Cryptocurrencies are an emerging, popular market. The majority of cryptocurrencies, also simply called “cryptos”, are operated using blockchain technology. They differ significantly from conventional Fiat currencies. After all, they are decentralized assets. No government, central bank or regulatory agency is currently regulating or controlling the new form of payment.
In most countries in the world, cryptocurrencies are not accepted as legal tender. Nevertheless, due to their potential to change the financial landscape, they have opened up unmissable opportunities and investment and trading opportunities.
The blockchain technology that controls most cryptocurrencies has far-reaching effects in a wide variety of areas. This ranges from client-server models to food supply chains to advanced cybersecurity protocols.
Trading cryptocurrencies differs significantly from traditional markets such as forex or indices. Because these are relatively new assets, they are not affected by the same forces as other more established markets. There are a number of cryptocurrencies on the market. Some are better known than others and all have different levels of volatility.
What moves cryptocurrency markets?
With the cryptocurrency markets so new, there are fewer correlating assets that cause price changes. Since the new means of payment are designed to be decentralized, they are not subject to official control. Data releases, exchange rate changes and political upheavals play a smaller role for cryptocurrencies than for fiat currencies.
However, the online payment method’s prices are sensitive to factors such as:
- Disagreements within crypto communities about upgrades. This can occur when the blockchain diverts in different directions.
- Attacks on cryptocurrency exchanges that reveal vulnerabilities.
- News and rumors about increased central bank control or countries that may ban cryptos.
The most popular cryptocurrencies include:
- Bitcoin: the first cryptocurrency and still the most valuable coin on the market.
- Bitcoin Cash: The result of the first branch in Bitcoin’s original chain. Bitcoin Cash is a standalone cryptocurrency.
- Ethereum: Another, perhaps more ambitious project that is supposed to fundamentally change the way the Internet works.
- Litecoin: Supports cross-border payments with shorter transaction times than competitors.
- Ripple: Created to address issues like versatility and speed of international payment solutions.
How many different types of cryptocurrency wallets are there?
There are five main types of cryptocurrency wallets, namely desktop wallets, mobile wallets, online wallets, hardware wallets and paper wallets. Traders don’t need a wallet when trading cryptocurrencies through a CFD account. Digital wallets are only required for the purchase of coins. These online wallets are used to store, send and receive cryptocurrencies.
What was the first cryptocurrency?
The first cryptocurrency was Bitcoin. The Bitcoin domain was registered in 2008, the first transaction took place in 2009. It was developed by Satoshi Nakamoto. However, there is speculation that Nakamoto is a pseudonym because the Bitcoin creator wants to remain undetected. In addition, nobody knows whether it is a person or a group.
What are the biggest cryptocurrencies?
Those who are not yet familiar with online trading will find it difficult to see the differences between some of the leading cryptocurrencies. After all, cryptocurrencies are relatively new assets. Therefore, it is crucial to understand how each crypto fits into the market.
Bitcoin – BTC
Bitcoin is the original decentralized cryptocurrency or peer-to-peer digital payment system. It is designed to challenge traditional financial models through the use of blockchain technology for transactions with other currencies, services or products. “Satoshi Nakamoto“, an anonymous user or a group of users, mined the first Bitcoin.
The digital currency was created with a limited number of possible Bitcoin coins. There are a total of 21 million. The coins are mined using the computing power of computers or computer networks. The task is to solve increasingly difficult algorithms.
The value of the very first Bitcoin was approximately $ 0.05 at the time of its launch. As Bitcoin grew and more and more entrepreneurs invested in its success, its price rose dramatically. At the highest price level ever recorded in December 2017, each Bitcoin was worth just under $ 20,000.
Bitcoin Cash – BCH
Bitcoin Cash was created in 2017 as a result of a fork in Bitcoin’s blockchain. The blockchain is the independent digital ledger that is used to record and verify every Bitcoin transaction. When a cryptocurrency splits and its blockchain breaks, two new chains of information are created. These in turn lead to two separate versions of the cryptocurrency. This can happen if there is no majority consensus on the direction of the cryptocurrency within the community.
The hard bifurcation that Bitcoin Cash created was the result of concerns about the block size and processing time of the original Bitcoin design. The new currency promised faster turnaround times and more flexibility for users.
Ethereum – ETH
Ethereum is an open source computer system. It aims to democratize the functioning of the Internet and the storage of global data using decentralized applications. Ether is the cryptocurrency that was developed to operate Ethereum and is used to pay miners. During mining, the ether coins are mined, which, like other cryptos, are stored in a decentralized, publicly distributed blockchain.
Ether was designed to be much faster than Bitcoin with a blocking time of around 15 seconds. BTC usually works with 10 minutes. In contrast to Bitcoin, there is currently no fixed upper limit for the number of ETH coins that can be mined.
Ripple – XRP
Ripple was developed as a payment solution with blockchain technology. The XRP coins should also change the way digital transmission systems work. Ripple eliminates or minimizes much of the cost of global transfers. In addition, customers do not expect long payment processing times. Ripple wants to enable fast and seamless international payments.
As one of the few cryptocurrencies that has put more focus on established financial institutions, Ripple’s potential for global trading is enormous. Major banks and institutions such as Santander have already partnered with the Ripple network to enable users around the world to make instant international payments. Ripple’s appeal for investors lies in its ability to act as a common currency that can support other transactions.
Litecoin – LTC
Litecoin is another crypto solution that aims to simplify cross-border payments at a low cost. Litecoin offers faster confirmation and processing times than Bitcoin. Even though this coin was also designed in such a way that it is more difficult to break down in larger quantities.
What is the difference between a digital currency and a cryptocurrency?
The difference between a digital currency and a cryptocurrency is that the latter is decentralized. So it is not issued or supported by a central authority such as a central bank or government. Instead, cryptocurrencies are executed over a computer network. Digital currencies have all the characteristics of traditional currencies, but only exist in the digital world.
How does crypto trading work?
In cryptocurrency trading, speculation about price movements in cryptocurrency is made via a CFD trading account or the underlying coins are bought and sold on a stock exchange.
CFD trading is a derivative that is used to speculate on price movements in cryptocurrency without taking ownership of the underlying coins. Crypto traders can buy long positions when a cryptocurrency gains in value, or sell short positions as they decrease.
Both are leveraged products. Crypto traders need to make a deposit called margin to get full exposure to the underlying market. Profit or loss is always calculated based on the full size of the position. For this reason, leverage can increase both profits and losses.
Instead of trading on a cryptocurrency exchange and opening a digital wallet, crypto traders speculate about market movements with spread betting or a CFD trading account. This has a number of advantages over buying a specific cryptocurrency directly. Retailers do not need a digital wallet and are therefore not exposed to potential network hacks. Because the crypto traders speculate on price movements instead of owning the underlying asset, the cryptos can take both long and short positions.
How to trade cryptocurrencies
As already mentioned, cryptocurrencies are entirely new assets. For this reason, they react differently to the numerous common market conditions than conventional assets. Even experienced investors speculate on how cryptocurrencies could develop in a major financial crisis.
Cryptocurrency markets are among the most volatile markets in the world. Large price fluctuations are very common. That’s why there are intelligent risk management tools when trading cryptocurrencies. With this in mind, it’s also important that crypto traders develop a careful cryptocurrency trading strategy that is based on sound risk management.
First steps in crypto trading
Choose a suitable cryptocurrency
All cryptocurrency markets are relatively volatile. It is therefore important to choose a market that is at your own risk.
Long and short positions
Research, analysis and market knowledge help traders decide whether they want to open a buy (long) or sell (short) position. The decision in which direction the trade should open plays an important role. Crypto traders should leave research and analysis to the point of entry to get the most benefit.
Because the markets for cryptocurrencies are so volatile, it is important that traders protect themselves against excessive price movements with intelligent risk management tools such as stop loss and limit orders. Trailing stops can help secure profits and limit losses, while some of the most popular markets also offer guaranteed stops.
Monitor your position and exit the market
Crypto markets can evolve quickly, so keeping track of market-moving events is critical to trading success. As more and more cryptos become mainstream, information about their price movements has spread more widely. For this reason, crypto traders need to closely follow messages about the cryptocurrency they trade with. It can be helpful to visit coin forums and stay up to date on possible regulatory measures that can lead to large price fluctuations.
Cryptocurrency trading is a relatively new phenomenon, considering that the entire market is less than a decade old. This brings with it an element of unpredictability for cryptocurrency trading as there is less contextual information and less reliable data points.
As with any asset, a clear trading plan is critical, as is investing time in solid research and in-depth analysis.
Price movements with cryptocurrencies can be larger than with many other assets. Sensible risk management is important and holding positions (especially overnight) can be risky.
A day trading strategy aims to take advantage of the volatility of the market over shorter periods of a few hours instead of days and weeks. Day traders identify market trends and act with the prevailing mood until a support or resistance level or a predetermined price point is reached.
Day trading can be a time-consuming approach and requires a lot of flexibility and the ability to respond to fast moving market events. The use of intelligent risk management tools such as stop losses is crucial for day trading.
Research and analysis
The bulk of any cryptocurrency trading strategy revolves around market news and speculation. While there are fewer data points and recurring market trends in the area of cryptocurrency than in other areas, the examination and analysis of the selected crypto is crucial.
The cryptocurrency markets are often not based on traditional market forces such as central bank decisions, political turmoil, or supply and demand. Rather, as brand new, decentralized assets, they can be particularly vulnerable to regulatory news, potential hard fork events, and attempted currency exchange attacks.
There is a wide range of independent cryptocurrency forums, community sites, and forums worth watching.
Indicators and drawing tools
With various tools, crypto traders protect themselves against the enormous price fluctuations of the real new asset. A range of powerful indicators and drawing tools help traders analyze cryptocurrency markets closely and spot trends and mood changes in real time.
Indicators like MACD, RSI and Bollinger Bands always keep crypto traders up to date. Charts with time frames show how trading opportunities can be explored. Customizable watch lists track general market sentiment.
What tools are available to manage risk?
Stop loss orders
To add a stop loss order to the position, traders simply activate the stop loss option directly in the trading ticket and specify the price level for the order. As soon as the market moves through this fixed price point, the position closes automatically. This means that crypto traders don’t have to constantly monitor their position.
Stop losses offer better protection than trading without stop losses. Nevertheless, this function cannot protect traders from excessive and sudden price fluctuations due to volatility or market gaps.
Guaranteed stop loss order
The safest way to protect yourself from excessive volatility in the cryptocurrency markets is to have a guaranteed stop-loss or. For this purpose, the function under Guaranteed Stop is selected in the trading area.
These powerful stop-loss orders always close at the specified level, regardless of market gaps or extreme volatility. For this reason, guaranteed stops are particularly recommended when trading cryptocurrencies.
With trailing stops, crypto traders can track price movements and automatically adjust the point of the stop loss to market fluctuations. Traders select a price point above or below the market value at which the position is to be closed automatically. The trailing stop then follows the prevailing market trend and is only activated when the price reaches the predetermined level. This feature enables traders to make profits in fast moving markets and protect themselves from adverse market movements.
How do cryptocurrency markets work?
Cryptocurrency markets are decentralized, which means that they are not issued or supported by a central authority such as a government. Instead, they run over a computer network. However, cryptocurrencies can be bought and sold on exchanges. The coins are stored in digital wallets.
In contrast to conventional currencies, cryptocurrencies only exist as shared digital ownership files that are stored in a blockchain. When a merchant wants to send cryptocurrency units to another user, he sends them to that user’s digital wallet. The transaction is not considered final until it has been reviewed and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.
What is a blockchain?
A blockchain is a shared digital register of recorded data. For cryptocurrencies, this is the transaction history for each cryptocurrency unit, showing how ownership has changed over time. Blockchain records transactions in blocks, with new blocks added to the front of the chain.
Blockchain technology has unique security features that normal computer files do not have:
A blockchain file is always stored on multiple computers in a network and not in a single location. It can normally be read by any user on the network. This makes it both transparent and very difficult to change. In addition, there is no weak point that is susceptible to hacks or software errors.
Blocks are connected to one another by cryptography, i.e. by complex mathematics and computer science. Any attempt to change data breaks the cryptographic connections between the blocks and can be quickly identified by computers on the network.
What is cryptocurrency mining?
Cryptocurrency mining is the process of checking current cryptocurrency transactions and adding new blocks to the blockchain.
Mining computers select pending transactions from a pool and verify that the sender has sufficient funds to complete the transaction. The transaction details are compared with the transaction history stored in the blockchain. A second check confirms that the sender authorized the transfer of funds with his private key.
Create a new block
Mining computers compile valid transactions into a new block and try to cryptographically link to the previous block by finding a solution to a complex algorithm. When a computer has successfully created the link, it adds the block to its version of the blockchain file and transfers the update over the network.
Trade cryptocurrencies with a CFD account
Trading cryptocurrencies through a CFD account acts as derivative products that allow traders to speculate as to whether the value of the selected cryptocurrency will go up or down. The prices are given in traditional currencies such as the US dollar. Crypto traders never take ownership of the cryptocurrency in this form of trading.
CFDs are leverage products. This means traders can only open a position for a fraction of the total trade value. Leverage products can increase profits, but also losses if the market is directed against the trader.
What is the spread in cryptocurrency trading?
The spread is the difference between the buy and sell prices specified for a cryptocurrency. As soon as traders open a position on a cryptocurrency market, as in many financial markets, two courses are offered. If traders want to open a long position, they trade at the purchase price, which is slightly above the market price. If you want to start with a short position, you trade at the selling price, i.e. slightly below the market price.
What is leverage in cryptocurrency trading?
Leverage is a means of being exposed to large amounts of cryptocurrency without having to prepay the full value of the trade. Instead, traders deposit a small deposit called a margin. When traders close a leveraged position, the gain or loss is based on the full size of the trade.
Leverage increases profits, but there is also a risk of increased losses. This includes deficits that can exceed the margin on a single trade. In leveraged trading, it is therefore extremely important to learn to deal with the risk.
What does margin mean in crypto trading?
Margin is an important part of leveraged trading. It is the term used to describe the initial deposit to open and maintain a lever position. The margin requirement may change depending on the broker and the trade size.
Margin is usually expressed as a percentage of the full position. For example, trading in Bitcoin (BTC) may require opening 15 percent of the total value of the position to be paid. So instead of depositing 5000 euros, traders only have to deposit 750 euros.
What is a pip in cryptocurrency trading?
Pips are units for measuring the price movement of a cryptocurrency. They relate to a single-digit price movement at a certain level. A change from e.g. 190.00 euros to 191.00 euros would mean that the cryptocurrency has shifted a pip. However, some lower-value cryptocurrencies are traded on different scales, with a pip being a cent or even a fraction of a cent. It is important to read the details on the chosen trading platform to ensure at what level price movements are measured.
Is cryptocurrency real money?
Cryptocurrencies are an alternative to traditional money. Nowadays, some stores accept cryptocurrencies as a form of payment. However, they have little resemblance to other asset classes because they are intangible and extremely volatile. They are mainly used by traders to speculate on increases and losses in value.
How many cryptocurrencies are there?
There are currently over 2000 cryptocurrencies available to buy and sell, but most are of little value. Of these, Bitcoin, Ether, Ripple, Bitcoin-Cash and Litecoin are among the most valuable.