Learn more about cryptocurrency trading

Cryptocurrency trading is becoming increasingly popular among individual investors. With thousands of digital coins and a wide array of exchanges, platforms, and resources at your disposal, diving into this space can be both exciting and overwhelming.
But what exactly is crypto trading, and how can you embark on this journey?

In this guide, we'll address key questions such as what drives cryptocurrency markets, the various tradable assets and strategies available, and more. Whether you're a beginner or looking to refine your approach, we’ve got you covered with essential insights and practical advice.

What is cryptocurrency trading?

Cryptocurrency trading involves speculating on the price movements of digital currencies relative to the US dollar, other fiat currencies, or different cryptocurrencies. Traders seek to profit from the substantial volatility in these markets, though this volatility also introduces significant risk, as prices can shift rapidly and lead to potential losses.

Additionally, crypto trading can encompass buying and selling derivatives that allow for speculation on price changes without directly owning the underlying assets.
Cryptocurrencies themselves are decentralized digital currencies that operate through peer-to-peer (P2P) networks. They are not governed or controlled by any central authority, relying instead on decentralized computer systems for transaction validation and record-keeping.

Traders can also choose derivatives such as contracts for difference (CFDs), options and future contracts to speculate on the prices of coins without actually owning them. With CFDs, traders can open both long and short positions, speculating on rising or falling prices. However, that CFDs involve the use of leverage, which magnifies both potential profits and losses.

Basics of cryptocurrency trading

Cryptocurrency trading involves buying and selling digital currencies in an effort to make a profit. Here’s a straightforward overview of the fundamental concepts and practices to get you started:

1. Understanding Cryptocurrencies
   Digital Currencies: Cryptocurrencies are digital assets that use cryptography for secure transactions.
2. Decentralization: Unlike traditional currencies, they operate on decentralized networks using blockchain technology, which records transactions on a distributed ledger.
   Choosing a Trading Platform
3. Exchanges: Platforms like Coinbase, Binance, and Kraken allow you to buy, sell, and trade cryptocurrencies. Each exchange has its own features, fees, and supported assets.
   Wallets: To store your cryptocurrencies safely, you’ll need a digital wallet. Wallets can be online, offline, hardware-based, or paper-based.
4. Types of Trading
   Spot Trading: Buying and selling actual cryptocurrencies at current market prices.
   Derivatives Trading: Engaging in contracts like futures or options that derive their value from the underlying cryptocurrency, allowing speculation on price movements without owning the asset.
5. Market Orders and Limit Orders
   Market Orders: Buying or selling a cryptocurrency immediately at the current market price.
   Limit Orders: Setting a specific price at which you want to buy or sell. Your order will only execute when the market reaches your specified price.
6. Understanding Volatility
   Price Fluctuations: Cryptocurrency prices can be highly volatile, changing rapidly due to market news, regulatory changes, or technological advancements.
   Risk Management: It’s crucial to manage risk by setting stop-loss orders and not investing more than you can afford to lose.
7. Technical and Fundamental Analysis
   Technical Analysis: Using historical price data and chart patterns to predict future price movements. Tools include moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence).
   Fundamental Analysis: Evaluating a cryptocurrency’s value based on factors like its technology, team, market demand, and overall potential.
8. Regulations and Compliance
   Legal Considerations: Cryptocurrency regulations vary by country. Make sure to comply with local laws regarding taxation and trading practices.
   Security Practices: Implement strong security measures, such as using two-factor authentication (2FA) and keeping your private keys secure.
9. Staying Informed
   Market News: Follow news and updates related to cryptocurrencies to stay informed about market trends and developments.
   Community Engagement: Participate in forums and communities to learn from other traders and share insights.

What moves the cryptocurrency prices?

The value of a cryptocurrency is primarily driven by supply and demand, similar to other assets or products. Several factors impact both the interest of traders and investors and the availability of coins and tokens in circulation.

1. Supply and demand
   In the cryptocurrency market, prices are driven by supply and demand dynamics. High demand for a particular cryptocurrency can push its price up, while increased supply can lower it. Market sentiment, technological developments, and regulatory news also influence demand. Understanding these factors helps traders predict price movements and make informed investment decisions.
2. Cost of production
   Cryptocurrency mining demands costly computer hardware and substantial electricity consumption. As more miners join a blockchain network, the complexity of cryptographic calculations increases, making it more challenging to mine the cryptocurrency. This heightened difficulty is designed to maintain a consistent rate of block creation. Consequently, as mining becomes more difficult, the associated costs also rise.
3. Availability on exchanges
   Higher trading volumes generally indicate better liquidity, which can influence price stability and competitiveness. Cryptocurrencies with higher liquidity are often less susceptible to dramatic price swings compared to those with lower liquidity.
4. Competition
   The presence of competing cryptocurrencies with similar use cases or superior technology can influence a coin’s price. For instance, new projects offering improved scalability or features might attract investment away from established coins. The presence of competing cryptocurrencies with similar use cases or superior technology can influence a coin’s price. For instance, new projects offering improved scalability or features might attract investment away from established coins.
5. Regulations
   Investors attracted by the decentralized nature of cryptocurrencies can be resistant to the prospect of the industry becoming regulated by government bodies, reducing their interest in buying coins and tokens if they expect regulations to be introduced.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spreadbets is restricted for all UK retail clients.