A Complete Guide to
Cryptocurrency Trading Defined
The act of trading cryptocurrency involves either buying and selling a digital currency through an exchange or using a CFD trading account to speculate on cryptocurrency price movements.
Cryptocurrency CFD Trading
Cryptocurrency CFD Trading allows speculators to bet on the price movements of a particular cryptocurrency without purchasing ownership of the currency. Buying is also referred to as going and is the choice to make if you think the value of a cryptocurrency will increase. You sell or go short if you think a decrease in the value of a currency will soon come to pass.
These derivatives are leveraged products, which means a small deposit is required to gain full access to the underlying market. This leverage will result in both your wins and losses being magnified.
Exchange Trading of Cryptocurrencies
If you would rather purchase actual cryptocurrency, you can do so through a crypto exchange. You can begin by opening up an account with an exchange. You must then pay the full value of the digital coins you want to purchase. You can then store your coins in a crypto wallet while waiting for the coins to increase in value.
There is a bit of a learning curve when it comes to crypto exchanges. You will need to be able to interpret the data provided by the exchange and deal with the technology presented on the website. Some exchanges establish limits for how much money you can deposit. You should also make sure you understand the expenses associated with maintaining a cryptocurrency exchange account.
How Cryptocurrency Markets Work?
Markets for cryptocurrency are known as decentralized markets. A decentralized market is not backed or controlled by a bank or national government. Cryptocurrency functions like fiat currencies but is transferred from one user to another via computers.
Another fact that differentiates cryptocurrency from fiat currency is the fact that cryptocurrency can exist only as a digital record that is stored on a blockchain and shared with users. When cryptocurrency is transferred from one user to another it is taken from one virtual wallet and sent to another. No transaction is final until it is properly verified and vetted through a process known as mining. New crypto tokens are also produced through the mining process.
What is a Blockchain
A blockchain consists of data that is recorded on a digital register. The transaction history for cryptocurrencies is kept on blockchains. Blockchain is the record of how digital currencies change ownership as time passes. Data that is stored on blockchains are recorded in 'blocks.' The most recent transactions are stored in blocks at the front of the chain.
Blockchain technology provides security protections not available when working with normal computer files.
A blockchain file is never stored on a single computer. Instead, multiple computers across a network are used. The file is updated with each transaction and everyone involved with the network can follow the progress of the blockchain file.
Cryptography is used to link the blocks that make up a blockchain. This is a complex system of computer science and mathematics that is capable of immediately detecting fraudulent attempts to disrupt the links between the blocks.
What is the Mining of Cryptocurrency
Cryptocurrency mining allows for new transactions involving cryptocurrency to be checked, as well as, new blocks to a blockchain.
The computers used to mine cryptocurrency select transactions from a pool and verify that users possess the funds to complete a valid transaction. To do so, the mining computer must check the details of the transaction against the transaction history that is already present on the blockchain. A second check is performed to ensure the sender in a transaction has authorized the transfer of the cryptocurrency.
New Block Creation
Once a transaction is deemed valid, the mining computer will compile a certain number of transactions on a blockchain. The computer must also solve a complex algorithm to create a cryptographic link to the blocks that already exist on the blockchain. Once a link is successfully generated, the new block is added to the chain and network users are informed of the transaction.
What Factors Affect Cryptocurrency Markets
Supply and demand is the main driver of cryptocurrency markets. However, these decentralized currencies have shown the ability to remain free from the effects of political and economic factors that often influence the movement of more traditional currencies. Cryptocurrencies can be a bit unpredictable, but there are a number of factors that have proven capable of affecting the market:
- Supply - The number of a particular cryptocurrency in circulation and how the currency is being made available to users.
- Market Capitalization - The total value of a particular digital currency along with the perception of users regarding the currency.
- Integration - The ability to integrate a cryptocurrency into existing economic infrastructure like online payment systems.
- Media Coverage - The manner in which publications and news agencies present cryptocurrencies to readers and viewers.
- Major Events - Happenings like security breaches, economic problems, and changes in regulatory policy.
Things to know about Cryptocurrency Trading
There are many issues an investor new to cryptocurrency must understand to be successful in the market.
What is a Spread?
The spread represents the quoted difference between the buy and sell price for a cryptocurrency. Cryptocurrency is similar to other financial markets as far as the two prices you will be quoted if you want to invest in the market. The price to buy is usually quoted a little above the market price. Conversely, a sale price is often valued a little beneath the market price.
What is a lot?
The trading of cryptocurrencies is standardized by compiling lots of digital currencies. These lots are usually small due to the volatile nature of cryptocurrency markets. There are times when a lot will consist of only one unit of a particular cryptocurrency. Other times, a lot will include many units of the digital currency.
What is Leverage
Leverage allows investors to gain access to a large amount of cryptocurrency without the responsibility of paying the full price for the currency upfront. Instead, you will put down a deposit that is currently referred to as "the margin." Your profit or loss will be based on the value of the full-sized trade when you play a leveraged position.
What is a Margin?
Margin is the initial deposit you must provide to initiate a leveraged position in the market. The margin requirements for cryptocurrency trading will differ based on the broker with whom you do business and the size of your trade.
Members of the cryptocurrency investment world base margin on a percentage of the full value of the currency. For example, it might take $750 or 15 percent margin to initiate a position on a $5,000 Bitcoin trade.
What is a pip?
A pip is a unit of measure that describes a movement in the value of a cryptocurrency that represents a single unit of movement. For example, a cryptocurrency traded in dollars has moved a pip if the value goes from $80 to $81. Many smaller cryptocurrencies use units other than dollars to establish pips. A pip can be a cent or even smaller with some cryptocurrencies.
Other Frequently Asked Questions
How are Cryptocurrencies and Digital Currencies Different?
The difference between cryptocurrencies and digital currencies involve centralization. Cryptocurrencies are completely decentralized while digital currencies are backed by a bank.
How Many Cryptocurrency Wallets Exist
The five types of cryptocurrency wallets that are available to traders are:
- Desktop Wallets
- Online Wallets
- Mobile Wallets
- Paper Wallets
- Hardware Wallets
What Cryptocurrency Was First on the Market?
Bitcoin was the first cryptocurrency introduced to traders. The domain for bitcoin was established in 2008 and trading began in 2009.
How Many Cryptocurrencies Are There?
More than 2000 cryptocurrencies have been introduced to the market. Most of them are not highly valued. Bitcoin, Ethereum, Litecoin, and Ripple are among the highest valued cryptocurrencies.
Is Cryptocurrency Real Money?
There are outlets that accept cryptocurrency for payment. However, the volatility and intangible nature of cryptocurrency as an asset make it difficult to compare cryptocurrency with other types of currency.