A cryptocurrency is a virtual currency used as a medium of exchange. Since it’s intangible and secured by an encrypted peer-to-peer network, it’s almost impossible to counterfeit or double-spend. Additionally, cryptocurrencies are immune from government interference, primarily because they aren’t issued by a central authority.
The most attractive features of cryptocurrencies are their transparency, immutability and decentralisation. One of the most well-known examples is Bitcoin, invented back in 2008. Other popular options include Litecoin, Ethereum and Ripple, hailed as one of the top ten cryptocurrencies in 2020.
Over the last few years, cryptocurrencies have become a global phenomenon. Many crypto exchanges and markets have since emerged, turning the trade of non-fiat money into the new norm.
So, what exactly is cryptocurrency trading, and how does it work? Keep reading to find out the answers to these questions and more.
What is Cryptocurrency Trading?
By definition, cryptocurrency trading refers to buying and selling cryptocurrencies through an exchange or speculating on price movements through a CFD (contract for difference) trading account. It’s similar to forex trading, where currencies from across the world are traded against one another.
CFD Trading with a Broker
If you use a forex broker, you’re purchasing a contract for difference. CFDs allow you to speculate on markets without having to buy and sell the specific asset. When you trade a CFD, you agree to exchange the price difference from the start of the contract until the end.
The primary benefit of CFD trading is that you can theorise on price movements in any direction. In other words, the profit or loss you make depends on whether or not your prediction was accurate.
If you buy a cryptocurrency, it means you’re going long, since you believe the value will increase. On the other hand, if you go short, it means you think the price will fall and so you choose to sell. Both of these options are leveraged, and you only need to put up a minimal deposit to access the market.
Trading Via an Exchange
To trade in cryptocurrency directly, you can use an exchange. If you decide to purchase cryptocurrencies this way, it means you’re buying the actual coins. Thus, you’ll have to set up an exchange account, put up the price of the asset, and store the coins in your virtual wallet until you’re ready to sell.
This form of trading can be challenging, as it requires a keen sense of technology and data analysis. Additionally, many exchanges impose limits on deposit amounts, while certain accounts can be somewhat costly to maintain.
How Cryptocurrency Trading Works
Cryptocurrency trading is similar to forex, and you can purchase cryptocurrency with British Pounds. Then, you can trade using one of the two methods we outlined above. Generally, most traders choose to use exchanges since a CFD doesn’t give you ownership of the asset.
To begin trading cryptocurrency, you first need to pick a reputable exchange. In the UK, the most popular options include eToro, CoinJar, and Coinbase, but you can use any platform you like. Additionally, if you want to trade in Bitcoin, you’ll need a Bitcoin wallet before you can transact. Once you’ve signed up at an exchange, you can start buying and selling cryptocurrencies.
You can compare the mechanics of cryptocurrency trading to stock market trading. Here, willing buyers and sellers post their orders at specific prices and quantities. Furthermore, all profits and losses are only final when the exchange event concludes.
The Risks of Cryptocurrency Trading
Cryptocurrencies are one of the most volatile financial investments, specifically in the short-term. It’s possible to lose a lot in a short period, but there’s also the potential to make a significant profit. However, the outcome largely depends on your knowledge and decision-making skills.
To limit your risk, you can diversify your portfolio by trading in more than one cryptocurrency. However, it’s crucial that you start slowly and take your time building up a stable position. If you’re just starting, it’s best to trade with a limited amount of funds and keep most of your money safe.
While this strategy can decrease your profits, it also lowers your losses, allowing you to continue trading in cryptocurrency. You’ll come out wiser and have more experience the next time you make a trade. Lastly, ensure that you have a solid understanding of CFDs and cryptocurrency trading before making any significant financial decisions.