What Is Cryptocurrency Trading & How Does It Work? All You Need To Know
Cryptocurrency trading is about speculating on price movements. You can do this by buying or selling the value of crypto on a currency exchange platform, or via a CFD trading account.
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Complete Guide To Cryptocurrency Trading
In today’s fast-moving and tech-driven world, it’s no surprise that cryptocurrency trading attracts more and more traders from all over the globe. At the same time, the world of cryptocurrency is still surrounded by myths and misconceptions. So, what is cryptocurrency trading and how does it actually work?
If you are wondering what exactly cryptocurrency trading is and how it works, we at Trading Education can provide all you need to know.
What Is Cryptocurrency Trading?
Cryptocurrency trading involves the buying and selling of different virtual coins and exchanging one for another. Crypto trading also allows traders to use fiat currencies to buy cryptos in order to get started. Note that unlike stock or forex trading, the cryptocurrencies market is open 24/7 – a fact that makes cryptocurrency trading highly attractive.
Cryptocurrency | Definition
Before we answer the question “What is cryptocurrency trading and how does it work?” we should explain what the world of cryptocurrency and blockchain technology is.
Cryptocurrencies or cryptos are defined as virtual money that is primarily supported by blockchain technology.
Cryptos are also referred to as virtual money, coins, tokens, and so on and on. While terms vary, cyber currencies are all encrypted, which gives them high levels of security. It is worth noting that the term “crypto” comes from cryptography.
What attracts traders is the fact that these currencies are decentralised and have the potential to change traditional banking and the use of fiat currencies.
Here we should note that cryptos are transferred across a powerful network of computers and are stored digitally.
The Basics of Blockchain Technology
Another term we have to clarify before explaining what crypto trading is and how it works is blockchain technology. Blockchain technology is a big deal! Blockchain technology has the potential to revolutionise the way we store data and create smart contracts and applications far beyond the financial industry.
When it comes to cryptocurrency, blockchain technology is used to record transactions and track data and ownership. New blocks are added at the front of the blockchain ledger to ensure transparency, which is exactly the process of crypto mining. Here we should mention that mining can be extremely time and energy-consuming.
Interestingly enough, blockchain-based algorithms differ. Two of the most common ones are proof of work (based on mining) and proof of stake (based on stake), among others.
Learn more about the difference between these two algorithms here.
The History of Cryptocurrency and Blockchain Technology
Before you start exploring the world of cryptocurrency trading, you should also understand its history. Just like their cryptic nature, the history of cryptos is more than enigmatic. The first cryptocurrency to be traded, bitcoin, was created in 2009. Bitcoin was created by Satoshi Nakamoto whose real identity was never revealed.
Bitcoin led to the creation of thousands of altcoins, including utility tokens (Binance Coin), stablecoins (Tether), and privacy coins (Monero). According to data, as of 2020, there are approximately 5,201 cryptos, and these numbers are increasing.
Now blockchain technology expands beyond trading. Blockchain technology can help societies recover from the ongoing pandemic and support medicine, gaming, voting, and much more.
Cryptocurrency Trading: Ways to Trade Cryptocurrency
Once you’ve got a grasp of the basics of cryptocurrency, let’s see what crypto trading is and how it works. Cryptocurrency trading, as stated above, involves the buying and selling of different virtual coins and exchanging one for another.
There are two main ways to trade cryptos. One is to buy and sell cryptocurrencies via an exchange and the other is to trade a Contract for Difference (CFD) and speculate on price movements.
Cryptocurrency Trading via an Exchange
Cryptocurrency trading via exchanges involves the buying and selling of cryptocurrencies. Here we should note that when you purchase cryptos via an exchange, you own the assets you buy. To do that safely, you have to open an account and store your assets in a crypto wallet until you decide to trade.
When you trade on an exchange, you should have enough capital to maintain your assets and also be familiar with all the technicalities in order to place successful buy and sell orders.
Cryptocurrency Trading and CFDs
When you trade cryptos via a CFD account, you can speculate on price movements. In this case, you’ll be trading derivative contracts, so you never own the cryptocurrencies you are trading. Note that CFDs are defined as leverage instruments, which can increase both wins and losses.
Another instrument that uses leverage is spread betting. The main difference between CFDs and spread betting is the way they are regulated and taxed around the world.
Cryptocurrency Trading & Volatility
Whether you choose a crypto CFD or an exchange, do not forget that cryptos are extremely volatile. As a result, cryptocurrencies are often traded in smaller lots.
Here we should note that cryptocurrency volatility is driven mainly by speculation and media. As cryptos are not backed by any physical asset or regulatory bodies, price movements are determined by supply and demand, with small changes exercising enormous effects on prices.
How Does Cryptocurrency Trading Work?
Ready to start trading cryptocurrency? After you’ve become familiar with the different ways to trade cryptocurrency, it’s time to understand how cryptocurrency trading actually works.
Cryptocurrency Trading | Regulations and Taxes
One of the first factors to consider is regulations and taxes. Though the world of cryptocurrency and blockchain technology is developing at a rapid pace, regulations are still slow and unclear.
In the US, for instance, cryptos are treated as property. As a result, US traders (referred to investors) should follow strict regulations. In some places, on the other hand, crypto trading is completely banned.
Such confusing regulations across the world can be detrimental, so make sure you are familiar with the legal status and tax regulations of cryptocurrency and Initial Coin Offerings (ICOs) in the country you’re based in.
Here you can learn more about the most crypto-friendly cities across the globe.
What Factors Affect Crypto Trading
To become a successful trader, you should analyse all the different aspects that affect the world of cryptocurrency. In fact, it’s not only regulations that affect crypto trading.
Traders should understand that crypto trading is moved by supply and demand. Interestingly enough, market capitalization and media play a crucial role. Key events, such as economic drawbacks, hard forks, as well as integration, should be considered.
The capability of some platforms to support smart contracts and decentralised apps is another attractive investment opportunity. To provide an example, if a big company announces they’ll be using a crypto, cryptocurrency trades may increase.
Even though crypto trading is relatively new compared to other forms of trading, traders should keep an eye not only on metrics and indicators but historical price charts, too.
How Can I Start Trading Cryptocurrency?
If you think you understand what cryptocurrency trading is and how it works, it’s time to start trading. Here are some ways to help you get started:
- Understand your trading goals: To become a successful crypto trader, one has to understand their own motives. While some trade cryptos to increase their wealth, others trade to diversify their portfolios. Those who want to own actual cryptos, for instance, should consider trading via an exchange.
- Focus on Cryptocurrency trading education: Whether you want to make a profit or simply find a new work opportunity, you should always focus on educating yourself. From online courses to seminars, one should know the basics of crypto trading by heart. You should be able to analyse different coins, use charts, and open deals.
- Familiarise yourself with cryptos: Crypto Traders should have a profound understanding of the different cryptocurrencies they can trade, as well as their abbreviations. For instance, BTC is the abbreviation for Bitcoin, while BCH is for Bitcoin cash - a hard fork in Bitcoin’s blockchain. You should master crypto pairings, too. Experts claim that beginners should start with popular coins. Bitcoin, Ethereum, Litecoin, and Ripple are some of the largest cryptocurrencies that can lead to successful trades. You can trade Bitcoin for Ripple, for example. Interestingly, figures show that Bitcoin makes up almost 64% of cryptocurrency’s market value.
- Develop a trading strategy: Traders should understand the complexities of trading in order to test and develop a strategy. Having a trading journal is recommended. One of the main rules is to buy when the price is low and sell when it’s higher. Here we should note that the term uptrend/bullish refers to when prices are rising, while the term downtrend/bearish to when prices are decreasing. You should learn to trade with the trend. Let’s take swing trading, for example! If you decide on swing trading, then you should pay close attention to trending prices and always place a stop to reduce risks.
- Consider crypto trading risks: Many traders start with fiat currency to buy cryptos. When you decide on a coin, though, consider processing times and supply limits. Simply because cryptos are highly volatile and the longer you wait, the higher the risk that the value will change! This volatility can result in high risks, so always integrate a risk management strategy in your trading style.
- Choose a trading platform: Another important step to help you reach trading success is to choose a reliable trading platform. Factors, such as ease of use, customer support, and security are essential.
- Find a regulated broker: Do your research before you choose a broker to trade crypto CFDs. Make sure you have a regulated broker! Consider exchange, trade, and deposit-withdrawal fees to make sure you have enough capital to start investing. Also, check if your broker specialises in other assets to help you diversify your portfolio.
- Create a cryptocurrency wallet: If you really want to own actual cryptos, you’ll need a cryptocurrency wallet. A cryptocurrency wallet is essential to keep your money safe. Note that traders can choose from paper, mobile, software, or hardware wallets.
- Consider demo accounts and trading bots: To help you get started, you can consider opening a demo account or using a trading bot. With a demo account, you can test your potential brokerage and develop a strategy. Trading bots, on the other hand, can execute actual trades automatically. At the same time, they can be a big mistake. Find out why crypto trading bots can be the best or worst decision you’ll ever make.
- Boost your self-control: One of the most important steps to success is to boost your emotional self-control. You should learn to put intense emotions aside and become consistent. Consistency will help you win not only one trade but a series of moves.
Ready to start cryptocurrency trading? Open a live account today.
Is Cryptocurrency Trading Safe?
While cryptocurrency trading offers numerous exciting opportunities to potentially increase your wealth like a real crypto king, crypto trading has some negative sides. One of the main concerns is safety. Though blockchain technology is almost unhackable, there are certain risks. Take 51% attacks, for example! This is an attack on a blockchain where a group of miners can execute different malicious acts.
Before you start investing in cryptocurrency, you should also be aware of different scams. As cryptocurrencies are not properly regulated yet, there are many scams and frauds (especially in the form of ICOs) that can lead to huge losses. OneCoin is one of the most notorious scams in the history of crypto trading.
On top of that, crypto trading is still ruled by negative attitudes. As cryptocurrencies have been used for illegal activities, many people still associate crypto trading with the dark web and criminal activity.
That said, cryptocurrency trading can be a reasonable investment opportunity. Learn how to overcome crypto-related challenges and become a successful crypto trader.
Cryptocurrency Trading Key Points:
- Cryptocurrency trading is the selling and buying of cryptocurrencies.
- Cryptocurrencies are virtual money supported by blockchain technology.
- Blockchain technology expands beyond the financial sector and can be used for smart contracts, decentralised apps, and much more.
- Some of the most popular cryptos to trade are Bitcoin, Ethereum, Ripple, and Litecoin, among others.
- Investors can trade cryptos via an exchange or a CFD.
- As the crypto market is highly volatile, traders should consider different factors, such as economic uncertainties, media news, and trends.
- Trading education, data analysis, risk management, and self-control become crucial to tame the cryptocurrency market.
- Though cryptocurrencies have been used for illegal activities, crypto trading is a reasonable investment option.
Now you know what is cryptocurrency trading and how it works. If you're feeling inspired to start cryptocurrency trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that etoro provides the ability to trade with Crypto assets and CFDs on up to 90+ cryptocurrencies. Crypto Traders can build a diversified portfolio with the most popular coins.
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Would you trade cryptocurrency? What cryptos would you choose to trade? Is an exchange or a CFD the right method for you? Let us know in the comments below.
Please Remember: Cryptocurrencies are highly volatile. Your capital is at risk and Past performance is not an indication of future results.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.