What is cryptocurrency trading?
Cryptocurrency trading is the act of
speculating on cryptocurrency price movements via a CFD trading account, or
buying and selling the underlying coins via an exchange.
CFD
trading on cryptocurrencies
CFDs trading are derivatives, which
enable you to speculate on cryptocurrency price movements without taking
ownership of the underlying coins. You can go long (‘buy’) if you think a
cryptocurrency will rise in value, or short (‘sell’) if you think it will fall.
Both are leveraged products, meaning
you only need to put up a small deposit – known as margin – to gain full
exposure to the underlying market. Your profit or loss are still calculated
according to the full size of your position, so leverage will magnify both
profits and losses.
Buying
and selling cryptocurrencies via an exchange
When you buy cryptocurrencies via an
exchange, you purchase the coins themselves. You’ll need to create an exchange
account, put up the full value of the asset to open a position, and store the
cryptocurrency tokens in your own wallet until you’re ready to sell.
Exchanges bring their own steep
learning curve as you’ll need to get to grips with the technology involved and
learn how to make sense of the data. Many exchanges also have limits on how
much you can deposit, while accounts can be very expensive to maintain.
How do cryptocurrency markets work?
Cryptocurrency markets are
decentralised, which means they are not issued or backed by a central authority
such as a government. Instead, they run across a network of computers. However,
cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’ .
Unlike traditional currencies,
cryptocurrencies exist only as a shared digital record of ownership, stored on
a blockchain. When a user wants to send cryptocurrency units to another user,
they send it to that user’s digital wallet. The transaction isn’t considered
final until it has been verified and added to the blockchain through a process
called mining. This is also how new cryptocurrency tokens are usually created.
What
is blockchain?
A blockchain is a shared digital
register of recorded data. For cryptocurrencies, this is the transaction
history for every unit of the cryptocurrency, which shows how ownership has changed
over time. Blockchain works by recording transactions in ‘blocks’, with new
blocks added at the front of the chain.
Blockchain technology has unique
security features that normal computer files do not have.
Network consensus
A blockchain file is always stored
on multiple computers across a network – rather than in a single location – and
is usually readable by everyone within the network. This makes it both
transparent and very difficult to alter, with no one weak point vulnerable to
hacks, or human or software error.
Cryptography
Blocks are linked together by
cryptography – complex mathematics and computer science. Any attempt to alter
data disrupts the cryptographic links between blocks, and can quickly be
identified as fraudulent by computers in the network.
What
is cryptocurrency mining?
Cryptocurrency mining is the process
by which recent cryptocurrency transactions are checked and new blocks are
added to the blockchain.
Checking transactions
Mining computers select pending
transactions from a pool and check to ensure that the sender has sufficient
funds to complete the transaction. This involves checking the transaction details
against the transaction history stored in the blockchain. A second check
confirms that the sender authorised the transfer of funds using their private
key.
Creating a new block
Mining computers compile valid
transactions into a new block and attempt to generate the cryptographic link to
the previous block by finding a solution to a complex algorithm. When a
computer succeeds in generating the link, it adds the block to its version of
the blockchain file and broadcasts the update across the network.
What moves cryptocurrency markets?
Cryptocurrency markets move
according to supply and demand. However, as they are decentralised, they tend
to remain free from many of the economic and political concerns that affect
traditional currencies. While there is still a lot of uncertainty surrounding
cryptocurrencies, the following factors can have a significant impact on their
prices:
- Supply: the total number of coins and the rate at which
they are released, destroyed or lost
- Market capitalisation: the value of all the coins in
existence and how users perceive this to be developing
- Press: the way the cryptocurrency is portrayed in the
media and how much coverage it is getting
- Integration: the extent to which the cryptocurrency
easily integrates into existing infrastructure such as e-commerce payment
systems
- Key events: major events such as regulatory updates,
security breaches and economic setbacks
How does cryptocurrency trading work?
With IG, you can trade
cryptocurrencies via a CFD account – derivative products that enable you
speculate on whether your chosen cryptocurrency
will rise or fall in value. Prices are quoted in traditional currencies such as
the US dollar, and you never take ownership of the cryptocurrency itself.
CFDs are leveraged products, which
means you can open a position for a just a fraction of the full value of the
trade. Although leveraged products can magnify your profits, they can also
magnify losses if the market moves against you.
What
is the spread in cryptocurrency trading?
The spread is the difference between
the buy and sell prices quoted for a cryptocurrency. Like many financial
markets, when you open a position on a cryptocurrency market, you’ll be
presented with two prices. If you want to open a long position, you trade at
the buy price, which is slightly above the market price. If you want to open a
short position, you trade at the sell price – slightly below the market price.
What
is a lot in cryptocurrency trading?
Cryptocurrencies are often traded in
lots – batches of cryptocurrency tokens used to standardise the size of trades.
As cryptocurrencies are very volatile, lots tend to be very small: most are
just one unit of the base cryptocurrency. However, some cryptocurrencies are
traded in bigger lots.
What
is leverage in cryptocurrency trading?
Leverage is the means of gaining exposure
to large amounts of cryptocurrency without having to pay the full value of your
trade upfront. Instead, you put down a small deposit, known as margin. When you close a leveraged position, your
profit or loss is based on the full size of the trade.
While leverage will magnify your
profits, it also brings the risk of amplified losses – including losses that
can exceed your margin on an individual trade. Leveraged trading therefore
makes it extremely important to learn how to manage your risk.
What
is margin in cryptocurrency trading?
Margin is a key part of leveraged
trading. It is the term used to describe the initial deposit you put up to open
and maintain a leveraged position. When you are trading cryptocurrencies on
margin, remember that your margin requirement will change depending on your
broker, and how large your trade size is.
Margin is usually expressed as a
percentage of the full position. A trade on bitcoin (BTC), for instance, might
require 15% of the total value of the position to be paid for it to be opened.
So instead of depositing $5000, you’d only need to deposit $750.
What
is a pip in cryptocurrency trading?
Pips are the units used to measure
movement in the price of a cryptocurrency, and refer to a one-digit movement in
the price at a specific level. Generally, valuable cryptocurrencies are traded
at the ‘dollar´ level, so a move from a price of $190.00 to $191.00,
for example, would mean that the cryptocurrency has moved a single pip.
However, some lower-value cryptocurrencies are traded at different scales,
where a pip can be a cent or even a fraction of a cent.
It’s important to read the details on
your chosen trading platform to ensure you understand the level at which price
movements will be measured before you place a trade.
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