What is Cryptocurrency Trading

Posted by Harry Johnson Jan 05, 2021

Online trading has become a major center of attention due to the current situation prevailing in the world. With a global lockdown in place, people are diverting their attention towards online businesses and other earing means.

Cryptocurrencies have become a huge part of the trading market because of their popularity and value. This value is owed to the revolution of the blockchain technology and the advantages it offers. Blockchain is a digital ledger which holds the record for every cryptocurrency transaction ever made. So, it is only natural that many people want to trade cryptocurrencies and many brokers offer the ability to do so.

Cryptocurrencies speculation is not done directly but through a CFD. If you want to trade the currency directly, you can do so using an exchange. Now the big question is what is CFD crypto trading? We will discuss this in detail in this article.

What is Cryptocurrency Trading

Cryptocurrency trading is done by speculating on the price of a cryptocurrency using a CFD trading account. We have established this fact already but how does cryptocurrency CFD trading actually work? CFDs are derivative contracts that allow you to speculate on the price of the underlying currency without actually owning the currency. This allows you to proceed with the trade by only making a small deposit compared to the full price of the trade because these are leveraged products. However, your profit or loss is calculated at the full price of the trade.

Cryptocurrency investing has seen a major rise in popularity and if you feel like that you need to own the crypto coins yourself, you can do so using an exchange. For this purpose, you will need to make a deposit of the full price of the asset and store the currency in your own blockchain wallet. This is a pricier way of crypto trading as not only you will need to make a deposit for the full size of a trade but also the exchange accounts are rather pricy to maintain in themselves and there is also a limit present on the amount of deposit that you can make at a time.

Cryptocurrencies Analysis

Now that we know how to trade cryptocurrencies CFDs and what are cryptocurrency exchanges, we will take a look at some important aspects of cryptocurrency trading that are necessary to understand if you want a profitable trading experience.

Cryptocurrency Market

Cryptocurrency market is unlike traditional currency markets. It is decentralized which means that there is not central authority that overlooks the movement of cryptocurrencies, how they are issued and their transactions. Instead, cryptocurrencies use the blockchain technology where every person and computer are part of a vast network chain. Cryptocurrencies are present as a record of ownership which is present on the blockchain along with the record of every crypto coin traded or mined.

When a cryptocurrency is sent form one user to another, it is not considered complete until someone from the network verifies the transaction. This process is called mining. Mining is also how new cryptocurrency tokens are introduced into the blockchain.

Since cryptocurrencies do not have a central authority, they are not affected by the traditional factors which affect other currencies around the world, but there are a number of different factors which affect cryptocurrencies.

  • The ease of implementation of cryptocurrency technology into the existing financial infrastructure such as online transactions and e-commerce.
  • New regulations, security issues or other financial setbacks.
  • Supply and Demand of the currency. The total number of coins present and how many new ones are being introduced or lost.
  • Market capitalization of the cryptocurrencies.

Cryptocurrency traders should keep a close eye on these aspects if they want their trading to go smoothly.

Spread in Cryptocurrency Trading

Spread is the difference between the buy and sell prices, which are offered for a cryptocurrency. These are the amounts that you will need to deposit if you want to open a long or a short position respectively in a cryptocurrency.

Similar to other financial markets, when you start trading cryptocurrencies, you are presented with two prices. If you are looking for a long position, you will trade at the buy price which will be slightly higher than the market price and on the other hand you can open a short position at a lower-than-market price, called the sell price.

Lot in Cryptocurrency Trading

A lot is a batch of cryptocurrency. Owing to the volatility of the crypto coins, they are often trade in lots. To avoid some major losses due to the highly volatile nature of the cryptocurrencies, these lot are very small for highly valuable currencies, for example the lot are very smaller in size for bitcoin CFD trading. However, there are some low-valued currencies which are traded in bigger lots.

How to start trading cryptocurrencies

Leverage in Cryptocurrency Trading

Leverage gives you the ability to trade with large amounts of a cryptocurrency without actually having to pay the full price of the trade. You only make a small deposit which is usually a fraction of the price of the full trade. This deposit is known as a margin which we will discuss later.

This means that you will not own the currency itself but can trade with it. Leverage is a good way to trade with currencies without paying the full price but the final profit will be calculated at the full price of the trade. This means that leverage will magnify your profits but the down side to it is that in case of a loss, that loss is magnified as well.

Margin in Cryptocurrency Trading

Margin is an extremely important aspect of leveraged trading. It is the smallest deposit that is to be made to keep a leveraged trading position open. When you are trading leveraged cryptocurrencies, the amount of margin changes depending upon the broker you are using and the currency you are trading in.

Margin is mostly represented as a percentage of the total amount so for example a 10% margin on a trade with a full value of $10,000 means you will only need to deposit $1,000 to start the trading position instead of the full price.

Pip in Cryptocurrency Trading

A pip is a unit of measuring movement in the price of the cryptocurrency and it refers to one-scale of movement at a specified level. If the cryptocurrency has a high value, they are usually traded directly against dollar, so one pip will correspond to one dollar. So, if the currency goes from $100 to $101, it means it moved up by a single pip. However, for low value currencies, a pip can be a cent or even some fraction of a cent.

It is advised to do a complete research on the cryptocurrency you are planning to trade and your chosen broker before doing any actual trading.

author

Harry Johnson

Successfully passed the internship at the United States Department of the Treasury. Discovered trading at the university.