should your unique private key ever be shared with anyone. It is also strongly recommended that one stores their private key offline in a safe space, and not on a desktop or accessible location (in the event of a hack).

When one loses their private key, whether lost or maliciously taken, they will lose access to their crypto funds. Due to the decentralized nature of cryptocurrencies, there is no support line or central authority that can access that information.

This is where exchange wallets come in handy as the account is created using an identity that once verified can gain access to the funds. This is known as a custodial wallet where the platform holds the private keys for you and allows you to access the funds through a user-generated password. When it comes to storing private keys, this is the most convenient option, however, if you use an untrustworthy platform that increases your risks greatly. It is strongly recommended to enable two-factor authentication when using this option.

How do private keys work?

A public key is generated using complicated mathematics by your private key, ensuring they form a matched pair. These digital keys are created when one creates their crypto wallet on a particular blockchain. 

After being generated, a private key must be stored in a secure location, ideally offline. Furthermore, private keys can have an extra layer of security by being password-protected, encrypted or hashed, ideally all three.

The owner of the public key will use the private key to encrypt the digital signature when making a transaction. 

A transaction is encrypted using a public key and can only be decrypted by using the matching private key. Therefore, when someone sends a transaction they will need their private key to decrypt and prove they own the funds being used in this transaction. 

The private key is used to sign the transaction, which verifies that the transaction hasn't been modified. A digital signature is created when someone combines their private key with the data that's being sent as part of a transaction. 

Once the transaction has been executed the nodes on the network will check and authenticate the details of the transaction and if any information is incorrect the transaction will be rejected. Once executed transactions cannot be reversed. 

Where should you store your private key?

Your private keys are essentially your passwords, so it's of utmost importance that you keep them safe.  Your best bet is to store them offline somewhere safe. This might mean written on a piece of paper, stored on an offline device, or kept in a password manager.  As mentioned above, public keys can be stored anywhere and shared with anyone.

To avoid the hassle and stress of ensuring the safety of your private keys at all times, you can use a hot wallet supplied through a reputable exchange. If you choose to take this route ensure that the crypto platform is regulated and adheres to stringent security measures. The Tap app ticks these regulatory boxes and ensures that customers have full access to their funds at all times, without the risk of losing them if they lose their private keys. 

In conclusion

Private keys are digital passwords used to establish one's ownership in a crypto wallet and are created in conjunction with the public key of the same wallet. One should never share their private keys with anyone. 

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Since the debut of Bitcoin in 2009, central banks have been living in fear of the disruptive technology that is cryptocurrency. Distributed ledger technology has revolutionized the digital world and has continued to challenge the corruption of central bank morals. 

Financial institutions can’t beat or control cryptocurrency, so they are joining them in creating digital currencies. Governments have now been embracing digital currencies in the form of CBDCs, otherwise known as central bank digital currencies. 

Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country's fiat currency, acting as a digital currency version of the national currency. CBDCs are created and regulated by a country's central bank and monetary authorities.

A central bank digital currency is generally created for a sense of financial inclusion and to improve the application of monetary and fiscal policy. Central banks adopting currency in digital form presents great benefits for the federal reserve system as well as citizens, but there are some cons lurking behind the central bank digital currency facade.

Types of central bank digital currencies

While the concept of a central bank digital currency is quite easy to understand, there are layers to central bank money in its digital form. Before we take a deep dive into the possibilities presented by the central banks and their digital money, we will break down the different types of central bank digital currencies. 

Wholesale CBDCs

Wholesale central bank digital currencies are targeted at financial institutions, whereby reserve balances are held within a central bank. This integration assists the financial system and institutions in improving payment systems and security payment efficiency. 

This is much simpler than rolling out a central bank digital currency to the whole country but provides support for large businesses when they want to transfer money. These digital payments would also act as a digital ledger and aid in the avoidance of money laundering.

Retail CBDCs

A retail central bank digital currency refers to government-backed digital assets used between businesses and customers. This type of central bank digital currency is aimed at traditional currency, acting as a digital version of physical currency. These digital assets would allow retail payment systems, direct P2P CBDC transactions, as well as international settlements among businesses. It would be similar to having a bank account, where you could digitally transfer money through commercial banks, except the currency would be in the form of a digital yuan or euro, rather than the federal reserve of currency held by central banks.

Pros and cons of a central bank digital currency (CBDC)

Central banks are looking for ways to keep their money in the country, as opposed to it being spent on buying cryptocurrencies, thus losing it to a global market. As digital currencies become more popular, each central bank must decide whether they want to fight it or profit from the potential. Regardless of adoption, central banks creating their own digital currencies comes with benefits and disadvantages to users that you need to know. 

Pros of central bank digital currency (CBDC)

• Cross border payments
• Track money laundering activity 
• Secure international monetary fund
• Reduces risk of commercial bank collapse 
• Cheaper
• More secure
• Promotes financial inclusion

Cons of central bank digital currency (CDBC)

• Central banks have complete control
• No anonymity of digital currency transfers
• Cybersecurity issues 
• Price reliant on fiat currency equivalent 
• Physical money may be eliminated 
• Ban of distributed ledger technology and cryptocurrency

Central bank digital currency conclusion

Central bank money in an electronic form has been a big debate in the blockchain technology space, with so many countries considering the possibility. The European Central Bank, as well as other central banks, have been considering the possibility of central bank digital currencies as a means of improving the financial system. The Chinese government is in the midst of testing out their e-CNY, which some are calling the digital yuan. They have seen great success so far, but only after completely banning Bitcoin trading.

There is a lot of good that can come from CBDCs, but the benefits are mostly for the federal reserve system and central banks. Bank-account holders and citizens may have their privacy compromised and their investment options limited if the world adopts CBDCs.

It's important to remember that central bank digital currencies are not cryptocurrencies. They do not compete with cryptocurrencies and the benefits of blockchain technology. Their limited use cases can only be applied when reinforced by a financial system authority. Only time will tell if CBDCs will succeed, but right now you can appreciate the advantages brought to you by crypto.

Looking to maximize profits and minimize risk in crypto investing? These top 6 crypto investing strategies will help you manage your portfolio and navigate the markets effectively. Whether you're a new or experienced investor, understanding these cryptocurrency investment strategies is crucial. Just like stocks and bonds, crypto investments require a solid strategy tailored to your unique needs. 

Be sure to outline your investment objectives, investing style, and long-term investment strategy before getting started. Let's explore the essential strategies for navigating the dynamic crypto market.

Top cryptocurrency investment strategy

Here are the best of the best when it comes to deciding on a crypto investment strategy.

Look to liquidity

When it comes to investing in the crypto market, liquidity is crucial. Liquidity looks at how readily an asset can be converted into cash while still preserving its value. The term "liquidity" refers to whether traders can enter or exit a trade at a specific price point. Bitcoin, for example, has the greatest liquidity of any cryptocurrency in the marketplace. 

Traders must be able to enter and exit positions quickly to keep up with the volatile crypto market. This implies that there must be both supply and demand for the cryptocurrency, allowing market participants to buy at a good price while still making a profit when they choose to sell.

Trading volume and how much a cryptocurrency has recently been bought and sold for, as well as investors' overall interest in the asset, can be useful when measuring an asset's liquidity.

Embrace volatility

The crypto market is notorious for its price fluctuations, but it's also known for its downturns. Volatility in crypto may be advantageous for traders who take advantage of these price fluctuations, but it can be challenging for long-term investors.

Although cryptocurrencies are a new asset, there is still a lot of hype and speculation surrounding it, which may lead to heightened volatility. While big price swings are typically considered a hazard, day-to-day volatility is common in the cryptocurrency market and can be an opportunity to make money.

Volatility is beneficial for cryptocurrency trading, but it's vital to understand your risk tolerance as an investor before diving in. It's also critical to keep a close eye on what's going on in the market by reading news items, blockchain updates, and historical charts regarding your positions.

Crypto market 101: only invest what you can afford

Possibly the most important crypto investment strategy: the golden rule of value investing is never to invest more than you're willing to lose. If you can't afford to lose all of your cryptocurrency investment, you can't afford to take the chance of investing in that currency.

In the cryptocurrency market, when establishing your risk tolerance you need to consider how much money you make and your current risk profile. And remember, outlining your investment objectives is as important as understanding your risk tolerance when you start investing.

When building your cryptocurrency investment strategy, Yubo Ruan, CEO and founder of Parallel Finance advises: "A person new to crypto should consider around 5% of their income to the crypto market, a crypto enthusiast should look for around 10% of their income allocated to crypto, and a DeFi expert or trader should probably consider 20% or more to crypto."

Consider a dollar-cost averaging approach

Traders can also look at incorporating a dollar-cost averaging into their cryptocurrency investment strategy. This involves making small regular investments instead of diving into a lump-sum investing strategy. Ideal for a long-term investment strategy, dollar-cost averaging is a very straightforward investment strategy, used across many markets.

Instead of trying to time the market and buy at the perfect moment or lump-sum investing, you invest a fixed amount of money regularly over time. This approach allows you to buy more digital currencies when prices are low and fewer digital currencies when prices are high.

By consistently embracing dollar-cost averaging over the long term, you can potentially reduce the impact of short-term market volatility and benefit from the average price over time. It's like taking small steps forward consistently, regardless of how the market is behaving, with the goal of growing your crypto investment gradually and building wealth over the long run.

Don’t be shy to take gains regularly

According to experts, investors should take profits from their crypto investment on a regular basis. When it's time to cash out, many crypto investors are confronted with the immediate decision of whether a cryptocurrency's price will fall or rise in the coming hours/days, experts, however, advise taking profits using a solid strategy.

While hodling (buying and holding for an indefinite amount of time) is a solid investment strategy, there are other ways you can maximize your profits. Consider selling a portion of an asset when the price is high, placing the funds in a stablecoin, and then repurchasing it with those same funds when the price drops again. This crypto investing strategy allows you to sell high and buy low, without using all your holdings.

Diversification crypto investing strategy

You know the saying “Don’t put all your eggs in one basket”. Well, when it comes to your crypto portfolio (and investment strategy) this couldn’t be more true. Building a reliable and profitable portfolio will require incorporating several different coins and crypto projects. Always do your own research before investing in digital currencies and be sure to adhere to an appropriate asset allocation for your risk tolerance.

Traders might like to create variety by investing in a number of established digital currencies as well as DeFi projects, coins associated with the Internet of Things (IoT), or non-fungible tokens (NFT). Diversification allows cryptocurrency investors to invest in both low-risk and high-risk assets. Diversification is also a favourable tool when engaging in cryptocurrency trading.

Trade with confidence

Another important element to consider when plotting your crypto investment map is where to keep them. Ensure that you store your cryptocurrencies in a safe location, preferably on a regulated platform that holds insurance. 

While the markets might be down, some crypto assets have proven over the years to be high performers, so consider this a beneficial time to accumulate “low-priced” digital assets. Follow these 6 crypto investing strategies above and reap the benefits down the line.

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If you're looking to tap into the world of earning passive income in the cryptocurrency space, you've come to the right place. While both yield farming and staking provide this service, they offer slightly different means of getting there. In this article, we're exploring yield farming vs staking, and how to get started. 

Both yield farming and staking fall under the DeFi (decentralized finance) umbrella. This aspect of the industry allows users to lend and borrow cryptocurrencies, similar to the traditional banking system. DeFi lending platforms and liquidity pools provide users with an alternative way to earn passive income, offering varying interest rates and methods of doing so. 

What Is Yield Farming?

Yield farming involves users lending their tokens to DeFi lending platforms. Investors can decide which cryptocurrencies they would like to use, and where they would like to invest their funds. The options range from lending platforms like Compound and Aave to decentralised exchanges (DEXs) like PancakeSwap and Uniswap. 

On a lending platform, the process typically involves a user depositing their funds on the platform, receiving both an APY (annual percentage yield) and tokens native to the platform. 

On DEXs, this alters slightly in that users need to provide one of the pair of coins as per the liquidity pool they wish to engage in. Users will then receive a percentage of the rewards of the pool based on the amount provided.

Passive income from yield farms comes from the interest paid to the borrower or the users of the liquidity pool. Yield farming is considered to be a more reliable option than trading cryptocurrency as yield farming uses smart contracts or automated market makers (AMM) to facilitate all trades. Top yield farms can be found on Ethereum, Polygon, Binance Smart Chain (BSC) and Fantom.

What Is Staking?

Staking involves locking your cryptocurrencies in a smart contract. In order to properly understand staking one will need to have a brief understanding of the Proof-of-Stake (PoS) consensus. 

While Bitcoin uses a Proof-of-Work mechanism to validate transactions through miners solving computational problems, PoS instead uses a less energy-intensive mechanism based on validators staking their cryptocurrency and generating new blocks. This is typically done in a selective process, with each validator getting a turn based on the amount that they stake. By staking in the network the validators are providing collateral to prove they are not bad actors. Ethereum is currently moving to a PoS consensus, with several other big cryptocurrencies already there.

To earn a passive income through staking users can opt to become validators on a network or participate in liquidity pools, alternatively, they can do so through a wallet or exchange that supports such activities. Pools vary in their conditions, lock-in periods (the amount of time the funds are required to stay there) and APYs.

As each staking process changes from cryptocurrency to platform, ensure that you do thorough research on the one you wish to take part in. Here are a few of the top staking coins: Ethereum (ETH), Cardano (ADA), PancakeSwap (CAKE), and Polygon (MATIC). 

Yield Farming vs Staking

While both offer excellent means of earning a passive income in the crypto space, the main difference is that yield farming involves depositing one's funds onto a DeFi platform while staking typically involves using one's funds to support a blockchain network or help validate transactions. 

Profits

Staking usually yields profits of around 5% and is expressed with a definite APY. Yield farming on the other hand can provide up to 100% returns but will require a well throughout investment strategy. 

Rewards

Staking rewards are given to validators as incentives for generating new blocks while yield farming rewards fluctuate with the token's price changes and are determined by the liquidity pool. 

Lock-In Periods

Some staking pools require users to lock in their funds for a certain period of time, often also stipulating a minimum amount. Yield farming does not require either of these. 

Security

Staking criteria are determined by the network and tied to the blockchain's consensus, users staking their funds are only at risk of losing them if they have ill intentions or act badly. Yield farming is less secure in that it relies on smart contracts and DeFi protocols, which can be susceptible to hackers if not created correctly.

Which Is Better: Yield Farming vs Staking?

Both yield farming and staking provide options in which one can earn passive income in the crypto space. While each has its advantages and disadvantages, the one offers a safer course while the other a more high-risk high reward endeavour. When it comes to deciding between the two, users should first establish how much risk they are willing to take and how comfortable they are in the DeFi space, followed by what kind of investors they would like to be.

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