- What is a cryptocurrency?
- What is Blockchain?
- Quick Look: Best Cryptocurrency Trading Platform
- What is mining?
- Stay updated
- What are Wallets?
- Trading Crypto CFDs
- What Cryptocurrencies Should You Trade?
- How Does Cryptocurrency Trading Work?
- How to Choose the Best Cryptocurrency Trading Broker Online
- How are cryptocurrencies different from regular currencies?
- How many Cryptocurrencies are there?
- Why Trade Bitcoin & Digital Coins?
- What To Look for in a Broker?
- Top Best Cryptocurrency Exchanges in 2019
Cryptocurrency trading works in much the same way as classic Forex trading with three significant differences.
Due to the extreme volatility of the cryptocurrency market:
- Leverage is much lower (the maximum is often 1:10 or similar) and
- Spreads are much wider (often in the range of 25-35 pips).
This is to protect brokers and traders from the wild swings often prevalent in the crypto market.
- The cryptocurrency market operates 24/7, as it does not rely on large financial institutions for liquidity.
Traders and brokers both know there is money to be made on cryptocurrencies, so brokers have adapted their trading platforms and customer support hours to provide a genuine crypto CFD trading experience.
What is a cryptocurrency?
A cryptocurrency is a digital currency with no asset or national backing.
They can be used to make payments or make investments and are more commonly accepted all the time.
Cryptocurrencies are ‘mined’ using computers, once mined the new unit of currency is added to a blockchain – a public ledger of transactions. This is very different from traditional currencies, which are minted by a federal bank.
Cryptocurrencies have a theoretical limit on the number of coins that can be created. As long as there is a demand, this supply limit allows them to hold their value, and they can be viewed as an investment vehicle.
There are dozens of cryptocurrencies, but the most liquid and widespread are Bitcoin, Bitcoin Cash, Litecoin, Ethereum, Ripple, and EOS.
What is Blockchain?
Blockchain is a time-stamped digital record used to keep track of data.
Much like a traditional notary, blockchain eliminates any possibility of backdating or altering digital data.
Quick Look: Best Cryptocurrency Trading Platform
With the introduction of digital tender, blockchain is used as a distributed ledger containing a register of transactions. Every block in a blockchain includes data, a unique hash (much like a fingerprint) and the hash of the previous block in the blockchain.
The data in a Bitcoin block stores details about transactions such as amount, sender and receiver.
The hash identifies a block and its contents and is always unique.
Altering the information in a block will also alter the hash of the block, thus automatically making all the following blocks invalid as they no longer store a valid hash of the previous block.
Additionally, blockchain has a mechanism that slows down the creation of new blocks called “proof-of-work” to prevent tampering with data inside the blocks.
The ledger (transactions) are re-calculated every ten minutes by the machine with the greatest processing power.
All the other computers on the network check and verify that the transactions entered are valid once the primary machine has completed the calculation.
If more than 50% of the computers agree on the outcome of the calculation, the new block of transactions gets included in the blockchain.
What is mining?
Mining is the process of adding new tender to the blockchain, in effect generating new tender.
Mining uses high-powered computers, often powerful GPUs (graphic processing units), to find and verify the resulting coin, which is placed in a wallet associated with the computer.
What are Wallets?
A digital wallet allows a user to store coins and enables the movement of funds by the owner. An account is often referred to as an address or key, where the key is used to track the ownership of a cryptocurrency.
A wallet can also be a program or a physical device, some wallets are geared for a single digital currency or a few select digital currencies.
Trading Crypto CFDs
If your goal is to purchase these assets for an investment, you can buy them on digital currency exchanges, such as Coinbase.
However, cryptocurrency pairs can be traded like any other Forex pair.
Like standard Forex CFDs, the value of a cryptocurrency CFD mirrors the currencies it follows.
Each transaction is speculation on the value of the currency increasing or decreasing.
There are several benefits to trading these currencies:
- You can use leverage
- You can trade them at most Forex brokers
- You don’t ever own the asset and only speculate on currency value changes
As mentioned previously, cryptocurrencies can experience extreme volatility. Bitcoin has seen a 250% increase in value against the USD over the last five months but has also experienced frequent crashes of over 20% in the same period.
This is in stark contrast to the traditional fiat currencies where historical volatility is below 3%.
These currencies have similar traits to traditional ones. If you plan on trading these assets over the short-term, you should look for rapid changes in sentiment, as this will help predict future price movement.
If you plan on trading over the long-term, watch for new information to affect value significantly.
Like traditional Forex trading, you can use your trading platform to execute trades, perform analysis and follow the news. Most brokers that offer cryptocurrency CFDs offer CFDs on other assets, which provides for a seamless transition if you are already accustomed to trading this asset class.
What Cryptocurrencies Should You Trade?
- Bitcoin – The oldest and most liquid of them all is Bitcoin (BTC).
How Does Cryptocurrency Trading Work?
It was established in 2009 by an unknown person using the name Satoshi NakamotoNakamoto to be used as a payment mechanism. In trading, BTC is commonly paired with fiat currencies such as the USD and EUR.
- Ethereum – This is an open-source platform that uses blockchain technology.
The critical function is smart contract programming. Ethereum is very liquid and experiences the same volatility expected from this market. The system went live on July 30, 2015, with 72-million coins.
- Litecoin – This coin was built using the same open-source software that was used to create Bitcoin but uses a different license to make it more flexible.
How to Choose the Best Cryptocurrency Trading Broker Online
Litecoin was initially referred to as an alternative coin or altcoin and was created in October 2011.
- Ripple – Founded as a payment system and currency exchange network by Ripple Labs Inc. The system was established in 2012, and Ripple can be traded versus several fiat currencies as well as other coins.
- EOS– EOS operates as a smart contract platform and decentralised operating system.
The system is fast and can execute millions of transactions in seconds. You can trade EOS against other coins and fiat currencies.
How are cryptocurrencies different from regular currencies?
Over the last decade the supply of money has grown exponentially; this has been the most significant growth in the supply of money in history. Central banks control our money system, and all currencies are government fiat currencies.
The issue with fiat currencies is that the more of money that is in a system, the more prices will rise.
This increase in inflation will also cause the value of the currency to fall.
Both BTC and gold are similar in that there is a finite supply; this is in contrast to fiat currencies, where central banks can print more tender whenever they please.
As such, there is a predictable rate at which Bitcoin is mined, like the predictable rate at which gold is added to the market.
How many Cryptocurrencies are there?
On July 3rd 2017, there were 34 – by June 5th 2019, there were 2216.
The table below shows the top 10 cryptocurrencies by market capitalisation (as of September 6, 2019).
Why Trade Bitcoin & Digital Coins?
These assets are known for their high volatility, thus creating more trading opportunities.
Forex volatility has fallen to near record lows in the past ten years, often to less than 1%, while Bitcoin has had extreme volatility readings of 30% with an average volatility reading of 10%.
More volatility means more trading opportunities and larger profits, but at the same time, it also increases the sizes of the losses.
Because of this volatility, you will find that brokers offer much lower maximum leverage for these pairs.
Analysing these pairs is easier because you don’t have fundamental data like GDP, CPI Inflation, unemployment rate or the business cycle to consider. Digital currencies are not influenced by fundamental macro data which will make the price action much easier to be read.
What To Look for in a Broker?
Find a well-regulated broker that provides a robust trading platform, where you can perform technical analysis with ease, execute trades quickly, with a wide choice of currency pairs.
You want to be able to buy and sell both fiat currencies, such as the dollar, yen, pound, and euro as well as versus other coins and commodities.
In addition to a downloadable or web-based platform, you should also look for a broker with a mobile app.
Your broker should offer a margin account, allowing at least 10:1 leverage on most pairs, an education section to help you trade this fast-moving market, with trading conditions that won’t eat up too much of your profits.
Finally, find a brokerage with a demo account which will let you test drive the platform, and work out any kinks before you risk your capital.