Cryptocurrency trading or Crypto trading, How to trade cryptocurrencies & CFDs
Cryptocurrencies can be traded all hours of the day across an increasing number of ‘crypto’ exchanges, such as Binance, Bitfinex or Coinbase Pro, Cryptocurrencies are a product of the digital society, and just like the digital society, they run 24/7, You can trade cryptocurrencies at any point in the week, Unlike stocks and commodities, the cryptocurrency market isn’t traded on a regulated exchange.
What is Cryptocurrency Trading?
Crypto trading (Cryptocurrency trading) is simply the exchange of cryptocurrencies, Like in Forex, you can buy and sell a cryptocurrency for another, like Bitcoin or altcoin for USD & Euro, This is one way of getting involved in the world of cryptocurrencies without having to mine it, Cryptocurrency is a decentralized digital currency, It is stored in a ‘wallet’, that can take various forms, Bitcoin can be stored in an online or offline electronic wallet.
Most cryptocurrencies referred to as simply ‘cryptos,’ are powered by Blockchain technology, They differ from established fiat currencies in that they are decentralized assets currently unregulated or controlled by any country, central bank or regulatory authority, Blockchain technology that drives most cryptocurrencies has wider implications for everything from client-server models to food supply chains & enhanced cyber-security protocols.
Trading cryptocurrencies is different from more traditional markets such as Forex because they are relatively new assets, they are not influenced by many of the same forces as other more established markets, Although cryptocurrencies are not accepted as legal tender in the vast majority of countries around the world, they can change the wider financial landscape, they have opened up investment & trading opportunities.
Although cryptocurrency trades around the clock, there are some periods that are more likely to be busier, however, the USA, Russia and the UK are the three biggest crypto trading states, it is unsurprising that the American through European market hours tends to be busy times for cryptocurrency.
The Asian market hours can be very volatile times for cryptocurrency, even on weekends, It is not uncommon to see big moves occur in cryptocurrency prices over Sunday night (GMT), this can be damaging for people trading on European time zones.
The distinguished thing about cryptocurrency exchanges is the extent to which the price disparity can reach between each exchange, there have been times where Bitcoin has had up to a $500 price disparity across exchanges, The reasons for this disparity are related to the differences in liquidity across exchanges and often the geographical location of these exchanges, Price disparity becomes more noticeable just after big moves in the price of cryptocurrencies.
What moves cryptocurrency markets?
Cryptocurrency markets are new, so, there are less correlating assets that drive price changes and because they have been designed as decentralized assets free from regulatory control, things such as data releases, rate changes & political upheaval do not affect them as much as fiat currencies.
Cryptocurrency prices are sensitive to potential moves towards greater regulation as well as a range of factors like Disagreements within crypto communities over upgrades, for example when a cryptocurrency undergoes a hard fork (This can occur when its Blockchain diverges in two different directions), Attacks on cryptocurrency exchanges which expose security flaws, News stories and rumours of greater central bank control or of countries potentially banning cryptos.
How to trade cryptocurrencies
There are two ways to start crypto trading, One way is to buy cryptocurrency on exchanges, such as purchasing Bitcoin on an exchange like Bitstamp, you can own the cryptocurrency yourself and you are waiting for the price to rise significantly so you can sell it for a profit.
You can trade a contract for difference (CFD) on a particular cryptocurrency, A CFD is a derivative product where a broker agrees to pay a trader the difference in the value of an underlying security between two dates; the opening & closing dates of the contract, you can either hold a long position (speculating that the price will rise) or a short position (speculating that the price will fall), when trading a Bitcoin CFD, you are speculating on the BTC/USD pairing.
There are crucial differences between buying cryptocurrency & trading CFDs on cryptocurrency, When purchasing cryptocurrency, you store it in a wallet, but when trading CFDs, the position is held in your trading account, which is regulated by a financial authority, You have greater flexibility when you trade with CFDs as you are not tied to the asset; you have merely bought or sold a derivative contract, CFDs are a more established & regulated financial product.
Advantages of using CFDs for cryptocurrency trading
Liquidity measures how easily an asset can be turned into cash, without impacting the market price, If an asset is more liquid, it brings about better pricing and faster transaction times, The cryptocurrency market is considered illiquid, partly due to the distribution of orders across exchanges, as noted by price disparity.
So, a relatively small number of trades can have a large impact on market prices, one factor contributing to cryptocurrency volatile, when trading CFDs on cryptocurrencies, you can gain exposure a lot easier because you are not trying to buy the underlying asset, simply a derivative product.
CFDs can be traded on margin, so, a trader only needs to put down a fraction of the value of their trade, and borrow the remaining capital from their broker, This allows for more accessibility, greater exposure & amplified results, This can be useful for cryptocurrencies, given a huge volatility asset class witnesses, but this brings increased risks.
The ability to go long or short, When purchasing cryptocurrency itself, you can only profit when the market is rising, you can profit in both a falling and rising markets due to the ability to short sell CFDs on cryptocurrency.
Tax-efficient trading, Trading CFDs on a cryptocurrency can offer benefits over holding the cryptocurrency itself, CFDs are useful for hedging your existing portfolio because if your expectations are wrong you can offset any losses incurred with CFDs against the capital gains charged on the increase of your portfolio.